First COVID, then bankrupt!

Financial impacts of the pandemic hit non-profit hospitals particularly hard

They are still fighting for the survival of COVID patients. By summer at the latest, they’ll be fighting for their own existence.

A wave of insolvencies is rolling towards German hospitals. Many experts are convinced of this. From the German Hospital Association to Schleswig-Holstein’s Health Minister Heiner Garg to the Association of Protestant Hospitals: They all demand an improvement of the rescue package intended to help hospitals financially through the pandemic. Indeed, an adjustment is urgently needed: Currently, only about half of the hospitals in our country can rely on these compensation payments. At present – because at the end of February, these aids could expire according to current planning.

Instead of focusing only on short-term support during the pandemic, we should urgently begin to address the structural problems in depth. After all, a consolidation of the hospital landscape was already in full swing before the first COVID patient landed in a clinic. An improved rescue package – as much as everyone probably wishes for it – would therefore only be a drop in the ocean: A brief relief, but quickly evaporated again.

For at least 5 years, we have been observing a continuing downward trend in the German hospital landscape: Even before the Corona crisis, the economic situation of many hospitals had significantly deteriorated and reached a critical point. In particular, hospitals under non-profit and municipal ownership have been struggling for financial stability for some time. The COVID special financing through retention allowances in the summer and shorter payment terms provided more liquidity in many cases, albeit temporarily. The structural problems were thus papered over in the short term; but they were not solved. On the contrary: Over 80 percent of hospital managers expect a further deterioration of the situation. This is shown – independently of each other – by various surveys.

Why so many hospitals are in deficit is actually obvious.

Tightened regulations are putting increasing pressure on hospitals in their operational business. Ever stricter and cost-driving requirements for minimum staffing levels and structural prerequisites for certain services make it difficult for hospitals to generate reserves. In addition, there is the pressure that the cost bearers exert on the hospitals via the Medical Service (MD). It must not be forgotten that the hospitals have already been carrying a heavy backpack for some time: Since the federal states only partially and very differently fulfill their investment obligations, an investment backlog of around 30 billion euros has built up in German hospitals in the last ten years alone.

Just to continuously replace the existing infrastructure and equipment, hospitals would need an annual, stable EBITDA ratio of around four percent. If you want to keep up with progress and position your hospital for the future, around six percent would even be necessary to make pending investments in digitalization, among other things. This is a goal that hospitals under non-profit and public ownership can only achieve with great difficulty: They have been below these values for years – and the situation tends to become increasingly critical. However, while county and municipal hospitals can often close financing gaps in the long term from public budgets – within the framework of permissible competition regulations – non-profit hospitals are generally in a worse position: Only a few sponsors can afford to compensate for deficits permanently.

What options do hospital owners and managers have to avert impending insolvency? Those who ask themselves early on whether their hospital is really viable for the future can react in time and initiate necessary restructuring measures. Closures and mergers of specialist departments or even entire locations, improvement of operational processes such as length of stay, occupancy and OR management, coding and revenue assurance are important starting points. But optimizations of material costs and a review of staff deployment also contribute to increasing revenues and reducing costs. In addition, investments, especially of a structural nature, should be critically scrutinized.

It is worthwhile – especially for non-profit organizations – to consider mergers and strategic alliances. Through a coordinated implementation of the aforementioned restructuring measures, coordinated treatment offerings can be developed while simultaneously leveraging synergy effects. This ensures the provision of healthcare for the population in the catchment area; at the same time, cost and efficiency benefits can be realized.

However, even if insolvency can no longer be prevented, it does not necessarily mean the end:

Insolvency law itself includes instruments for an orderly restructuring of hospitals with the option of long-term survival. For several years now, hospitals have been increasingly using, for example, self-administered insolvency to advance urgently needed restructuring. With the Act on the Stabilization and Restructuring Framework for Companies (StaRUG) that came into force at the beginning of the year, an additional set of tools has now been created to carry out preventive and discreet restructuring measures outside of insolvency and to relieve the company of claims against it. Those who have established a risk early warning system and continuously monitor their own liquidity development will hear alarm bells ringing in time: In most cases, a critical situation can still be overcome. A sale or even the closure of a hospital can still be averted.