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[White Paper] Distressed Hospitals: What Every Board Should Know About Assessing Risk

Jeffrey Sommer, MPP, Director, Stroudwater Associates

Ryan Sprinkle, JD, Consultant, Stroudwater Associates

Originally published in AHLA 2017 Health Care Transactions Resource Guide

On September 30, 2015, the cargo ship El Faro left port in Jacksonville, Florida, bound for Puerto Rico and aware of Tropical Storm Joaquin and its projected path. The ship’s captain, an experienced seaman, had charted a course that would allow El Faro to reach San Juan while maintaining a safe distance from Joaquin’s destruction. With El Faro’s owner approving that course, the ship and crew left port despite forecasts from the National Hurricane Center that Joaquin would develop into a hurricane the next day.

Twenty-six hours after setting sail, battered by the winds and seas created by Category 3 Hurricane Joaquin, El Faro sank off the coast of a Bahamian Island, losing her entire 33-person crew. As the ship’s recorded bridge audio and other intelligence would later determine, a confluence of events some within the captain’s control and some beyond it ultimately contributed to making this voyage one of the worst disasters in the modern history for the U.S. Merchant Marine. With the benefit of advanced weather forecasts, satellite imagery, and modern communications, it’s easy to ask: how did a disaster like the El Faro happen?

Across the United States, hospital management teams and governing boards are facing their own gathering storm. Since 2010, approximately 190 hospitals across the country have closed. Similarly, and by these authors’ count, approximately 85 hospitals have sought the protection of the U.S. bankruptcy courts since 2011. While the number of hospital closures and bankruptcies may seem small compared to the 4,862 community hospitals in the United States, the hospital industry has experienced fundamental structural changes that make closure or bankruptcy a risk that is now visible on the horizon for many hospitals.

Like the captain and crew of El Faro, many hospital management teams and governing boards are increasingly struggling just to keep their ships afloat, let alone make it safely to port. With hindsight, we can ask of a hospital that has closed, “Why didn’t it change course, away from the threat, when it had time?””

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