Image: Emogene Brown, Dr. Steven Yucht
Phil Sandlin  /  AP
Dr. Steven Yucht, right, talks with emergency room patient Emogene Brown, left, in the Shands AGH Hospital in Gainesville, Fla. The hospital is shutting down next fall because of the economy.
updated 12/28/2008 2:11:38 PM ET 2008-12-28T19:11:38

Gainesville's first community hospital has been on life support since the Shands Healthcare system in northern Florida bought it a dozen years ago.

Now, because of the recession, the plug is being pulled on 80-year-old, money-losing Shands AGH. Next fall, its eight-hospital not-for-profit parent company will shut the 220-bed hospital and shift staff and patients to a newer, bigger teaching hospital nearby as part of an effort to save $65 million over three years across the system.

Like many U.S. hospitals, Shands is being squeezed by tight credit, higher borrowing costs, investment losses and a jump in patients — many recently unemployed or otherwise underinsured — not paying their bills.

All that has begun to trigger more hospital closings — from impoverished Newark, N.J., to wealthy Beverly Hills, Calif. — as well as layoffs, other cost-cutting and scrapping or delaying building projects.

More closings and mergers are on the way, industry consultants predict.

"They'll get swallowed up by somebody else, if they need to exist, and if they don't, they'll just close," said Tuck Crocker, vice president of the health care practice at management consultant BearingPoint.

Endangered hospitals
Most endangered are rural hospitals and urban ones in areas with excess hospital beds and a lot of poor, uninsured patients.

Hospitals, which employ 5 million people, are reporting that donations and investment returns are down, patient visits are flat and profitable diagnostic procedures and elective surgeries are declining as people with inadequate insurance delay care. But those patients are turning up later at ERs, seriously ill, making it tough for hospitals to lay off nurses and doctors.

All those problems are aggravating long-standing stresses: stingy reimbursements from commercial insurers, even-lower payments that generally don't cover costs for Medicare and Medicaid patients, and high labor and technology costs.

Slideshow: The Year in Health Cartoons Hospital executives and consultants say the growing number of people with high-deductible health plans is boosting unpaid patient bills. Many worry health reform efforts by the Obama administration could bring cuts in Medicare reimbursements, and many cash-strapped states already have begun cutting payments for poor people covered by Medicaid.

‘Prospects of a protracted recession’
In the past few months, patients and insurers have been paying hospital bills more slowly. As a result, some think hospitals will start demanding up-front payments for elective procedures.

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In November, Moody's Investors Service changed its 12- to 18-month outlook from "stable" to "negative" for nonprofit and for-profit hospitals, citing "prospects of a protracted recession," bad debt and the credit crunch.

"Looking forward, the cost of borrowing will likely be higher — and may be nonexistent for lower-rated hospitals," Moody's noted, a problem because hospitals borrow for everything from expansions and equipment to payroll and supplies.

Since October, there's been "a dramatic slowdown" in plans for new wings and building upgrades, with many delayed indefinitely, said Paul Keckley of the Deloitte Center for Health Solutions.

"It probably means we won't have as many new things in the hospital," he predicted.

Tim Goldfarb, CEO of Gainesville-based Shands Healthcare, said his system, Florida's second-largest provider of charity care, this year has seen bad debt jump 20 percent from patients with no insurance.

"We write them off," Goldfarb said. "It's a burden that we cannot carry any longer."

Florida started cutting Medicaid reimbursements two years ago, when its economy started to slow, Goldfarb said. He fears another huge cut next year.

Shands already has paid off variable-rate bonds to avoid higher interest rates, deferred roughly $25 million in equipment purchases, shifted management meetings to church halls and adopted employee suggestions to save millions more.

Goldfarb believes closing Shands AGH will save nearly $100 million over seven years, mainly by avoiding costly renovations, but some administrative jobs will go.

Bankruptcies on the rise
Around the country, while some hospitals still are doing well, closings and bankruptcies seem to be picking up.

In New Jersey, where 47 percent of hospitals posted losses in 2007, five of the 79 acute-care hospitals closed this year, and a sixth may close soon. In Hawaii, nearly every hospital is in trouble, with two filing for bankruptcy and one nearly closing recently.

All over, hospitals are cutting costs by outsourcing services like housekeeping and security and trimming staff through layoffs, hiring freezes and attrition. Most are trying not to touch patient care jobs — nurses, pharmacists, therapists and X-ray technicians — as those already have staff shortages.

"The last thing we can do is skinny down our staffing right where we need it the most," said Mike Killian, marketing vice president for the three Beaumont Hospitals in suburban Detroit.

There, auto industry job losses and other factors now equal fewer patients with commercial insurance. The system expects a $22 million loss, its first in at least 40 years, Killian said.

Slideshow: Perspectives on health care So Beaumont this fall announced a $60 million restructuring program that includes 4-10 percent pay cuts for doctors and managers, reducing overtime for some employees and eliminating 500 jobs, 200 already vacant, mostly outside of patient care. Rich Umbdenstock, chief executive of the American Hospital Association, said some of the hardest-hit hospitals began reducing staffing and services as early as last spring and more will follow. He expects some to eliminate services — money-losers such as behavioral health treatment, or those with high operating costs such as burn units — rather than weaken their entire operation.

An association survey of more than 700 hospitals found two-thirds have seen elective procedures and overall admissions fall since July, and half have seen moderate or significant jumps in nonpaying patients.

An industry database on more than 550 hospitals found their third-quarter investment results amounted to a combined loss of $832 million, down from a $396 million gain a year earlier. During the quarter, those hospitals paid 15 percent more in borrowing costs and swung to a 1.6 percent average loss, from an average 6.1 percent profit margin a year ago.

"They're having serious problems getting the capital they need for needed renovations and upgrading their facilities," said Mike Rock, a lobbyist at AHA, which is seeking increased federal reimbursements from Medicaid and Medicare.

At Exempla Healthcare, with three hospitals in Denver and its suburbs, Chief Executive Jeff Selberg said there's usually a 5-7 percent annual profit margin, but this year investment losses wiped that out. He's scaled back a $200 million plan to upgrade facilities, information technology and clinical equipment and may halt construction of a new maternity unit and operating rooms at one hospital.

Selberg has seen a slight increase in bad debt and expects more problems.

"We feel like the wave is coming, but it hasn't hit yet, and we don't know how big this wave is going to be," he said.

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