Predicting Hospital Closure Using Popular Financial Indicators: An Exploratory Study of Muhlenberg Hospital

Abstract

The role of government in the U.S. healthcare system is critical and hospitals play fundamental roles in our communities, among them critical healthcare provider and major employer. The federal funding program Medicare, and the federal-state funding source, Medicaid, are the two public health financing mechanisms that comprise significant funding to hospitals. Further, Medicare and Medicaid account for approximately 37 percent of all health expenditures in the U.S. (United States Centers for Medicare and Medicaid Services, 2018), and more than 60 percent of all hospital care (American Hospital Association, 2016).

The public administration roles in the $3.4 trillion U.S. healthcare industry span that of provider, purchaser of services, initiatives and research funder, regulator, and policy implementer. In today's precarious political climate, amidst layers of government bureaucracies and an increased focus on better and fairer healthcare outcomes, the integration of public policy, administration, and healthcare has become increasingly important to practitioners and researchers. Indeed, the American Hospital Association tallies 5,564 hospitals in the United States, with 16 million employees and accounting for about one-sixth of the U.S. economy. Recently, of particular importance is the rise in U.S. hospital closures that impact healthcare and the economy in our local communities.

This study contributes to the literature by identifying indicators for detecting warning trends in hospital financial condition before closures occur using a parsimonious system that can be replicated by both practitioners and policymakers with minimal data gathering efforts. The findings discussed here suggest that in the case of Muhlenberg Hospital, a clear trend of worsening financial condition could be detected at least four years prior to its closure. Current ratio, total margin, and debt to net asset ratio for Muhlenberg Hospital evidenced very clear indicators of financial instability. Consequently, the question emerges as to why neither the hospital nor the community was able to adequately negotiate these treacherous financial challenges to retain this valuable community asset.