Urban hospital's bankruptcy sheds light on 'anarchy' of health care system

Before health care investor Joel Freedman shutters the money-losing hospital he controls in the heart of Philadelphia, he must craft a plan to remove all the street signs that direct people to its emergency room.

Medical care, emergency or not, will no longer be available at Hahnemann University Hospital under a proposal being considered this month by the federal judge overseeing the bankruptcy of the 171-year-old institution and its parent company.

The plan, which faces significant opposition, has raised questions about where the people who rely on Hahnemann will be treated. It also highlights the financial stress urban hospitals face, operating in a health care system that pushes administrators to compete for patients with high-quality private insurance. In rural areas, the situation is even worse.

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“This is a symptom of the underlying anarchy that pervades U.S. health care,” Alan Sager, a professor of health law, policy and management at the Boston University School of Public Health, said referring to the plan to shut Hahnemann. “Nobody is accountable for identifying the hospitals that are needed for the public. There is no free market and there is no government accountability.”

Freedman didn’t respond to requests for an interview.

Closure opposition

Hahnemann’s ER serves about 56,000 people a year — more than 150 a day — many of whom are low income. It also runs the city’s only Sexual Assault Nurse Examiner program, which employs nurses who are trained to collect evidence.

If Hahnemann’s closure is approved, patients are likely to be routed to some of the more than a dozen other hospitals in the city of 1.6 million. The plan doesn’t mention that some of those medical centers are on financial life support themselves, struggling with the same economic forces that brought down Hahnemann just 18 months after Freedman’s company bought the group.

A few miles away, another leading Philadelphia medical group, Temple University Health System, is in the midst of an out-of-court restructuring led by bankruptcy consultant Alvarez & Marsal Inc. As part of that effort, Temple has considered selling its well-regarded cancer center to Thomas Jefferson University, which runs a downtown Philadelphia hospital not far from Hahnemann.

Constant losses

Hahnemann has posted operational losses every year from 2004 to 2018, a “remarkable” record, said Sager, who reviewed public documents kept by Pennsylvania on hospital finances. The institution has a “fairly high” share of Medicare and Medicaid patients, which typically don’t pay the full cost of their care, Sager said.

Local and state regulators oppose the proposal to close Hahnemann. They have asked U.S. bankruptcy judge Kevin Gross to reject the closure plan, arguing it doesn’t provide enough details about how patients will be relocated and their records preserved.

Gross has ordered the company to talk to state and local officials about the closure plan in detail, and warned that he “does not want to hear that discussions were limited or did not take place.”

A hearing on the plan is set for July 19.

Hahnemann’s parent, Philadelphia Academic Health Systems LLC, says there is no alternative. The hospital simply can’t keep losing money. In 2008, Hahnemann’s pre-tax loss exceeded $69 million on an unaudited basis, court papers show, and in March that loss topped $5.8 million.

Balancing act

Hospitals thrive if they can attract enough patients with high-quality, private insurance to offset the uninsured and the poor who rely on government programs like Medicaid, according to Marshall Glade, a senior managing director with the GlassRatner financial consultancy. The trick, he says, is to treat enough people with private insurance to cover losses imposed by Medicaid, which typically pays about 70% of the actual cost of treatment.

Urban hospitals also may develop a reputation for serving the indigent that makes it hard to attract wealthier patients, Glade said.

“Your private insurance folks may go to those other hospitals because it’s perceived that the other hospital is better, is nicer,” he said.

Sager’s research shows that patient race is a key factor in the financial health of U.S. hospitals. Those primarily serving African-American communities have historically been more likely to be shut down.

After whites moved out of many cities, their doctors left the big urban hospitals and followed them to the suburbs, Sager said. That led to the closure of many city hospitals in the 1970s, 1980s and 1990s.

Rural woes

The trend for hospitals in rural areas shows that they are in even worse shape than their city counterparts. Rural hospitals have lower profit margins and serve poorer, less insured people than urban ones, according to a 2016 study from the University of North Carolina at Chapel Hill. In the five years through 2017, 64 rural hospitals closed compared with 49 in urban areas, according to the U.S. Government Accountability Office.

It is unusual for a big, university-affiliated hospital like Hahnemann to close. Strong community and political support often insulates such institutions from the funding woes that have afflicted so many U.S. hospitals in recent years, Sager said.

Founded in 1848, Hahnemann employs about 2,500 people and operates as a teaching hospital for Drexel University College of Medicine with more than 570 medical students in residency. It trains about 500 rotating medical students and 800 nursing students annually.

Hahnemann’s corporate parent, Philadelphia Academic Health Systems, and its affiliates filed for bankruptcy on June 30. The Chapter 11 filing came just 18 months after the group, which is controlled by Freedman, took on at least $68.5 million in debt to buy two hospitals from Tenet Business Services Corp.

St. Christopher’s Hospital for Children, the other hospital, is profitable, attracting pediatric patients from throughout the region surrounding Philadelphia, according to court papers. St. Christopher’s will be restructured and sold in order to exit bankruptcy.

The case is Center City Healthcare, 19-11466, U.S. Bankruptcy Court, District of Delaware (Wilmington)

Read more: 

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• Hospital closings average 30 per year

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