Are Half of Hospitals Insolvent? Not Exactly

A few weeks ago, we highlighted the surprising fact that top nonprofit hospitals in the U.S. are making a ton of money, even as many of them shirk their legal duty to serve the uninsured. Some are now even charging patients enormous sums up front before treating them for cancer and other serious conditions.

As one commenter pointed out here at the time, though, many other hospitals are living much closer to the edge. Now we have what looks like some hard evidence of that, courtesy of the restructuring consultants Alvarez & Marsal. The firm's recent report on hospital finances (PDF link) concludes that more than half of the 3,861 hospitals it surveyed are technically insolvent or "at risk of insolvency."

Those findings, however, are quite a bit less dire once you dive into the details. The firm reports that 53 percent of the hospitals it studied don't earn a profit on patient care, meaning that they're forced to make up for medical losses with charitable donations, government funding, gift-shop receipts, parking fees and a variety of other sources. The firm contends that such funding can get a lot shakier in tough economic times -- thus its classification of such hospitals as "at risk of insolvency."

That's an awfully loose definition, though, and it raises the obvious question of whether Alvarez & Marsal is basically trying to drum up some consulting business by scaring hospital administrators, state and local governments, and large hospital chains. That thought apparently didn't occur to the WSJ, which wrote about the firm's study under the headline, "Hospitals Face Financial Squeeze." (The full article requires a subscription, although the Kaiser Daily Health Policy Report also provided a helpful summary.)

As it turns out, Alvarez & Marsal also looked at a more conservative measure of financial distress -- namely, whether hospitals can generate enough income to replace old buildings and equipment. The firm looked at earnings before interest, taxes, depreciation and amortization, or EBITDA, a measure of operating cash flow before capital expenses and other costs. Hospitals with EBITDA amounting to less than four percent of revenue are supposedly unable to fund even a "survival" level of capital investment, according to the analysis.

By that standard, only 19 percent, or 744, of the 3,861 hospitals in the study are technically insolvent, Alvarez & Marsal found. (All but seven of those facilities also rack up losses on patient care.) That's still a pretty large number of hospitals in financial peril, but it's nowhere near as serious as A&M apparently want us to think.

Unsurprisingly, the firm concludes that there are too many hospitals -- or, in consultant-speak, that the industry "tolerates excess capacity that would be unheard of in rational economic markets." Maybe yes, maybe no -- the economics of healthcare are so twisted in most respects that I'm not sure anyone can say with certainty. (At least anyone who doesn't make their living telling businesses how to restructure themselves, that is.) Meanwhile, anyone interested in taking on the challenge of "rationalizing" the hospital industry would be wise to check out Jane Sarasohn-Kahn's recent post, "Why it's impossible to close a hospital."

Image by Flickr user Giant Ginkgo, CC 2.0