THE BLOG
10/30/2014 11:58 am ET Updated Dec 30, 2014

The American Hospital, in a State of Emergency

There's an epidemic in America that's not getting the attention it deserves: hospital closures.

In Alabama, 10 hospitals closed in the last three years, leaving some smaller communities without a major medical facility. Last year, Georgia lost three hospitals, Virginia and North Carolina one each. And in New Jersey no fewer than 40 urban hospitals have shut down over the last decade. The situation is so dire that, according to the American Medical Association, almost one third of all emergency rooms in the country have closed since the mid-nineties.

"Across the nation," The Los Angeles Times observed earlier this year, "both rural and urban areas are struggling daily to maintain the necessary infrastructure to provide support for residents. The loss of even the smallest facility places additional strain on the already tenuous existence of neighboring institutions." It's a trend that threatens the very future of the institution of the hospital, which in modern times has become the foundation on which the American medical system is built.

There are various reasons for the closings. In New York City, some hospitals are built on land so valuable developers pressure the city and owners to sell so the land can be used for commercial and residential purposes. In a number of the 23 states that opted not to sign onto the Medicaid expansion under Obamacare, a dearth of Medicaid money has crippled some hospitals financially, leading them to close.

But all too often hospitals, both rural and urban, find themselves on the brink of fiscal insolvency because insurance companies, driven by bottom-line profits, woefully underpay claims hospitals file for services they provide. "This business practice is not only unfair and illegal," one city attorney said when San Francisco filed a lawsuit against three insurance companies on behalf of the city's public hospitals for allegedly habitually underpaying claims, "it jeopardizes the city's ability to provide critically necessary emergency health care."

In New Jersey, one hospital, Bayonne Medical Center, has found a way to fight back. Bayonne is a working class community in Hudson County, which has the highest number of uninsured and underinsured patients in the state. Founded in 1888, Bayonne Medical, one of only six hospitals in the county, has been an important fixture in the area for years. So, in 2007, when the hospital filed for bankruptcy -- it was losing $1.5 million a month -- city leaders worried that the hospital might shut down for good.

That was avoided in 2008 when CarePoint Health, a private company owned by three entrepreneurs, bought the hospital in bankruptcy for $41 million. To make the facility profitable again -- and allow it to remain open to serve the community -- the new owners took a series of deliberate steps.

They changed the status of the facility from nonprofit to for-profit. Then they terminated all current contracts with insurance companies that had been underpaying claims for years, one of the main reasons the hospital got into financial trouble in the first place. "The practices at Bayonne Medical," The New York Times reported about the hospital's restructuring, "highlight a new financial strategy used by a small number of hospitals to increase their profits by 'going out of network' -- severing ties, and hence contractual agreements that limit reimbursement rates, with large private insurers."

Because it was now out-of-network, Bayonne Medical was free to charge insurance companies whatever it wanted for a procedure or treatment. Depending on the insurance company, the hospital sometimes overcharged simply to force the insurance company to pay a fair price on a claim.

One case made national headlines. Baer Hanusz-Rajkowski was doing home repairs when he cut his finger with the claw of a hammer. He went to the ER at Bayonne Medical and received care. Because Hanusz-Rajkowski was insured by United Healthcare, a company with a history of underpaying the hospital for ER services, Bayonne Medical submitted a bill for $8775.

At first, the insurance company balked before finally paying three fourths of the bill. When the story of the exorbitant bill made the national news, it exposed the new method some hospitals are using to force insurance companies to pay. As Mark Spektor, Bayonne Medical president, told one television network: "These sticker price charges only apply to... a minority of patients whose insurance companies have refused to negotiate fair contracted prices with us."

But the new pricing approached has worked. As of 2011, Bayonne Medical revenue tripled with an operating income of $9.3 million. At present, the hospital is on firm financial footing with anticipated growth for years to come. For so many hospitals across the country teetering on bankruptcy or closure, the fight-fire-with-fire approach used by Bayonne Medical may well become the model for the future.