Mobile Edition
Print
Get the Mag
Weekly UpdatesEXECUTIVE SUMMARY
Between 2000 and 2006, 42 U.S. acute care hospitals filed for bankruptcy protection under federal law. This article explores hospital bankruptcies over a six-year period. Bankrupt hospitals are compared with their competitors, and hospitals surviving bankruptcy are compared with those organizations that eventually close. Finally, this article identifies nonfinancial factors associated with the filings and categorizes these factors into a political and economic framework.
A literature review of hospital trade publications is used to identify organizations filing for bankruptcy during this period. Data gathered from these resources are used in concert with American Hospital Association data to identify hospital characteristics and publicly available information on factors surrounding hospital bankruptcy filings. Data on the status of hospitals after filing are also collected to determine whether bankruptcy reorganization is successful or results in hospital closure.
Results indicate that 67 percent of hospitals filing for bankruptcy during this time eventually ceased operating. Bankrupt hospitals are smaller than their competitors. They are also less likely to belong to a system and more likely to be investor owned. Factors associated with filing organizations are placed into a political and economic framework derived from Park's work on municipal bankruptcy filings. Common nonfinancial factors associated with hospital bankruptcies include mismanagement, increased competition, and reimbursement changes.
**********
In late 2008 and into 2009, the economy could be described as volatile at best and on the verge of a depression at worst. U.S. hospitals continue to provide care amid a sea of home foreclosures and bank collapses as well as a consumer credit crisis (Grant 2008; Starkman 2008). These organizations are seeing bad debt increase, while the number of uninsured citizens continues to rise (Putre 2008). Compounding the financial situation for hospitals, government reimbursement for programs such as Medicaid is threatened by instability in state budgets (DoBias 2008). With a steadily increasing rate of unemployment, the financial outlook for hospitals is not promising. Many of these organizations will be stressed to the point of breaking, and bankruptcy is one potential strategy either to relieve financial pressures to allow for reorganization or to transition these facilities into closure.
Between 2000 and 2006, 42 U.S. acute care hospitals filed for bankruptcy protection under federal law. Some were forced into bankruptcy by creditors, while others voluntarily filed in an effort either to reorganize or to become more attractive to potential buyers. While a bankruptcy can serve as a positive financial strategy, allowing for hospitals to continue operations, typically it costs millions of dollars to creditors and often ultimately results in hospital closure. Research has been conducted on antecedents to hospital closures (Bazzoli and Andes 1995; Sloan, Ostermann, and Conover 2003) and hospital financial performance (Cleverley and Harvey 1992; Ginn, Lee, and Ellis 2006; McKay and Dorner 1996). However, except for descriptive studies on the financial characteristics associated with filings (Bazzoli and Cleverley 1994; Coyne, Singh, and Smith 2008), research on hospital bankruptcies is scarce.
A community might benefit from the successful bankruptcy reorganization of a local hospital, because this effort keeps the organization in business. In contrast, if the reorganization is not successful, hospital closure can negatively affect the local economy (Holmes et al. 2006) and reduce access to healthcare (Buchmueller, Jacobson, and Wold 2006). A hospital might file for bankruptcy protection in an effort to reduce debt to become more attractive to potential buyers (Becker 2001 a; Kirchheimer 2001a, 2001b). In such cases, large hospital chains tend to benefit from hospital bankruptcy motivated by an organization's desire to be sold. It appears that the only definite beneficiaries of hospital bankruptcy filings are lawyers. In a large bankruptcy filing, the legal fees incurred are substantial, often running into the millions of dollars (Nickles and Adams 1994).
Because of the paucity of research on hospital bankruptcies, the factors associated with financial distress and eventual filing are poorly understood. This article attempts to answer these questions: (1) How are hospitals that file for bankruptcy different from their competitors? (2) How are hospitals that either remain open under or successfully emerge from bankruptcy reorganization different from their counterparts that file for bankruptcy and eventually close? (3) Can a framework that explains factors associated with bankruptcy filings in other types of organizations adequately explain factors associated with hospital bankruptcy filings?
We answer these questions by examining hospital bankruptcies over the past six years. We compare the organizational characteristics of bankrupt hospitals with their nonbankrupt counterparts and explore the differences between hospitals that remain open after filing with those hospitals that eventually close. Additionally, we identify nonfinancial factors associated with hospitals filing for bankruptcy and place these factors into a political and economic framework derived from Park's (2004) work on municipal bankruptcy filings. Finally, practical implications and recommendations for future research are offered.
LITERATURE REVIEW
Most empirical research on organizational bankruptcies exists within the finance and accountancy literature and focuses primarily on financial ratios as predictors of filing (Aziz and Dar 2006; Foreman 2003). However, nonfinancial factors associated with financial distress must not be overlooked if we are to diagnose and treat organizations that are moving toward bankruptcy. Factors associated with organizations that successfully emerge from bankruptcy reorganization are also of interest given the low organizational survival rate. One study suggests that only 24 percent of organizations that file for bankruptcy successfully reorganize and that, of those firms that reorganize, only 49 percent last for more than five years (Hotchkiss 1995).
It makes sense to study financial ratios as predictors of bankruptcy because only firms in financial distress consider filing, and, in fact, bankruptcy filing might be viewed as an alternative of last resort for those organizations in dire financial straits. A variety of models have been derived from financial indicators and developed to predict organizational bankruptcies, which range from statistical models (Keasey and Watson 1991) to artificially intelligent expert system models (Yang, Platt, and Platt 1999). Research suggests that simple changes in certain financial indicators can predict future bankruptcy with some accuracy. Structural changes on an organization's balance sheet relating to the composition of assets and liabilities are a signal of potential future financial distress (Booth 1983). Cash flow management problems, particularly an imbalance in cash inflows and outflows, are also indicative of potential future financial insolvency (Aziz, Emanuel, and Lawson 1988; Laitinen and Laitinen 1998). Sophisticated credit-risk models have also proven to he good predictors of organizational bankruptcy (Aziz and Dar 2006). However, a proactive approach that identifies organizations with the potential for future problems in advance of poor financial statements requires the examination of nonfinancial factors in addition to financial ratios and balance sheets.
Although some studies evaluate antecedents to financial distress (Denis and Denis 1995; John, Lang, and Netter 1992; Poulsen and Khanna 1995), many ignore nonfinancial factors associated with bankruptcy (e.g., Ooghe and De Prijcker 2006). Much research that attempts to identify nonfinancial components associated with bankruptcy tends to look at poor management as a major factor in bankruptcy filings (D'Aveni and MacMillan 1990; Greening and Johnson 1996). Management is responsible for setting an organization's strategic direction and creating corporate policies, which can lead to organizational failure if done poorly (Hambrick and Mason 1984; Ooghe and De Prijcker 2006). Poor management can also hinder organizational recovery under bankruptcy, and the retention of pre-bankruptcy management under reorganization has demonstrated negative effects on post-bankruptcy performance (Hotchkiss 1995).
A different perspective is offered in the finance/accounting realm. Research suggests that macroeconomic and regulatory changes lead to bankruptcy (Denis and Denis 1995) and that managers tend to blame the economy for poor financial performance (John, Lang, and Netter 1992). One study evaluated the different decisions made in failing and nonfailing firms and found no significant differences. This same study reported that, despite similar behaviors, managers were still blamed for factors beyond their control (Poulsen and Khanna 1995). These findings suggest that management does not bear the sole burden for bankruptcy.
Organizational characteristics such as size (Baum 1996) and maturity or newness (Fichman and Levinthal 1991) have been linked to bankruptcy and organizational failure. Larger organizations are less likely to file for bankruptcy than their smaller counterparts (Baum 1996), and they also demonstrate a greater chance of bankruptcy survival than smaller firms (Dawley, Hoffman, and Brockman 2003). In addition, older, more well-established organizations are less likely to face financial failure than their younger counterparts (Fichman and Levinthal 1991).
The process leading to bankruptcy has also been studied. D'Aveni (1989) found that the type of decline an organization is experiencing might influence the timing of bankruptcy filing. Additionally, different "failure processes" among organizations have been identified, which suggests that the time horizon leading to bankruptcy is relevant (Ooghe and De Prijcker 2006).
FEED