will also require hospitals to invest
millions of dollars in information
technology and the development of
holistic healthcare delivery methods.
Healthcare institutions must learn
how to maximize reimbursement
productivity adjustments and minimize
readmittance penalties under the
new law. It will be very difficult for the
average SNICH to fund these increased
costs and simultaneously climb the
necessary learning curve. Coupled with
DSH cuts, the mix may be financially
toxic for many stand-alone SNICHs.
Even well-capitalized SNICHs will face
growing financial pressures under the
ACA. Large healthcare networks can
afford best-in-class management,
invest in best-in-class technologies, and
leverage purchasing power. In contrast,
all but the best-endowed SNICHs
will fall farther behind each year in a
more complicated system that rewards
efficiency and penalizes inefficiency.
It will be very difficult for SNICHs to
survive on their own. State cuts to
Medicaid budgets are increasing despite
a growing demand for services. Medicare
value purchasing programs, combined
with ACA-mandated reductions in DSH
payments and Medicare market basket
payment updates, are likely to exacerbate
financial limitations, particularly in states
that have refused to expand Medicaid
coverage. Growing fiscal constraints at
the federal, state, and municipal levels, as
well as the unintended consequences of
the ACA, are likely to combine to make
it extremely difficult for stand-alone
SNICHs to survive in the long term and
will result in many consolidations or, in
highly overbedded markets, closures.
SNICHs will also be affected by the ACA’s
focus on fraud mitigation. Healthcare
expenditures account for about 17. 9
percent of gross domestic product
(GDP). Annual healthcare spending lost
to fraud and abuse claims is estimated
at between $82 billion and $272 billion,
the equivalent of 0.5 to 1. 7 percent
of GDP (source: Donald M. Berwick,
The federal government believes that
consolidations of healthcare providers
will significantly reduce healthcare fraud.
The government will have larger and
more creditworthy entities to pursue
when excess reimbursements are
identified. Furthermore, by reducing the
number of providers, the potential for
widespread abuse may also be reduced.
Because SNICHs are, by and large,
small institutions, the pressure on them
to consider consolidating with larger
healthcare systems will only increase.
Here again, the ACA’s goal of reducing
healthcare fraud and abuse, laudable
though it may be, will likely have
unintended consequences for SNICHs.
What Can SNICHs Do?
During the two-year period from
2012 to 2013, 20 hospitals filed for
Chapter 11 bankruptcy protection or
announced plans to close. During
the first three months of 2014, seven
hospitals had already taken such
actions. Given the additional financial
pressures brought about by the ACA,
one can expect this increased level
of distressed activity to continue.
A SNICH that has stable cash flow
and reasonable liquidity can take a
pragmatic approach to preserving its
independent mission by seeking to join
with a larger network in providing shared
services. Organizations with stable but
limited liquidity may wish to
consider seeking accelerated
timelines through out-of-court mergers or sales.
For institutions with
compromised financials, it is
critical to preserve sufficient
liquidity to assess and
pursue strategic options. Boards and
management should never let liquidity
be depleted to the point that there are
insufficient funds to guarantee, in a
worst-case scenario, a safe wind-down
of the hospital and an orderly transfer
of patients. In this regard, they should
never rely on the discretion of a lender to
make advances in a distressed situation.
As a first step in deciding between
strategic alternatives, it is critical to
develop a weekly liquidity projection
covering 13 to 26 weeks to assess
cash flow constraints. The choice of
strategic alternatives may be heavily
influenced by the time frame available.
The liquidity projection should be a
conservative baseline without imbedded
improvement initiatives, reflecting a
two standard deviation sensitivity (95
percent expectation of achievement).
The liquidity projection will be a key
driver to setting the expectations of
the stakeholders. Once a liquidity
projection is prepared, an integrated
financial model can be used to evaluate
the possibility of implementing
improvement initiatives, assess long-term debt capacity, and serve as the basis
for negotiations with stakeholders.
The driving force of such negotiations
is to understand the short- and long-term cash flow debt capacity in relation
to the sale value of the assets, both
as a going concern and as dark value
(non-operating sale). It is advantageous
to perform dark-value appraisals prior
to engaging in negotiations because
they represent the value of the hospital
if the assets were to be repurposed.
It may also be advisable to conduct a
parallel sale process, if one is not already
underway, to assess market value.