HomeTown Health CEO's and Senior Staff :

Reference: Important!!!! 2014 - So with so many possible rural hospital closures what will the hospital model look like in 2014 if it’s as bad as it appears?


By: Jimmy Lewis, CEO

theleadershipgrp@mindspring.com

HomeTown Health, LLC

www.hometownhealthonline.com


Wow!! Your responses were many and expressing much concern for your hospitals as you affirmed the issues in the attached email of 12-31-2013. Important to read attachments



This commentary is in response to your questions to the HomeTown recent email of 12-31-2013 ( copy attached). Your questions have been “so if there are some many pending rural hospital financial problems what is the model that will work in Georgia?” In order to understand what may work , one must understand what is available and what has not worked in Georgia. First, one must understand why immediate action is required. It takes a 40,000 population service area as a given for a rural hospital to survive. There are about 60 rural hospitals in existence in the state of Georgia. Those sixty hospitals have an average county population of 18,000 or so for a total of just over 1,000,000 people. Then at 40,000 population per hospital theoretically there is financial room for 25 hospitals. Give communities with a will to live to find ways to survive some of which are below, that number may be 30-40 rural hospitals surviving. Still the excess rural hospital capacity in beds is in the vicinity of 15 or more rural hospitals and that is what is being seen in the Georgia rural hospital industry. In other industries this is called the “shake out” and this is probably why the federal government and the state government may not be so adamant in jumping in and saving rural hospitals.

Compound this issue with the fact that days cash in so many rural hospitals is less than 10 and the problem becomes dire.



So how has HomeTown developed this commentary? Having had so many interactions with your hospitals in the last year and now since Thanksgiving 2013 having worked in many strategic plans and crisis events with various hospitals, the common threads in issues come down to cash shortage, bad payer mix, demographic shortage, CEO turnover, and lack of Board education to take strong steps to improve.



While many have said this is all “Gloom and Doom” and it may be , more importantly this is a reality check and call to action to deal with the critical issues of the day proactively instead of reactively.



This analysis precludes the fact that rural Georgians need and deserve health care just like other Georgians, WHICH THEY DO VERY BADLY AND IS WHAT HOMETOWN FIGHTS FOR DAILY!!!! So what are the options?

Options:

1) Do nothing

a) This is always the first option

i) Occasionally this option is used to buy time for a variety of reasons

(1) Hire a new CEO

(2) Drop an existing relationship as an example

2) Affiliations include:

a) 100% equity takeover

i) Full asset purchase with resolution of who buys or sells any outstanding debt

ii) Requires CON and Attorney General approval

iii) Requires a deep pocketed investor because most rural hospitals require at least $3 million subsidy annually

(1) There are insufficient inefficiencies that can be fixed to carry the debt load

(2) Critical Access Hospitals have spiraled their cost to charge ratio down to the point that there is no improvement room left without paying the efficiency penalty, thus paying back to federal government all gains

b) Management Contracts/No equity exchanges

i) Typically used to get hospital out of management business

ii) Contractor may have one two motives

(1) Squash competition and close unit

(2) Make a profit off of inefficiencies that can be cleaned up

(3) Management fees range from profit sharing up to $600,000 annually plus hiring of CEO and CFO plus 20% - 30% commission on their salaries

(4) Little equity type expenditures invested in neither hospital nor community

c) Consulting contracts/no equity

i) This is usually done short term either to clean up a very bad operational or financial situation e.g., a bond covenant violation resulting in bond agent taking over until resolution complete

ii) To prepare for next option of disposal

d) Long Term Leases/no equity exchanges

i) Usually designed to get a leaser into a relationship long enough to make equity type investments

ii) Negotiated lease with resolution of who assumes, buys, or sells any outstanding debt

e) Short Term Leases/No equity exchanges

i) This usually done short term either to clean up a very bad situation or

ii) To prepare for next option of disposal

f) Soft Network affiliations/no equity exchanges

i) Usually verbal agreements and letters of commitment but nothing contractually binding e.g., verbal agreements to participate in physician recruiting in exchange for tertiary referrals

ii) These are new and appear to have a lot of rhetoric but are filled with non commitment and skepticism larger system has “no real skin in the game”

iii) Many question their long term viability for smaller hospitals because there are no guarantees of success

iv) Rural hospitals do not give up their independence

g) Shared services affiliation/no equity exchange

i) Usually verbal agreements and letters of commitment but nothing contractual binding e.g., verbal agreements to participate in physician recruiting in exchange for tertiary referrals and are similar to “f” above

ii) These are new and appear to have a lot of rhetoric but are filled with non commitment and skepticism

iii) Many question their long term viability for smaller hospitals because there are no guarantees of success

iv) Rural hospitals do not give up their independence

3) Note!

a) The above options have a very limited degree of success when made up of a large hospital taking over a small hospital because

i) The cultures of larger hospitals are not sensitive to the micro management needs of a smaller hospital

ii) Large hospitals try to impute the IT and Business office/Registration practices on the smaller hospital

iii) The above options have a much better survival rate if the parties participating are of mutual size financially speaking

4) New possibilities

a) Joint collaborative

i) Two or more hospitals collaborate or joint venture a service line such a laundry, sharing a surgeon, business office

ii) This is new but a few minor instances are occurring

iii) Can have very positive results recognizing that it takes 40,000 population to for a hospital to survive without subsidy and this allows overhead distribution over a large volume

iv) This creates a joint venture while leaving the two or more hospitals in place

v) This is a viable long term venture if the cooperative politics are dealt with at the front end properly

vi) Rural hospitals do not give up their independence

b) Consolidation

i) Two more hospitals( two provider numbers) join in a legal structure to create one hospital with one Provider number

ii) This is new but a few minor instances are occurring

iii) Can have very positive results recognizing that it takes 40,000 population for a hospital to survive without subsidy

iv) This creates a joint venture for the purpose of taking excess costly capacity out of the industry

v) This can be a very difficult venture to engage and succeed because of very technical, political, and arbitrary agreements that can be required to create the venture

vi) This may be a viable long term venture if the cooperative politics between parties are dealt with at the front end properly

vii) This is has occurred extensively in the Atlanta Urban area and probably will continue and can be used as a model for rural Georgia

5) The big question for 2014 for some rural hospitals is will there be sufficient cash to live and last through while evaluating, adopting, and implementing one of these options.



So beginning with an email dated February 5, 2013 from HomeTown (copy attached) and to understand what has not worked well, it is very clear that in Georgia few management contracts have worked as an option.



Equity arrangements that tie larger or more heavily capitalized ventures may not have worked but created a sense of stability for the smaller hospital even if the larger hospital took a major financial hit. Even many equity arrangements in smaller hospitals are now appearing to be in very much trouble and will face sale or outright closure because there is no middle of the road downsized system defined or allowed by the state facility/CON regulations.



Quoting from an earlier HomeTown Email to CEO’s dated 2-5-2013–

“As rural hospitals have aggressively pursued various affiliations with other entities in recent years the question that repeatedly has been raised in strategic discussions with CEO’s is “do hospital management contracts work in Georgia” as a means to help a hospital survive.



As a means to answer this question HomeTown has researched back about 10-1 2 years to see which rural hospitals have engaged management contracts and did they have any longevity. It has been assumed that if the management contract that was employed was then terminated and not reemployed that it was a failure. Additionally a couple of contracts have been engaged and based on local newspaper reports they seem to be having problems. As a result, the following is a blinded summary of hospital management contracts employed, terminated, still good in place, and otherwise problematic based on media reports.



Total Hospital Management Contracts Terminated in last 10-12 years 34 or 90%

Total Hospital Management Contracts appearing to be having major problems currently 2 or 5%

Total Hospital Management Contracts still in place and functioning – assumed good (because they have not been terminated) 2 or 5%

Total Hospital Management Contracts implemented in last 10-12 years 38 or 100%



Then cumulatively, 95% of Hospital Management Contracts in Georgia have been terminated and no longer are in effect or are currently having problems leading to the conclusion that Hospital Management Contracts seem to have a low probability of succeeding in rural hospitals.



The question that has been asked then is “Why the low probability of success with this option – management contracts?” the answer seems to be

1) As long as there is sufficient volume and margin to cover administrative expenses the management contract expenses can be covered

2) As reimbursements have fallen there is no margin to cover the un-reimbursable administrative or consulting fees that are inherent in the Hospital Management Contracts

a. The administrative Fees and consulting fees have ranged from $500,000 to $1 million annually for which there is no margin to cover the expenses

3) Because the admin is so big and over a period of 3-5 years, it erodes all cash cushion the end result is there is no cash to pay the contract nor is there any opportunity to ever replenish the cash

a. The contract usually looks good initially as the Management Contact reduce A/R down to 40 days. Thereafter there is no cash available so the Vendors then become the bank until they call the question and problems occur and contract are terminated.

4) The volume break for successful Hospital Management Contracts based on Georgia’s experience may be that it takes at least $70 million Annual Net Revenue to support a Hospital Management Contract and that may be increasing based on deteriorating reimbursement.



Also indications nationally are that the numbers of Hospital Management Contracts have fallen dramatically in the last five years reportedly as much as 50% which indicate that they must not be as favorable as in the past.



While there are a few equity positions held by regional hospital motherhships for surrounding smaller hospitals as well as long term leases, there is insufficient data at this time to determine how well they are working. The total number of equity positions and long term leases held in Georgia rural hospitals may not exceed 12-15. Stability can follow these positions because regional hospitals may be willing to weather losses in hopes of tertiary referrals.



The primary reason for termination of contracts has been that the administrative costs of the contracts have not been fully reimbursable and some cases the administration fees have exceed $600,000 annually on the top of hospital expenses. When the current reimbursements are so tight as they are at 85.6% of cost for PPS and when CAH cost to charge ratios are reduced so low, there is no room for a management fee to be reimbursed or paid. “





So the purpose here is to answer your questions about options and to outline options as rural hospitals enter into crisis periods and what may have worked or may not have worked in the past. Based on what you are telling us, the shakeout may be beginning to occur in 2014. Because HomeTown has seen and followed virtually every option that has been employed in the past ten years, we are probably the most informed source that you can engage to plan with. Call us if we can assist in any way as you evaluate options and do strategic planning.



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