A message large nonprofit hospitals should hear: "The judge will see you now…"

There are some remarkable similarities between serial bankruptcy filers and large nonprofit hospitals that constantly claim financial difficulties.

First, Chapter 13 bankruptcy filers regularly overspend in good times, over-leverage themselves to buy large houses, insist on the need for luxury vehicles, and rack up significant credit. They usually have no real idea how much they are bringing in during any given month, nor do they know what is going out – a true failure in household accounting and budgeting.

They usually have a pretty decent job or business that should be more than enough to sustain a modest, or even middle- to upper-class lifestyle. Nevertheless, time and time again they find themselves unable to restrain their spending in a manner to keep them in the black – finding themselves in the same cycle every seven years when they are again able to seek relief from the bankruptcy court.

Like the serial filer, large nonprofit hospital systems like to build without much thought to long-term sustainability, and we’re not just talking about footprints here. We are talking about state-of-the-art glass atriums, rooftop tranquility gardens and palatial halls filled with world-class art and sculptures. I would analogize the luxury vehicles to the seven-digit salaries of the growing cadre of hospital executives. The excuse that “everyone’s doing it” put forth by the hospital boards’ compensation committees is akin to the mentality of “keeping up with the Joneses” that afflicts so many serial filers.

One of the most striking, and devastating, similarities between serial filers and large nonprofit hospitals is their collective failure to truly understand their own financial situations to ensure long-term sustainability and success. For individuals this might mean failure to appropriately budget, and for large hospitals this is a failure to engage in good cost accounting.  Indeed, a 2019 study found that nine in 10 hospital CFOs don’t know their costs.

When I was a bankruptcy attorney, I recall sitting in chambers listening as the judge heard Chapter 13 cases every Wednesday. At times I would find myself truly feeling for these individuals who had put themselves and their families in a precarious financial condition – in danger of losing their homes, needing to move their kids from their schools and social-support systems, and facing social shame. Even though they brought much of this pain on themselves by their own mistakes, it didn’t make the impact on their families any less damaging.

The executive management teams of many nonprofit hospitals claim to be victims in the health-care system, victims of the labor market, inflation, and any number of issues. They plead for more and more public monies and regulatory protection to sustain their spending habits. In the case of hospitals, though, it is not an unwitting family that suffers, it is the whole community, including the clinicians within its walls, and the individuals whom hospitals intend to serve who are left with a raw deal.

The tale of Ascension St. Vincent illustrates how this plays out. In Indiana, Ascension recently shuttered two dozen primary and walk-in urgent-care centers in the past year, citing financial struggles for the decision. At the same time, the health network is putting $325 million into expansions and renovations at its main hospital at 86th Street in Indianapolis and is building a new hospital near Purdue University. Ascension has also pointed to its financial losses in 2022 – it lost a whopping $1.2 billion in investments that year.

The list of communities that lose while nonprofit bottom lines win goes on. Of the hospitals Bon Secours Mercy Health divested, 42% were in areas with high poverty. At Mercy, a St. Louis-based hospital nonprofit, 75% of the hospitals shed were in areas of high poverty and 56% of new hospitals were built in more affluent areas.

The American Hospital Association and its consultants can put out more studies, flash reports, and letters to Congress highlighting the dire financial straits of hospitals. They can put together scary-looking graphs showing the drastic drops in operating profit margin, net profit margin, and increase in labor costs and inflation. All the data points may technically be true, especially when you consider that many nonprofit hospital systems act more like investment firms than benevolent institutions and are therefore subject to market downturns.

But remember the individual standing before the bankruptcy judge with three Mercedes payments, a 4,000-square-foot home and over $100,000 in credit-card debt – with a job that pays six figures – is also in the red. It is technically true that such people are in financial distress. But it is also true that much of what caused their predicament was of their own making, and they should not be rewarded for their behavior.

In order to grant a Chapter 13 discharge and a fresh start to the filer, the judge would have a very candid and honest conversation with each of these debtors about their spending and the manner in which they should conduct themselves so as not to find themselves in her courtroom again.

At the very least, it seems that many hospital systems and those that lobby on their behalf are due for a “talking to” by the judge.

Chris Deacon, JD, is a health care executive and consultant recognized for her advocacy for transparency and accountability. She previously ran New Jersey's public sector health plan, covering 820k lives.