More Than Half of U.S. Hospitals Are Now Technically Insolvent or at Risk of Insolvency,...

Tue Apr 22, 2008 1:21pm EDT

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More Than Half of U.S. Hospitals Are Now Technically Insolvent or at Risk of Insolvency, According to New Alvarez & Marsal Study

     Looming Crisis Takes on New Sense of Urgency as Dependence on
     Sources of Non-Patient Care Revenue Become More Vulnerable in
                           Weakening Economy
NEW YORK--(Business Wire)--
More than half of short-term acute-care hospitals in the United
States are technically insolvent or at risk of insolvency, according
to a recent analysis conducted by Alvarez & Marsal Healthcare Industry
Group, part of the global professional services firm Alvarez & Marsal.
As states and municipalities begin to limit spending in the face of
slumping tax revenues and a weakening economy, the financial health of
many hospitals is likely to further deteriorate. Many will encounter
serious liquidity crises and face the prospect of radically
restructuring or shutting their doors, the report notes.

   Among the key findings of the Alvarez & Marsal analysis:

   --  More than 2,000 of the nation's 4,900 acute-care hospitals do
        not make a profit treating patients and must rely on alternate
        and generally unstable sources of funding, including
        government subsidies and philanthropic contributions.

   --  Of the hospitals classified as "profitable," approximately
        1,000 do not generate sufficient cash flow to fund essential,
        non-discretionary capital expenses necessary to comply with
        regulations and/or remain competitive with increasingly
        dominant academic medical centers.

   --  Capital expenses in the hospital industry are underfunded by
        $10-20 billion, largely because capital dollars have been
        diverted to fund operations.

   --  The majority of potentially insolvent hospitals are located in
        urban areas.

   --  The lack of profit- and performance-based incentives in most
        hospitals prevents the industry from attracting the management
        talent that is prevalent in other sectors. In many cases, the
        complexities of operating a hospital or hospital system
        overwhelm management and the boards that oversee them.

   "The findings of this study underscore the sobering reality that
decades of incremental change have not ensured the long-term viability
of our nation's hospital system," said George D. Pillari, a managing
director in Alvarez & Marsal's Healthcare Industry Group. "With a
government safety net becoming less and less reliable and non-patient
sources of funding becoming fragile, it has become critical for
hospital management and boards to deal with these troubling issues
head on and take urgent steps - such as restructurings, mergers or
recapitalizations - to improve their finances and allow hospitals to
execute on their missions. In the absence of such action, hospital
insolvencies will increase and community after community could be
forced to grapple with a steady decline in access to care."

   "In today's healthcare environment, there are many factors that
separate successful and unsuccessful institutions," said Guy Sansone,
managing director and head of Alvarez & Marsal's Healthcare Industry
Group. "Unfortunately, the gap between the 'have' and the 'have nots'
continues to widen, making early strategic intervention critical in
preventing a downward spiral that ultimately ends a hospital's ability
to fulfill its mission."

   Data, including operating expenses and net revenue, for fiscal
years ending in 2005 and 2006 were gathered for each short-term acute
care hospital in the U.S. with more than 25 beds. Hospitals with
missing data were eliminated, reducing the final sample from 4,510 to
3,861. The sample was then compared to the universe, as published in
the American Hospital Association's directory, Hospital Statistics, to
ensure the sample was representative and unbiased.

   The analysis focused on two key measures of hospital performance:
patient care margin (i.e., net patient revenue less operating expenses
divided by net patient revenue) and EBITDA margin (net income +
depreciation + amortization + interest + taxes) / operating revenue
(net patient revenue + all other revenue). To minimize the effects of
unusually good or unusually bad years of financial performance,
average values of the metrics for 2005 and 2006 were used.

   --  Patient Care Margin less than 0.0 percent - If a hospital
        cannot earn a profit on its patient care services, it must
        rely on non-patient care sources of funding to remain viable.
        Hospitals not earning a profit on patient care will become
        insolvent when they can no longer sell or borrow against
        assets, or receive emergency governmental aid to fund losses.

   --  EBITDA Margin less than 4.0 percent - A minimum level of
        profit and cash flow is required for a hospital to fund daily
        expenses and re-invest in necessary, nondiscretionary capital
        expenditures. Capital investment needed to remain competitive
        is estimated at 6.0 percent to 8.0 percent of annual operating
        revenues. This analysis identified a level of 4.0 percent as
        the minimum level of profitability for a hospital under
        pressure to fund day-to-day activities, as well as a
        "survival" level of capital expenditures.

   The complete findings of the analysis are available at
www.alvarezandmarsal.com.

   Alvarez & Marsal Healthcare Industry Group: Changing the Business
of Healthcare(TM)

   Alvarez & Marsal's Healthcare Industry Group is changing the
business of healthcare. As the leading, independent global
professional services firm, Alvarez & Marsal's dedicated healthcare
professionals have established a long and successful track record of
working with management, boards of directors and stakeholders of both
investor-owned and non-profit providers, payors and suppliers to
improve financial, operational and clinical performance. For 25 years,
Alvarez & Marsal has set the standard for working with organizations
to tackle complex issues, boost performance and maximize value for
stakeholders whether serving in advisory, interim or contract
management roles.

   Alvarez & Marsal delivers independent, fact-based and fresh
perspectives to healthcare leaders across the continuum of care. The
firm's comprehensive healthcare industry services include strategic
advisory; financial, operational and clinical performance improvement;
interim, crisis and contract management; turnaround and restructuring,
transaction and financial advisory; compliance, governance and
investigations. All Alvarez & Marsal professionals bring a proven
hands-on approach to serving clients, and excel at leadership,
problem-solving and value creation.

   For more information, visit www.alvarezandmarsal.com.

Linden Alschuler & Kaplan, Inc. Public Relations
Hannah Arnold / Casey DePalma, 212-575-4545
or
Alvarez & Marsal
Rebecca Baker, 212-759-4433
Chief Marketing Officer

Copyright Business Wire 2008
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