Partnering with Distressed Hospitals: Three Case Studies of Turnarounds

Picture of Brendan Rokke
Brendan Rokke
Chief Strategy Officer

From 2019 to 2022, hospitals comprised about 13 percent of healthcare bankruptcies. In 2020, at least 47 hospitals closed or filed for bankruptcy. In 2022, 19 hospitals that filed for bankruptcy closed or announced plans to close.

The problem is even more acute for rural hospitals. “More than 100 rural hospitals have closed over the past decade, and over 600 additional rural hospitals – nearly 30 percent of all rural hospitals in the country – are at risk of closing in the near future.”

Hospital Finances 2023

2023 is expected to be an “exceptionally turbulent” year for hospital and health system finances. Top of mind for most hospital CEOs, CFOs and Boards of Directors are inflation, shrinking margins and increases in hospitals’ labor and supply expenses that have dramatically outpaced revenue growth, leading some experts to predict more hospitals on the brink this year. In the words of Kaufman Hall’s Managing Director Anu Singh, “If reimbursement does not stay on pace with climbing expenses, the industry will likely see more financially distressed sellers this year.”

I am confident Octave’s hospital turnaround services can help the majority of challenged hospitals and financially distressed sellers architect a better future.

Our turnaround engagements begin with a thorough financial assessment that evaluates revenue and expenses, billing and collections, and operations. Once the problems and opportunities are identified, Octave leverages our shared services such as revenue cycle, supply chain and workforce productivity to operationalize changes that improve operating margins. At the heart of our turnaround services are economies of scale we bring to community and independent hospitals, which KaufmanHall calls “crucial to organizations’ long-term sustainability.”

Just ask Springfield Hospital, Abbeville Area Medical Center and Sierra Vista Hospital.

Springfield Hospital (SPH), a 25-bed hospital in Springfield, Vermont, that provides inpatient, outpatient, 24-hour emergency, diagnostic imaging, physical therapy, rehabilitation and general surgical services, specialty care and inpatient general psychiatric care, came “dangerously close” to closing its doors. To say SPH was a distressed hospital is a serious understatement.

Over a three-year period, Octave focused on financial and operational excellence, collaboration and relationship management, and communication, going from one day’s cash on hand and millions owed to vendors and banks to a lower total debt, improved cash flow and positive days cash.

Abbeville Area Medical Center (AAMC), is a 25-bed short-term, acute care, critical access hospital in Abbeville, South Carolina, that provides inpatient, outpatient and 24-hour emergency care services. During the pandemic, AAMC partnered with Octave to turnaround the hospital and expand service lines while earning accolades for its response to the COVID-19 pandemic.

Sierra Vista Hospital (SVH). In 2017, before Octave began working with the board of directors and leaders, Sierra Vista Hospital was facing sizable financial, operational and leadership challenges, including:

  • Declining inpatient volume,
  • Five days cash on hand and cash exhausted in 90-120 days,
  • Expense growth exceeded revenue growth by 244 percent,
  • Negative annual EBITDA,
  • $32 million in new debt and a new hospital building project under way with no ability to meet debt service payments and
  • Debt covenant default.

Now, Sierra Vista’s results show the FY22 operating loss improved to $500,000, following an FY21 operating loss of more than $1.6 million. Days cash on hand has increased from five in 2017 to 150+ in 2022.

This turnaround centered on five best practices:

  1. Financial turnaround
  2. Smart growth
  3. Culture of safety and quality
  4. Optimize workforce
  5. Sustainability and care transformation

Partnering with distressed independent hospitals to help them turnaround their organizations is one of the most important ways Octave supports community hospitals.

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