Industry Voices—With margins plummeting more than 100%, healthcare leaders must act now to secure their financial future

As healthcare leaders grapple daily with the coronavirus pandemic, many are desperate to know: What does the future look like for our organization?

To answer that, we must first understand the present.

New data from Kaufman Hall quantify COVID-19’s impact on hospital financial performance for the first time, and the numbers are grim:

  • In March, hospitals’ median operating EBITDA (earnings before interest, taxes, depreciation and amortization) margins fell more than 100%, dropping a full 13 percentage points compared to last year.
     
  • Volumes were down across all measures. Median occupancy fell to 53% in March 2020, down from 65% in March 2019. Operating room minutes were down nearly 20% compared to 2019 and were more than 25% below budget.
     
  • Hospitals experienced double-digit variance increases across all expense metrics per unit of service in March. Total expense per adjusted discharge jumped 18% compared to March 2019 and was 17% above budget expectations.

Those figures are scary, and we have no indication they will improve anytime soon. So, what can hospital finance leaders do when it’s clear that traditional methods of reducing spending and maximizing revenue will not be enough to recover?

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We recently convened a roundtable of healthcare executives to discuss strategies for stabilizing and protecting their organizations. Their strategies can be separated into three categories: the now, the near and the far.

Now: Analyze system data to understand and guide what happens each day.

How can healthcare organizations protect or secure cash flow in a COVID-19 environment? What approaches should leaders undertake to model the impact of current inpatient volumes and deferral of elective procedures on revenue? How can they forecast for the future when it’s not clear when the pandemic will end? These are just some of the questions weighing heavily on healthcare leaders.

“The hardest part right now is that there isn’t an end in sight,” one leader shared. “Some markets are getting hit much harder than others, which has forced us—as a national organization—to look at the impact of COVID-19 at the facility level, not just the organization as a whole.”

Leaders also are left to predict when their organizations will again be able to provide elective procedures.

“Right now, we’re projecting that 70% of the procedures we’ve delayed will take place in an acute care setting,” said one hospital leader.

That hospital and others are reviewing case trends and margins to determine which service lines to focus on when it comes time to reschedule canceled procedures. With the help of decision support software solutions, they can compare scheduling data with profitability to model what recovery will look like with various assumptions about capacity and priorities.

At one five-state health system in the Midwest, finance leaders recently gathered regional presidents to discuss the current state of affairs, operationally and financially, and plan for the next 90 days. “Things change by the day, and we know more this week than we did last week,” said the system’s vice president, finance and treasury. “We’re thinking about the ‘near’ and starting to make plans for the ‘far.’ Our operational finance team is performing significant analysis of volumes and the impact of deferred elective procedures.”

Another system has enabled department managers to request additional budget dollars and reclassify approved dollars from a placeholder budget into the department budget so that managers are not left to explain variances at the end of the year.

Leaders whose organizations use rolling financial forecasting have adjusted current budgets easily, but only about half of organizations use this model, according to a recent report. Rolling forecasting enables leaders to respond with agility to changes in the market, improve resource allocation and adjust strategies in as close to real time as possible.

“I wish we had rolling forecast methodology in place, but we don’t,” said the vice president at the Midwestern health system. “Right now, we’re modeling the impact through Excel.”

Other “now” responses undertaken by leaders include:

  • Monitoring cash flow daily
  • Compiling statistics around delayed or rescheduled procedures
  • Tracking, by the hour: bed utilization, airborne isolation unit availability, ventilators and personal protective equipment on hand
  • Developing dashboards for monitoring COVID-19 cases
  • Applying for federal relief funding through the CARES Act
  • Talking with financial advisers to determine how to improve liquidity

Near: Develop strategies around how to optimize reimbursement and manage payer contracts in the six months immediately following the crisis.

As leaders contemplate the financial impact of COVID-19 on their organizations’ financial health, one of the most pressing near-term challenges comes down to a single question: “How do we get those dollars back?”

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One of the first actions taken by the chief financial officer of an East Coast community hospital was applying for advance funding. “I’ve increased my organization’s line of credit from $3 million to $10 million, and we have about 280 days cash on hand. With these actions, I’m pretty confident we will not need to change our investment strategy through January 2021.”

At another system, protecting the organization’s core pool of investments within its equity portfolio is a top priority.

While investment strategies differ, everyone agrees that establishing a near-term view of the impact on hospital revenue over the next six months is extremely challenging.

“It’s probably going to take us a year or more to dig out of this financially,” said one financial leader. “Our revenue is down 62%, as most of our income as a critical access hospital comes from outpatient and elective procedures. I’m concerned that a lot of the previously scheduled procedures are being picked off by ambulatory surgery centers or private clinics. These are issues that make it challenging to plan for 2021 as we move toward budgeting season.”

As current-year forecasting remains a moving target, one of the nation’s largest rural health systems is building out projections at a higher level. “Instead of going down all the way to the general ledger account, we’re rolling things up to fee schedule detail, which enables us to forecast the ‘now and near’ of what the next three to four months will look like. We then share this insight with our accounting team to forecast cash flow,” the system’s CFO said.

“It’s complicated,” he said. “We’ve got a lot of different entities all forecasting differently. We’re building a model now that will allow us to forecast our balance sheet for the next six months, but as we look ahead to our budget process in July, the first six months of this year aren’t normal months. My biggest fear is that I’m going to get bad outputs for our budget.”

Other approaches leaders are taking include:

  • Tracking expenses for grant reimbursement
  • Establishing new accounting units to track expenses, then merging the data to show true COVID-19 costs by market
  • Tying activity codes to COVID-19 care

Far: Contemplate the future of their organizations next year and beyond.

Local competitors and new entrants to healthcare, such as digital health organizations, may prove to be more formidable foes in a post-COVID-19 environment.

“I’m afraid of how easy it is for these competitors to put mechanisms in place to attract volumes away from us,” one community hospital CFO said. Meanwhile, organizations that lacked sufficient tools to adjust quickly and easily to changing business circumstances likely will find it harder to navigate the new normal without shoring up their business intelligence, analytics and reporting capabilities.

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For example, a 2020 survey of healthcare finance leaders taken before the coronavirus crisis showed:

  • Just 24% are “very confident” in their team’s ability to quickly and easily adjust strategies and plans if business circumstances change suddenly, as they did this year.
     
  • 76% of healthcare organizations face resource constraints that limit the effectiveness of financial planning and analysis.
     
  • 54% have insufficient data, benchmarking and reporting tools to support efforts to lower costs without compromising quality of care.

Now more than ever, growing resource constraints are cause for concern, potentially hampering the ability of legacy hospitals and health systems to make the investments needed to compete effectively after COVID-19.

A strategic approach to recovery

The move from a “now” to a “near-term” response to the coronavirus crisis will happen quickly for healthcare providers, although it’s impossible to predict when.

As discussions with these healthcare leaders show, seeking ways to strategically use data analytics—from data around types of procedures postponed and expenses related to COVID-19 to financial modeling and cash flow analyses—will be vital to supporting a well-informed, highly strategic response at any stage of recovery.

Kermit S. Randa is CEO for Kaufman Hall’s software division. He can be reached at [email protected].