Not-for-profit hospitals and health systems have been through three of the most grueling years in recent history. They were on the front line of the battle against the COVID-19 pandemic, which took a heavy toll on the many dedicated healthcare professionals who served in the struggle against a disease that has taken more than 1.1 million American lives.
As the clinical disruptions caused by COVID-19 have begun to stabilize, hospitals are now confronting a “new normal” of persistent organizational and financial challenges. These include supplementing a depleted workforce with expensive temporary labor and facing the same inflationary pressures that have gripped the country since mid-2021. Data from the Kaufman Hall National Hospital Flash Report, a monthly look at key performance indicators, show that more than half of hospitals across the country ended 2022 in the red.
Not-for-profit hospitals and health systems have two primary sources of funding: They either earn most of their revenue from providing direct patient care, or they borrow funds. They do not have access to equity markets to raise cash; instead, they build financial reserves to ensure that they will be able to continue providing essential healthcare services to their communities in good times and bad. These resources also ensure that not-for-profit hospitals have access to needed capital to invest in the lifesaving technologies, facilities and highly skilled professionals that modern healthcare depends on.
Financial reserves enabled hospitals to keep their doors open during the early months of the pandemic, when most were required to suspend nonemergency procedures and to obtain the extra staffing and personal protective equipment needed to care for COVID-19 patients who flooded their intensive care units during the initial surges. And they have enabled hospitals to continue providing services even as escalating expenses have meant that many are operating at a loss. Without these reserves, many hospitals would have undoubtedly had to close or limit services to their community.
The pandemic is only one example of why financial reserves are so critical to not-for-profit hospitals’ and health systems’ mission of caring for communities. In recent years, we have seen hospitals struck by a wave of natural disasters—hurricanes, wildfires, tornadoes and deep freezes, just to name a few. We have seen cyberattacks that threaten to shut down operations. In times of great distress, hospitals are most needed by their communities, and financial reserves provide the resources they need to always be there ready to care.
As people who have spent decades collectively working in finance and hospitals, we know how important the relationship between credit ratings, access to capital and providing care is.
It is difficult to overestimate how important strong financial reserves are as a determinant of financial sustainability, especially in today’s economy. Those hospitals in a position to maintain financial reserves are able to borrow money at more affordable rates, meaning they can access more funds at a lower cost to invest in the facilities, technologies and most of all the people they need to make the highest quality healthcare accessible to their communities.
It is distressing to see hospitals criticized for doing exactly what they should do, and what the markets demand—building the reserves that make them creditworthy borrowers and put them in a position to navigate through periods of difficult operational and financial performance while continuing to provide needed services. This is becoming increasingly challenging for hospitals and health systems as pandemic relief funds recede and severe financial challenges persist: A Kaufman Hall report prepared for the American Hospital Association shows that median days cash on hand decreased 28%, or 55 days, from 2021 through September 2022. The bottom 25th percentile decreased by nearly half.
Over the past three years, financial reserves have served the very purpose for which they are intended — ensuring that hospitals can continue to serve their communities in the face of challenging operational and financial headwinds. When these headwinds have subsided, rebuilding these reserves should be a top priority to ensure that our not-for-profit hospitals and health systems can remain a vital resource for the patients and communities they serve.
Lisa Goldstein is a senior vice president in the treasury and capital markets practice at Kaufman, Hall & Associates, LLC.
Ashley Thompson is senior vice president, public policy analysis and development, at the American Hospital Association.