Annerose Tashiro and Volker Beissenhirtz in interview with Tilo Kolb (all Schultze  & Braun), Attorney and Insolvency Administrator, about risks for hospitals in the present hospital situation

The current legislation has strongly influenced the scope of efficiency for hospitals in Germany and this influence has not just been positive. Notably from an economic perspective a significant increase in costs with stagnating turnovers are being observed in the hospitals. This is primarily the result of an increase in pay rates determined for hospital doctors and nursing staff, which is mandatory for the individual hospitals. Furthermore the end of the convergence phase at the end of 2008 along with the considerable consequences of the complete introduction of the Fallpauschalengesetz (law governing case-based lump sum remuneration) on 1st January 2009 (DRGs = German system for fees and remuneration in hospitals) will compel the hospitals to adopt a particularly cost-conscious management. Further changes, such as e.g. the last sales tax increase as well as the remodelling of the medical emergency services, increasing energy costs and an impending rehabilitation contribution towards the health insurance funds, raise the costs for the hospitals. The chances, to be able to operate cost-effectively, particularly for smaller hospitals, will decline as a result.

Question: Are you expecting the number of hospitals that are not economically viable to increase?

Kolb: As a matter of fact, an increase in the number of insolvencies is expected for the hospital and medical services industry after 1st January 2009. The hospital rating report for 2007 assumes that the policy will allow a shake-out according to economic criteria; it calculates the closure of almost 22% of the existing 2104 hospitals, thus more than 400 hospitals.

Question: Do you also believe that the reasons for a potential threat to the existence of the hospitals results from the behaviour of the respective management?

Kolb: Of course working cost-effectively also essentially depends on the reaction of the hospital management to the new legislative framework and to the overall changing market in the health-care system. The hospital management must recognize potential threats to the continuance of the hospital promptly, draw conclusions from them and implement the necessary measures. The path to insolvency proceedings is inevitable if this is not done. If insolvency is to be prevented it is the hospital management’s duty to install a corresponding early risk detection system and to also provide an insolvency control in this connection in order to be able to accurately assess the economic situation on the basis of the evaluation results.

Question: What exactly does insolvency control mean?

Kolb: Insolvency control should be an inherent part of the early risk detection system in a hospital or even in a nursing home. Besides the normal tasks of controlling, compilation and evaluation of data, creating the corresponding opportunities for control - it should promptly recognise potential insolvency risks and the reasons for insolvency and the excessive indebtedness in this respect and, help make decisions to prepare for the avoidance of an arising crisis situation in the context of prophylactic measures. Furthermore, insolvency control shall prepare the basis for the development of strategies for the elimination of the causes of insolvency in the event of their existence and thus once again eliminate the risks of insolvency.

Question: In the context of the insolvency code there is also the option to file for insolvency due to an impending illiquidity. Is this option for the early filing of an application used by hospitals which are caught up in a crisis?

Kolb: Unfortunately not, although it essentially depends on how the hospital management is advised and aided prior to the insolvency proceedings. If the hospital management has secured this aid on time and, if necessary, has already begun with the creation of a draft insolvency plan, then the chances that it can file an early insolvency application increase provided it is due to a pending insolvency. In the process this can prevent wages and salaries of the employees remaining unpaid for more than one or several months at the time of filing the application.

Question: What options does a hospital still have during the insolvency proceedings and what changes will in-patients have to anticipate?

Kolb: Various possibilities arise after the filing of an application for insolvency. Depending on how well or how badly the insolvency application is prepared and whether it was filed by the insolvent hospital or only by a creditor within the scope of an external application, favourable or unfavourable views can arise for the continuation of the hospital operations. The pre-condition for a continuation of the hospital operations by the insolvency administrator is initially determined within the scope of a so-called financial planning as to whether the hospital can be managed cost-effectively henceforth. If cost-effectiveness cannot be achieved then the hospital operations cannot be continued in this manner at least not in the long term. In this case, an insolvency administrator will look for potential partners, parties interested in a takeover or investors who have an interest in the acquisition of the hospital.

As far as positive forecasts for the economic portfolio of the hospital arise from the financial planning of the insolvency administrator, the option of insolvency proceedings with the aim to continue the operations of the hospital and its essential departments can be worked on. The skill of the interim insolvency administrator or after the commencement of the insolvency proceedings lies in convincing all involved parties - which particularly includes the suppliers as secondary creditors as well as the employees of the hospital in case of outstanding wages and salaries, the hospital sponsor, the health insurance funds and of course the patients - that a continuation of the hospital with its medical services makes sense both factually and economically. Besides, the charm of the insolvency plan procedure lies in the continuity of the legal entity, in the preservation at least of a part of the workplace and in a considerably shorter duration of the insolvency proceedings as in the case of a general insolvency proceeding. With good preparation and presentation of a draft plan at the time of filing for insolvency the insolvency plan procedure can be successfully completed as quickly as six months after its commencement, leaving behind a debt-free and efficient hospital.

Question: Can it be inferred from your answer that you consider the insolvency plan procedure to be the best option for the insolvency settlement for a hospital?

Kolb: Yes, that’s right. When the hospital and its services are accepted by the health insurance funds and the patients, and, a cost-effective method of operation can be forecast, then the aim is clearly the preservation and continued operation of the hospital. For this purpose, reorganisation measures are to be often implemented by the insolvency administrator in order to achieve the cost-effective method of operation which can be easily attainable with the help of an insolvency plan.

Question: A glimpse into the future: Do you also anticipate opportunities for the hospitals after the end of the convergence phase at the end of 2008?

Kolb: After the previous experiences in the convergence phase hospitals also have a considerable potential for development under the changed legal framework. This applies particularly to the range of different medical services offered to the patients, the image as well as the marketing of the hospitals in this respect. When these opportunities are seen and seized, the hospitals have a good chance to survive in the market even in the future and to convince health insurance funds as well as patients of their own effectiveness as a hospital. Several hospitals have already adapted themselves to the changes in the context of the convergence phase and, therefore are likely to successfully survive in the market in the future and to be able to work cost-effectively.

In areas where there is no likelihood for this, perhaps because of an over-provision of medical services or because of a continuous decline in potential patients due to migration of the population residing in the catchment area of the hospital, the hospital management should recognise the possibility of insolvency proceedings or an insolvency plan procedure.


Annerose Tashiro
Rechtsanwältin / German Attorney-at-law
Head of Cross-Border Restructuring & Insolvencies at Schultze & Braun