Impending Death of Hospitals

The Impending Death of Yet Another Large Hospital

July 1, 2019

It’s easy to be a backseat driver, but in the context of case flight from hospitals to outpatient facilities, buying large hospitals from national chains “because we can run them better” is a bit risky.

Well, what the heck, it’s incredibly risky, so risky in fact, that one investor, Joel Freedman, and his company American Academic Health System LLC, an affiliate of Paladin Healthcare of El Segundo, California, just announced that they’re closing down one of the hospitals they purchased from Tenet less than two-years ago.

The hospital in question: 171 year old, 496-bed Hahnemann Memorial Hospital in Philadelphia, a teaching facility affiliated with Drexel University’s medical school.

Unless something drastic changes very quickly, no one is going to have to drum up 172 candles for Hahnemann’s next birthday.

News reports indicate that the facility is saddled by longterm insurance contracts with low reimbursement, a significant Medicaid population, high operating costs, and an overall declining patient census.

And, it’s not as if Mr. Freedman and his crew at American Academic Health System didn’t do all that they could to turn the facility around. He sold other healthcare investment assets and even moved his entire family to Philadelphia. He obviously stands to lose millions.

And, it’s not as if Tenet sold them a pig in a poke: It was no secret that the hospital lost money each and every of the 14 years it was owned by Tenet.

Year by year, month by month, the hospital business is eroding. The type and number of cases that can be performed on an outpatient basis is growing. And, sooner or later, very few will be performed in hospital outpatient departments. That’s both because HOPDs are more expensive than ASCs, and because, with tremendous shortsightedness, Obamacare, upon the lobbying of the American Hospital Association, pushed physicians out of hospital ownership. Good timing, right? They succeeded in protecting a dying business by pushing those who can influence referrals to refer those patients somewhere else.

There are, of course, exceptions, and well-run, small hospitals, especially physician-owned facilities outside of the bureaucratic prohibitions (update – once again there is new federal legislation in the works to end the prohibition on physician ownership of Medicare participating hospitals), can make sense under the correct circumstances and location.

So too, do physician-forward “hospital-like” ventures combining ASCs, imaging facilities, aftercare and medical office buildings.

Do yourself a favor. Even if the prohibition on physician investment in Medicare participating hospitals ends tomorrow, don’t go buying a gigantic facility that has lost money every year for as long as anyone can remember and that serves as a quasi-social services agency. Instead, explore facility ventures that make sense.

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