Exploring the Options for a Distressed Hospital
Client/Profile
A financially distressed New England community hospital
Challenge/Situation
To guide a struggling acute care hospital with long-standing community ties in an affiliation exploration process, and to analyze its financial viability as an independent entity.
After several years of increasing financial pressure, the hospital was reluctantly forced to consider affiliation. The client requested that we clarify the situation, determine available approaches and engage the board on criteria for affiliation. The client also sought accurate financial projections of its performance if it were to remain independent, including its ability to service debt under scenarios including potential conversion to Medicare critical access status.
Process
Veralon facilitated an education and planning session to guide the affiliation process, in conjunction with ACCORD, a strategic partner. We evaluated several potential partners for fit with criteria identified by the board through planning sessions, interviews, extensive research, and data analysis.
Veralon projected future financial performance in the absence of affiliation, based on a baseline scenario for utilization, payment, and expense levels developed in conjunction with hospital management. This analysis included assessing the impact of health reform and the scheduled sale of an unsuccessful subsidiary. We facilitated management working sessions to identify reasonable expense reductions that would increase funds available for debt service.
Results
Our projections ultimately showed overall expenses outpacing revenues even in the most optimistic scenario. These findings gave management the information needed to negotiate revised repayment terms with creditors.
We also simulated the results of operations if the hospital were designated a “Critical Access Hospital” under Medicare regulations, finding that this would allow the hospital to meet current debt service requirements. The hospital is considering additional analysis that would precede a formal application for CAH status, while continuing to engage with potential affiliates on options and approaches.