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Rural Hospital Challenges: Is Chapter 11 a Quick Fix?

On Behalf of | Jul 22, 2019 | Bankruptcy, Business, Firm News

By: Laura Day DelCotto and Dean A. Langdon

The economic challenges in today’s current health care climate are well documented and run to the core of a fundamental national debate rearing its head in the upcoming 2020 election cycle. “Medicare for All” is more than a sound bite or political posture; the larger issue is whether U.S. citizens believe that access to affordable health care for all is a right in this country. That issue won’t be addressed here but in legislative bodies across the nation. While the debate rages, those who can afford access to the best will travel to and pay for the best care. Those without such means will take their medical care where, when and however they can get it, even if it means traveling to foreign lands for affordable care and medications.[1] Those living in rural America know all too well the shrinking options that are available to them.

A local community hospital is more than just a regular business entity. Often, it is the largest sole employer within a rural area/county.[2] Yet finding and retaining sufficient and talented staff in rural areas is a factor contributing to higher costs or a limited menu of services. Attracting jobs and economic development into rural America is already difficult, and the combination of a tight health care job market and declining rural populations is a one-two punch to the gut of rural hospitals. Without access to hospital care within a close proximity, bringing new jobs into a rural market is highly unlikely. Rural hospitals are continuing to close at an alarming rate[3] as they face fiscal challenges that are too great to correct. Absent a sale to a larger health care system with additional capital or economies of scale, a rural hospital simply lacks the funds to continue to operate.

Unalterable demographic data is a sizable factor. The millennial generation is about to become the largest demographic sector, exceeding baby boomers. Millennials will follow jobs to population centers, and as rural populations continue to decline, falling inpatient admissions and empty beds create a severe financial strain for rural hospitals. Any of us who drive back roads through rural areas across all 50 states can see the population declines first-hand and the resulting economic declines.

Whether we call it a “death spiral” or not, the declining populations and empty beds lead to inability to attract the capital needed to invest in ongoing needs, including aging infrastructure repairs, newer leased equipment, overall modernization and technological advances, not the least of which is the high cost of implementing an electronic health records software program. The lower standard of care leads to the more affluent patients getting treatment at further distances and at larger (and more modern) hospitals in surrounding cities.

In just the first week of May, two hospital systems filed for chapter 11, one in Delaware and the other in Washington. While not exclusively “rural” related, they each verify the many challenges facing hospitals and health care providers. Becker’s Hospital Review is a good online newsletter resource for keeping up with ongoing filings and closures.

LifeCare Holdings, LLC, headquartered in Plano, Texas, filed on May 6, 2019, in Delaware (lead case In re Hospital Acquisition LLC, Case No. 19-10998 (BLS)).[4] There are 27 jointly administered debtors. The First Day Declaration cites to “unmanageable debt services obligations” and “untenable liquidity position” as the key triggers leading to the filing. LifeCare operates 17 long-term acute-care hospitals (along with other nondebtor health facilities/home health agencies) with a total of 865 licensed beds. The Declaration explains the challenges, including the regulatory lowering of Medicare’s reimbursement rates, which generated sharp drops in both revenues and qualified Medicare patients, as well as the “oversupply of beds.” While the system states that it took steps to address improvements in its core business — by building referral sources, adding complimentary businesses, developing “centers of excellence” for specific programs, and closing four “marginally performing” hospitals — these were not enough. LifeCare anticipates a successful sale via a stalking horse APA. Outright closure of the “marginal” locations was part of the events leading up to the chapter 11 process, but there’s no guarantee a buyer will take all locations and might move licensed beds to other more populated areas. The outcome is unclear as the cases are in their infancy.

Astria Health and affiliate debtors also filed on Monday, May 6, in the Eastern District of Washington. There are 13 jointly administered debtors, Lead Case No. 19-01189.[5] The First Day Declaration explains that the acquisition process of two additional hospitals got bogged down in the state regulatory approval process, creating “extended uncertainty” and a reduction in EBITDA. Of greater impact, the costs of a new system-wide EHR platform for all three hospitals had major cash-flow impact, and problems arose from the outsourcing of billing and collections/revenue-cycle management. The cash-flow constraints led to lender defaults, limited liquidity and, ultimately, chapter 11. The debtors hope to reorganize their 315 collective licensed beds.

Rural hospitals will continue to struggle with all these fiscal realities and more. Bankruptcy courts are known for seeing first-hand the U.S.’s broad societal issues within the myriad cases that appear before them. Health care settings are highly specialized and difficult, with ombudsmen, both state and federal regulatory agencies, patient care concerns, pending litigation and other complexities. Buying a breathing spell is not the same as emerging with a successful § 363 sale or confirmed plan. Chapter 11 is one tool, but it is never going to be a fix-it for our ailing rural hospitals. These authors encourage our health care and bankruptcy colleagues to give of their time and expertise as these significant issues move to the forefront and affect all of us, along with future generations.

[1] John Bowden, “Group ‘Caravans’ to Canada for Cheaper Insulin,” The Hill (May 7, 2019), https://thehill.com/policy/healthcare/442473-group-caravans-to-canada-fo….

[2] Gregory M. Holmes, et al., “The Effect of Rural Hospital Closures on Community Economic Health” (Apr. 2006), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1702512/.

[3] Alex Kacik, “Nearly a Quarter of Rural Hospitals Are on the Brink of Closure,” Mod. Healthcare (Feb. 20, 2019), https://www.modernhealthcare.com/article/20190220/NEWS/190229999/nearly-…. According to this article, 430 hospitals across 43 states that employ about 150,000 people and generate around $21.2 billion in total patient revenue per year are at “high risk” of closing, citing a Navigant study of CMS data. The UNC Sheps Center tracks and maintains a running list of the 104 rural hospital closures from January 2010 through April 2019. The Cecil G. Sheps Center for Health Services Research, U.N.C., https://www.shepscenter.unc.edu/ (last visited May 25, 2019).

[4] Pleadings are available at www.primeclerk.com.

[5] Pleadings are available at www.kccllc.net.