Krankenhaus Rating Report: Not every hospital needs to be maintained

Interview with Dr. Boris Augurzky; Author of the German Krankenhaus Rating Reports

This year’s German Krankenhaus Rating Report (English: Hospital Rating Report) concludes: the probability of insolvency for German hospitals continues to increase. More than ever, the demographic change demands a more efficient health care system. This also includes the closing of several hospitals, particularly in rural areas. The scheduled Hospital Structures Act (German: Krankenhausstrukturgesetz) is soon said to make this decision easier.


Photo: Man with short grey-black hair

Dr. Boris Augurzky; ©private spoke with Dr. Boris Augurzky, one of the authors of the Krankenhaus Rating Report, which is a joint collaboration between the Rhine-Westphalia Institute for Economic Research (Rheinisch-Westfälischen Instituts für Wirtschaftsforschung), RWI, the management consulting company Accenture and the Institute for Health Care Business.

Dr. Augurzky, what is the Krankenhaus Rating Report?

Dr. Boris Augurzky:
Once a year, the Krankenhaus Rating Report (KRR) analyzes the economic and financial situation of hospitals and provides an overview of the current hospital market. It examines developments in the past and provides a forecast on future or potential market developments. Statements regarding the current situation are based on data from the year 2013.

What types of data is this based on?

We use publically available data and primarily annual financial statements from hospitals. We extract how much profit they make or how much equity they have. There are approximately 2,000 hospitals and clinics in Germany. We have the annual financial reports on about 1,000 of them.

In addition, we use data of the Federal Statistics Office on the number of beds and patients, the services rendered as well as the personnel costs. We also receive selected quality information from AQUA, BQS as well as the German Technicians’ Health Insurance (German: Techniker Krankenkasse) and the Scientific Institute of the German health care insurance company AOK.

We link this data with the annual financial statements. The scientific analyses are therefore linked to parameters such as patient satisfaction, medical quality or staff numbers.

What is the actual state of German hospitals and clinics?

Overall, the probability of insolvency has once again slightly increased in 2013 to the effect that 15 percent of hospitals exhibited an increased probability of insolvency – two additional percentage points compared to the previous year. This decline has continued since 2010.
Photo: Empty patient's room

Approaches for a more efficient health care system include structural changes and increased digitization of medicine. If this will not be implemented, hospital beds especially in rural areas will stay empty; © epstock

Do you also record the reason of this rise in financial distress?

We can make different cases and also test them in part. Generally speaking, the profitability of hospitals has also not developed well. Though you have to concede that it has slightly improved at least in 2013. Nevertheless, approximately 30 percent of hospitals are still exhibiting losses.

What are the reasons for this?

This is due to the fact that revenues increase less than costs which include material and personnel costs but also capital expenditures. The resulting difference is the so-called revenue-cost gap. Hospitals need to close this gap by becoming more productive. That is to say: they need to deliver the same performance with fewer resources, less personnel and fewer tangible means – or conversely: they need to achieve more revenue with the existing means. This works in some areas. Several hospitals have already improved their processes while others are still lagging behind. Yet there are more and more that navigate these "choppy waters".

What would be the worst case scenario if the status quo would remain unchanged?

In that case, according to our estimates, approximately 12 percent of hospitals would have to close by 2020. Yet the past has also shown that time and again fewer hospitals have closed than originally predicted. Why is that? Some decide on rigorous reorganizations and thus escape the risk of insolvency. Others are able to fall back on an affluent regional supporter who supports the struggling hospital with a capital injection.

However, you also should mention that we have a relatively high concentration of hospitals here in Germany – especially in the Western part. There are comparatively many sites. Approximately 99 percent of the population today reaches a hospital within 30 minutes at most by car. This is above-average in an international comparison. If a hospital should then close, we don’t think it is tragic since there is usually a great alternative within an acceptable distance. Not until the distances become too far after a closure should an intervention with safeguarding contingencies take place.
Photo: Diagram for traffic classification by federal states

©medhochzwei Verlag GmbH

Picture on top: Central indicator for the evaluation of the economic situation of a hospital is the probability of default (PD). A PD up to 1.0% reflects a low to a moderate default risk (green). Values between 1.0% and 2.6% show that borrowing money is difficult (yellow). All values above (red) illustrate that borrowing is expected to be much more difficult or is not even possible anymore.

So you think that closing several hospitals would not damage the German hospital market?

I believe, approximately 200 of the roughly 240 hospitals that are in danger of insolvency, could be closed down without any issues, that being without compromising health care services.

However, this is crucial: hospital planning needs clear and distinct criteria to decide when health care services are really in jeopardy. This is the provision of the new Hospital Structures Act. When the hospital needs to be supported because the distance to the nearest alternative would become too far if it wasn’t there, a safeguarding contingency ("Sicherstellungszuschlag") could be granted that health insurance companies would need to pay. The Federal Joint Committee (Gemeinsamer Bundesausschuss), G-BA, is meant to prepare the necessary criteria.

The worst-case scenario has happened and a hospital is insolvent. You propose that a type of "bad bank" could accompany market exits. What does this mean exactly?

As a general rule, you need to anticipate closure costs totaling at least one year’s of revenues. To manage market exits better financially, we propose a type of "bad bank" for hospitals. This "active structural fund" would take over the hospital liquidation if both a reorganization or a sale is out of the question for the supporting organization and the site doesn’t need to be supported for health care reasons. The fund would bear all of the liquidation costs and should be maintained by federal funds and therefore, be able to operate independently from the states. In doing so, at least the financial hurdle of a closure would be overcome. However, the hurdle of local politics should also not be ignored in this. But this is a different topic.
Photo: Melanie Günther; Copyright: B. Frommann

© B. Frommann

The interview was conducted by Melanie Günther and translated from German by Elena O'Meara.