Community Hospital Loan Risk

February 1, 2017 | Article

More than 70 rural hospitals in 25 states have closed since 2010. National studies have shown that several hundred more are in an “at risk” state. Health care is changing, and rural hospitals have to change with it or risk closure.

Rural hospitals are often an important economic engine in any rural community—sometimes one of the largest employers and often with one of the highest payrolls supporting the community. When loans are made to the community hospital, it’s important to be aware of the risks. Many of these rural hospitals are dependent upon Medicare, Medicaid or local tax revenue to survive. The Medicare and Medicaid programs bring a level of complexity that needs to be evaluated and understood. If the hospital is receiving tax revenues, they are often tied to specific debts or expenses and may not be available for collateral.

Case Studies
Here are a couple recent case studies that show the difference a proper plan can make for hospitals. 

Situation 1
A local hospital with more than 200 employees and that has been financially stable for years went into an expansion phase, adding several new clinics that required several million dollars in loans from three different community banks. This, along with some other operational issues, caused the hospital to file Chapter 9 Bankruptcy, at which point the board needed to find a buyer and keep the operations going long enough to close the sale and payoff its loans.
The risk that was not addressed early enough here was the hospital’s lack of a long-term plan that addressed the changing health care landscape.

Situation 2
A hospital was losing millions because they were not changing their operations as quickly as the industry was changing. Recommendations through an operational analysis helped hospital management cut their payroll in half while increasing some of their revenue, which brought them back to a break-even point. Management is now working on a long-term picture of what they need to become to survive in today’s health care environment and the changes in the Medicare and Medicaid programs.

A Common Thread
Eide Bailly has worked with several rural hospitals over the last year in either a turnaround situation, strategic planning or taking them through bankruptcy reorganization. In every case, the local community bank had some loans out to these facilities. None of these banks wanted to foreclose on the local hospital, so they ended up carrying the loan. Make sure your bank is taking the time to review its risk if it is involved in the complex industry of rural health care. 

Contact your Eide Bailly Professional for assistance with risk management.

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