Paladin Management Group

Insights from the Restructuring Recognized as the 2025 Healthcare Deal of the Year

Key Takeaways

• Revenue cycle failures can be the fastest path to insolvency. Even strong operators struggle in today’s environment, and in a restructuring, RCM becomes the first and most urgent priority. Fixing billing gaps, correcting missed charges, and tightening denials follow-up can immediately strengthen liquidity.
• Troubled hospitals must re-examine their assumptions about profitability by analyzing which procedures and service lines are truly profitable.
• Look before you leap with operational cuts. Healthcare providers must thoroughly vet any licensing, regulatory, accreditation, or payor contractual implications before taking drastic steps to reduce cost.

Introduction

Healthcare operators are under extraordinary strain right now. Labor and supply costs keep climbing, reimbursements aren’t keeping pace, and regulatory demands are escalating. According to Kaufman Hall, 40% of U.S. hospitals continued to lose money from operations into 2024, reflecting a level of financial stress that has become systemic across the industry.

A Texas-based specialty surgery hospital was caught in the same squeeze: rising costs, declining revenue, and mounting cash-flow pressure.

By July 2023, the hospital was weeks away from running out of cash and at real risk of shutting its doors while dozens of patients were still recovering from surgery. The hospital’s owners called on Paladin to help the hospital restructure, and with the support of its lender, it filed for Chapter 11 bankruptcy protection in September with plans to recapitalize. The plan itself was straightforward: monetize assets, conserve liquidity, and run parallel sale and recapitalization processes.

External and internal pressures forced multiple changes in direction along the way, but 19 months later, in March 2025 the bankruptcy judge confirmed the hospital’s Plan of Reorganization, earning Paladin Healthcare Deal of the Year from M&A Advisor.

The hospital’s experience surfaced several patterns common among distressed healthcare providers. These are the risks that break providers and the steps that stabilize them. While the strategy was simple, execution was complicated by legacy administrative deficiencies, a reality that many healthcare providers will recognize.

1. Revenue Cycle Failures Can Be the Fastest Path to Insolvency

Revenue cycle management was not the only issue at the hospital, but it was the issue that was most directly connected to its troubles. Chronic leadership turnover, underinvestment in systems, and widespread billing and coding issues hindered the hospital’s ability to turn services into cash. At the time of the filing, the hospital had not had a revenue cycle management director for over a year.

• As noted in ABI Journal, revenue-cycle failures quietly erode 3–10% of potential reimbursement, which may not sound significant but can determine whether a hospital generates profit or loss.
• Optum’s 2024 Denials Index reinforces the scale of the problem: 84% of denials are potentially avoidable, and nearly half of registration- and eligibility-related denials cannot be recovered.
• Optum data also shows that 24% of all denials stem from registration and eligibility errors and that nearly 44% of total denials occur at the front end.

The hospital fit that profile: billing gaps, coding issues, and lack of denials follow-up were draining cash from the organization, quite literally leaving money on the operating table. The hospital was not billing for all the costs associated with some of its highest-margin procedures, nor was it proactively managing denials. Many receivables were aging out past statutory time limits before the hospital ever followed up with payors. These issues were exacerbated by management’s decision to rely heavily on third-party service providers instead of maintaining a robust in-house RCM function.

These challenges would not be solved overnight, but by focusing the hospital’s internal team on interim workarounds, Paladin helped improve RCM discipline to at least stabilize weekly cash flow so the hospital could remain operational throughout the bankruptcy process.

2. Troubled Hospitals Must Re-Examine Their Assumptions About Profitability

Another important lesson is how easy it is for providers to fall into the bad habit of operating on unexamined assumptions about margin performance. The revenue cycle issues that clipped the hospital’s cash receipts already caused a drag on profitability, but Paladin’s analysis revealed that even without the revenue cycle problems, procedures that are typically associated with high margins were in fact unprofitable when all the costs were accounted for.

In any restructuring, it is essential to reexamine “the way we’ve always done things.” When Paladin first arrived, the hospital was pursuing and prioritizing certain procedures on the belief they were profitable, but deepening operating losses put the lie to that strategy. Turnover in finance leadership had left the hospital reliant upon assumptions rather than analysis when making operational decisions, which only compounded the liquidity issues.

If the hospital had a firm and accurate grasp of its costs, they might have been able to find ways to improve margins at a granular level. Without a sophisticated understanding of its true cost structure, however, the hospital instead took more desperate measures to reduce cost that could have been fatal to the hospital.

3. Look Before You Leap

Without the benefit of continuity, the hospital's leadership was effectively learning the job as they went. Two decisions almost brought down the hospital because leadership lacked the time and awareness to carefully consider implications. Hospitals operate under complex licensing, quality, and compliance constraints that can be highly specific to each provider, which makes broad cost-cutting measures tricky affairs that must be carefully thought out and meticulously planned.

First, before Paladin’s involvement, the hospital closed one of its two surgical centers to concentrate all its procedures into one location and drastically reduce overhead. Not a bad decision on its face, and facility consolidation is indeed a very common restructuring strategy. However, the hospital’s contracts with insurance carriers were specific to each location, and the facility that was closed turned out to be the one that had the rates associated with the highest revenue procedures, while the remaining one did not. In one fateful move intended to reduce cost, management had also decimated revenue.

Second, the hospital attempted to close its emergency department, which was costly to maintain but did not see a lot of patients. As a licensed hospital, it was required to run an emergency department. Management made inquiries and believed that it could apply for a waiver based on the hospital’s financial condition. Unfortunately, that turned out not to be the case and the hospital received immediate threats from regulators to reopen the emergency department or the hospital’s accreditation would be revoked.

Conclusion

Despite all of this, the hospital was finally able to emerge from a protracted bankruptcy proceeding as a going concern through the strenuous efforts of its legal and financial advisors, and with the input of the professionals representing the unsecured creditors. Together, the advisors helped keep the company afloat and guided its principals through a difficult but ultimately successful reorganization process. Healthcare distress is rarely about one problem; it is a stack of interrelated failures.  The providers who pull themselves out of distress fastest are those who:

• Get revenue cycle management right.
• Validate true case-level profitability.
• Respect the complexity of the environment within which they operate.

Underlying all the issues discussed above is a factor specific to the hospital – the extreme degree and pervasiveness of turnover at all levels. While hospital CEO turnover has declined to 16% in recent years, this Texas-based hospital experienced turnover far above industry norms. Every executive role and several middle-management positions became a revolving door from the moment the prepetition ownership took over, and this churn continued through the restructuring, with the CEO and CFO turning over twice.

This instability was a major contributor to the failures cited above as well as to the protracted nature of the bankruptcy proceeding. Paladin provided the necessary continuity and hands-on support of management during the bankruptcy to maintain financial viability and uphold care standards. The court-appointed Patient Care Ombudsman later commended Paladin for identifying and addressing patient-care risks that had been overlooked.

Happily, a year after the bankruptcy filing, the hospital finally found stable and committed leadership, and with the help of its advisors, was able to formulate a business plan sound enough to support a reorganization. That team is currently driving the necessary operational and financial improvements to realize the hospital’s full value creation potential, and nine months after exiting bankruptcy the hospital is adding well-regarded surgeons and attracting sophisticated investment partners.

For distressed healthcare providers, delivering clinical excellence is unsustainable if it is not supported by excellence in the administrative functions that are necessary to converting clinical outcomes into collectible revenue and enabling effective decision-making. The hospital’s experience proves that when management focuses on getting the blocking and tackling right, even deeply challenged providers can find a path forward.