Independent hospitals could need to make drastic decisions such as reducing service lines or workforces to survive the cash crisis caused by the COVID-19 pandemic, a new analysis finds.
The analysis, published Thursday from consulting firm Kaufman Hall and the law firm Waller, projects an increased number of independent hospitals and smaller systems partnering up due to massive financial damage caused by COVID-19. Kaufman Hall also finds that more integrated and larger systems with more access to capital are better positioned.
“While the desire to remain independent is understandably important to many community hospital boards, independence may no longer be realistic in the current environment,” the analysis said.
COVID-19 has caused massive financial upheaval for hospitals that were forced back in March to cancel or postpone elective procedures. Patient volumes at outpatient clinics have also plummeted as patients have been afraid to head back to the doctor’s office.
At the same time, hospitals have faced higher costs for personal protective equipment and other price hikes for drugs and adding more staff to handle surges.
The analysis finds that larger systems are more able to weather these challenges because they have more purchasing power, additional borrowing capacity to get more money and greater integration of healthcare services.
“The COVID-19 pandemic has revealed that hospital systems that are able to deliver services in post-acute settings and through telemedicine, home health agencies and other outside services are better positioned,” the analysis said. “This sort of vertical integration enables hospital systems to diversify risk, as well as create significant efficiencies and cost savings.”
But smaller and independent hospitals need to start thinking now about what their facility will look like in the near future.
“In some cases they may have been operating on razor thin margins prior to COVID-19, but now are bleeding into the red,” Kaufman Hall said. “Finding a strategic partner may be imperative, and failure to engage in a thorough analysis of strategic alternatives now may come at the risk of losing potential partners down the road.”
Hospitals may have to take a number of actions to continue to be viable, including:
- Reducing service lines that don’t have a lot of patient demand
- Reducing workforces and cuting more expenses
- Cutting capital investments in plant and equipment
“For nearly every organization, some element or facet of the ‘core business’ is changing and the failure to diagnose and act with purpose to this fact may be the first step in a downward cycle of performance," Kaufman Hall said.
The analysis also expects a surge of hospital mergers and acquisitions in 2021 as the impact of the pandemic lessens. So far, the pandemic has reduced deal volume as hospitals shift toward strategic growth.
Distressed hospital systems, though, could already be looking for new partners to get through the financial crisis.
“Rural hospitals in particular are likely to pursue ‘hurry-up mergers’ to enable them to address supply and staffing shortages, as well as fund increased expenses, during the pandemic,” the report said.