Hospital restructuring: three steps out of the crisis

Many clinics see their existence threatened in the short or medium term. Other healthcare facilities are also experiencing economic difficulties.

Inadequate remuneration structures, staff shortages, the after-effects of the coronavirus pandemic and political instability are just a few examples of current hotspots. The accumulation of the various problems is leading to ongoing economic instability across the entire sector.

A hospital can achieve economic stability through restructuring.

A structural change is taking place in the healthcare sector

The healthcare sector is currently undergoing significant structural change. Demographic changes, technological innovations, economic developments and political decisions are driving this change. The costs of medical care, medicines and technologies are rising and patient care is changing. More and more care services are being shifted to the outpatient sector. Hospitals are also struggling with a shortage of specialists.

The investment subsidy no longer covers the costs

In accordance with Section 4 of the Hospital Financing Act (KHG), hospitals are economically secured by the fact that their investment costs are covered by public funding. In addition, they receive performance-related revenues from the nursing rates as well as remuneration for pre- and post-inpatient treatment and outpatient surgery.

However, investment funding has not covered the costs for years. Staff costs have risen massively, but the prime rates have not been adjusted to inflation. As a result, service remuneration is now also inadequate and can no longer cross-subsidize the missing investment costs. Increases in services are also hardly possible due to the shortage of specialist staff and simultaneously increasing staffing requirements and case budget ceilings. In addition, service remuneration is increasingly earmarked, for example as part of the care budget.

At a political level, the existing problems should be solved in the long term through the measures initiated as part of the hospital reform. The declared aims of the Hospital Care Improvement Act (KHVVG) are:

• the de-economization,
• ensuring and improving the quality of treatment,
• Measures to reduce bureaucracy,
• an integration of the sectors,
• the reduction of overcapacities.

However, the exact impact of the measures that have now come into force is not foreseeable in many places and is causing further uncertainty.

Hospitals should therefore stabilize themselves economically. There are essentially three stages to this.

Step 1: Create financial transparency at an early stage

Reliable financial reporting provides the company with an overview of the financial framework conditions and is the first step out of a difficult economic situation. Reporting is an indispensable part of a preventive system and an effective crisis management tool.

The systematic recording and analysis of financial data as well as corresponding reporting enable rapid countermeasures to be taken in the event of negative trends. Cash flows can thus be monitored and receivables managed while ensuring sufficient liquidity at all times.

In practice, however, there are often typical problems that hinder hospitals in implementing reliable financial reporting. Data quality can be affected by inaccurate or incomplete data, manual data entry, lack of data validation or outdated systems. In addition, complex billing systems, constant regulatory changes, incompatible IT systems and a lack of trained staff can also create obstacles. Last but not least, inadequate internal communication between different departments can also lead to inconsistencies and delays in financial reporting.

Many of these problems can be countered by adapting existing or introducing new cost management and controlling systems and setting up an effective compliance management system. The implementation of modern software solutions that allow automated and standardized data collection and processing can also reduce susceptibility to errors and ensure the interoperability of different billing systems.

Robust financial reporting then forms the basis for internal management processes and decision-making as well as for communication with external stakeholders such as investors, creditors, supervisory authorities and other interest groups.

Stage 2: Initiate targeted transformation measures

If it is clear which areas of the company are in deficit and what the causes of liquidity bottlenecks are, restructuring can make sense.

Synergies can be exploited through cooperation with other service providers. It may be necessary to close departments and create focal points. In any case, the institution should invest in digitalization in order to orient itself towards the future.

Integrated care models, i.e. the interlinking of outpatient and inpatient care, possibly including nursing and rehabilitation facilities, offer important prospects for the future. Over the years, the legislator has opened up the sector boundaries with individual regulations. However, a systematic and comprehensive link has yet to be established. Necessary restructuring measures must therefore overcome regulatory hurdles, which makes their implementation more challenging.

In addition, the tight financial situation often leaves no or only limited room for necessary adjustments. If a transformation is therefore not possible, a planned insolvency can offer a way out.

Stage 3: Insolvency as a tool for hospital restructuring

Many hospital operators perceive the current wave of insolvencies as a risk. They fear reputational damage, job losses, incalculable consequences and ongoing financial uncertainty. However, these negative consequences are by no means inevitable, as insolvency is not always the result of neglected or failed adjustment measures. Rather, insolvency can also be deliberately chosen as part of an adjustment strategy.

Planned insolvency serves as a restructuring instrument for a hospital to restructure and reorganize itself under court supervision while continuing operations. In the case of insolvency under self-administration – possibly as part of so-called protective shield proceedings – the management remains in office and retains the power of administration and disposal over the insolvency assets. A court-appointed administrator monitors the process and ensures that the interests of the creditors are protected.

The possibilities for necessary corporate restructuring are then considerably improved within the scope of the insolvency proceedings, for example by allowing tenancies to be terminated within shortened periods. The implementation of personnel measures is also made easier by limiting the notice periods and capping the social plan costs.

A planned insolvency is challenging, but enables a strategic realignment

Nevertheless, there are certain uncertainties in the context of insolvency that need to be taken into account in planning. For example, the management is exposed to a liability risk during self-administration proceedings and there is the possibility of an unintentional change of shareholder. This can be accompanied by a loss of control. In principle, insolvency proceedings can also have a negative external impact.
Not all concerns are justified. For example, jobs are not at risk due to the insolvency, but due to the tense economic situation itself.

Insolvency is undoubtedly very challenging. But it enables targeted restructuring measures and a strategic realignment. This can strengthen competitiveness in the long term.

If there is a threat of insolvency or over-indebtedness, the instruments of the Insolvency Code should be examined as part of various strategy scenarios. Which instruments are suitable is always a question of the individual case. The more likely insolvency or over-indebtedness is, the less room for maneuver the management has.

The bottom line is that early planning minimizes risks and significantly increases the chances of a renovation.

Ways out of the crisis are possible

Although the healthcare sector is currently in a tense economic situation overall, there are often viable solutions for individual hospitals. The first step is to systematically analyze the economic situation and the legal framework in order to identify the appropriate adjustments in each individual case. Many hospitals shy away from insolvency proceedings. But experience shows: The benefits of a planned insolvency can be high, as it can strengthen competitiveness in the long term.