On top of the heightened cost of care, healthcare financing is trending downward and the pervasive risk of the national credit and financial crisis has intensified the strain on hospitals. A new level of financial difficulty and distress has now permeated a broader cross-section of hospitals and health systems in the United States.
The impact of the financial crisis is a double-edged sword. On the one hand it has diminished, or in many cases eliminated, the ability of health systems to access the credit markets to fund physical asset replacements and expansions. On the other, it has decimated the value of investment portfolios and diminished liquidity to levels that threaten the violation of restrictive financial bond covenants.
The financial market upheaval has affected everyone. Financially strong health systems are now feeling the effects of these events and trends, as well as average and weak performers. At a time when operating margins are becoming increasingly difficult to maintain, investment portfolio losses, liquidity concerns and weakening philanthropy are enhancing the need for positive operating cash flows as a means to support financial health and liquidity.
What can you do right now?
Healthcare providers can take 10 steps right now to help them survive in these extraordinarily difficult times.
1. First and most importantly, concentrate management’s time and energy over the next 6 to 12 months on improving positive cash flow from core operations and the operating margin. Look to both revenue cycle improvement initiatives and cost efficiencies (both labor and non-labor) to achieve this goal. Most likely, the opportunities are significant. They just need to be identified and implemented in a highly focused and comprehensive manner. Here are a few ideas:
- Specifically as it relates to revenue cycle improvement, strengthen front-end processes such as registration, scheduling, insurance verification and co-pay and deductible collection; make strategic pricing modifications; renegotiate payer contracts where feasible; strengthen the self-pay follow-up function or consider outsourcing; consider mounting an intensive one-time accelerated cash collection initiative; to name a few.
- For labor costs, update and reset departmental labor productivity standards and manage to them in disciplined way; evaluate and renegotiate contract labor arrangements where feasible; reengineer premium and overtime pay practices; and many more.
- In terms of non-labor costs, renegotiate service contracts; outsource services that are not core to your operations; re-evaluate all insurance coverage as to dollar limits and form of insurance (commercial, self, captive, etc.); standardize supplies usage (both clinical and non-clinical) where feasible; and many more.
2. Implement rigorous cash flow projection and monitoring procedures. It is critical to anticipate adverse trends or events that could impact maintenance of adequate cash and unrestricted investments to cover both operating and capital budget needs. Avoid the serious consequences of breaching any financial liquidity covenants under the hospital’s bond agreements.
3. Reevaluate the overall capital expenditure budget and each significant item. Depending on the immediate and intermediate cash flow projections, consider delaying or eliminating capital expenditures if they are not mission critical at this time.
4. Intimately understand the restrictive terms and conditions of the capital structure and the recourse of debt holders when those covenants are breached. This is particularly important with variable debt that is often accompanied by sophisticated credit enhancement, remarketing or swap arrangements. Make sure to seek the help of a bond attorney and/or financial adviser when necessary.
5. If you think it is probable that your organization will violate one or more bond financial covenants in the near future, consider seeking the assistance of a qualified consultant now to help develop a performance improvement plan. It is better to deliberately anticipate that requirement to better control your destiny rather than have it imposed on you by an outside stakeholder.
6. Critically examine all programs and services, especially those that may be at the periphery of the core mission. Measure the contribution of each against a set of well-defined financial and non-financial criteria and be willing to prune or modify the economics of those that are less strategically important and that are draining financial resources.
7. Evaluate non-liquid, non-core assets and investments that could be monetized or converted into cash through a sale, a sale-leaseback or some other form of transaction. Assets that may be candidates for monetization include land held for the future, non-core buildings (such as medical office buildings), ownership interest in a health plan, or excessive amounts of cash accumulated in joint ventures.
8. Reassess pension and other retirement plans. First, take immediate steps to improve expense predictability in financial reporting. Second, consider incremental plan amendments in an effort to reduce the unfunded liability of defined benefits plans. Finally, identify long-term options in benefit redesign to further reduce risk in the event of additional deterioration in economics or the financial viability of the organization.
9. Reevaluate the investment policy with attention to investment asset allocation and diversification and your organization’s appetite for risk. Also be sure to include the performance of the investment manager(s) in the evaluation. Again, seek assistance from an objective and qualified investment adviser as necessary.
10. Because it is so important, we repeat step #1…focus on improving core operations. The effort and attention on this will reap substantial rewards in a matter of months. And, the result can position the organization for sustainable, strong performance for years to come.
How vulnerable is your organization?
How can you tell if your hospital is financially vulnerable? That is an important question that many boards and hospital executives are asking themselves right now. Recent events have resulted in major game changes and assumptions that are only months old have been rendered obsolete. Mapping a course for the future has changed for hospital executives.
In order to truly understand your organization’s financial vulnerability risk profile, management needs to conduct a comprehensive financial, operational and strategic health assessment. Similar to the care of patients, a complete health assessment will provide an accurate understanding of the symptoms, as well as the root causes and the recommended plan of treatment. If properly planned and staffed, an in-depth assessment can generally be completed in two to three months. That may seem like a long time if the organization is facing impending crisis, but it is vitally important to take the time on the front-end to carefully identify a course of action. This will yield optimum results as quickly as possible on the back-end.
Five early-warning indicators that are signs of heightened financial vulnerability include:
- A persistent trend of declining patient volumes, suggesting either eroding competitive position or, in more recent months, a slowdown in election of healthcare services consistent with general economic conditions
- Labor and other significant costs increasing disproportionate to changes in patient volumes, indicating an erosion of cost effectiveness or inefficiency.
- Declining and/or anemic profit margins and cash flows.
- A decline in liquidity (cash and unrestricted investments available for operating and capital needs).
- A highly leveraged capital structure that reduces an organization’s financial flexibility and may expose it to more financial risk in uncertain times.
If uncertainty exists as to whether your organization is a candidate for a comprehensive financial, operational and strategic assessment, the following quick diagnostic self-assessment can help. Calculate (or if you are a board member, ask the management team to calculate) the following four sets of ratios and the operating statistics (see Figure 1 below). Then compare the results to the color-coded dashboard. This will give you a good indication of the organization’s financial vulnerability. If the organization’s financial vulnerability profile is red in at least one category of indicators or is yellow or red in more than one category, then management should consider conducting a comprehensive financial health assessment and develop an action plan tailored to the findings of that assessment.
Figure 1
Mr. Wilson and Mr. Tiscornia are managing directors with Wellspring Partners, a Huron Consulting Group practice that is a market leader in providing performance solutions for hospitals, health systems and academic medical centers. To learn more, visit www.huronconsultinggroup.com/wellspringpartners or call (312) 880-3596.
