Hospitals and health systems have absorbed the initial, disruptive shock of the COVID-19 pandemic, yet they continue to face multiple unknowns. New hot spots are flaring up, the economic costs of the pandemic are mounting, and the healthcare industry has recognized that the pandemic’s impact has moved beyond a short-term liquidity crisis to management of a chronic condition that will persist well into 2021, if not beyond. Many organizations will require significant operational restructuring to meet lower revenue and volume levels. Whether described as the “new normal,” “next normal,” or “new abnormal,” the future has rarely felt as uncertain as it does today.
In the face of so much uncertainty, management team leaders might be tempted to throw up their hands and wait for some sense of stability to return. But thinking ahead and maintaining a disciplined financial planning process to chart a clear path to resiliency—the ability to withstand changes to the core business model—has never been more critical. Unpredictable and rapid changes in the operating environment require that organizations be prepared to respond quickly to issues that could grow into significant problems and to pursue opportunities that may present only a narrow window for action.
The financial planning process fundamentally should not change, even though the new operating environment requires that organizations reevaluate both the strategies that will advance their mission and the methods in which they will monitor organizational performance. The five steps described below define best practices for ensuring that your organization is equipped with the processes and tools needed to build resiliency and maintain a balance of discipline and flexibility as it navigates an uncertain future.
1. Define what will be required to thrive
An organizations’ resiliency is defined primarily by two factors: the strength of its balance sheet and the consistency and strength of its operations. Thriving organizations are those that have both the resources and the ability to effectively marshal those resources to drive growth and enhanced returns.
Figure 1: Positioning for Resiliency
A strong balance sheet acts as a cushion in the face of uncertainty, providing stability during periods of operational disruption until the organization can regain its operational footing. Cash and unrestricted invested assets, which are the most flexible balance sheet assets, are particularly important to the balance sheet’s role as stabilizer. Resiliency depends on an organization’s ability to harness and effectively deploy these assets—and all available resources—in a process of strategic resource allocation. Strategic resource allocation first hedges against operational risk and other potential claims on liquidity and second, pursues independent return to support and grow the clinical and strategic initiatives that will further the organization’s mission.
The ability to navigate through operational headwinds is a key differentiator between organizations that can be characterized as thriving versus those that face greater challenges. The specific headwinds will vary by market, driven by such factors as the pandemic’s local impact and its effect on economic conditions, payer mix, volumes, and revenues. Strategies to counter these headwinds will vary as well, and might include growth into new markets, service line reconfiguration, or development of new programs to meet critical community needs. Many organizations may need to make significant expense reductions to address new revenue realities.
As the matrix in Figure 1 suggests, all organizations face some degree of risk; even those with a strong balance sheet are vulnerable if, for example, volume models shift or the competitive environment is fundamentally restructured. Every organization needs to ensure that its infrastructure and processes that support decision-making are effective and integrated. Further, they need to ensure that their portfolios of service offerings and investments are optimally structured to advance the organization’s mission through the challenging times ahead.
2. Reevaluate the financial plan through the lens of resiliency
With an understanding of what will be required to be a resilient, thriving organization, management should step back and evaluate its current operational and investment portfolio. What is our current credit position? What resources do we have available, and how effectively are they being deployed? Are we in the right businesses or service lines for today and in the future? How has COVID affected our point of view? What are reasonable assumptions around our operating trajectory, investment requirements, and the liquidity implications of the expected trajectory?
This broader portfolio review should be coupled with a review of the organization’s initiatives. The rationale for major initiatives planned before the pandemic may now be stronger or weaker. The management team should first divide initiatives into three categories:
- Initiatives that have already started and cannot be stopped
- Initiatives that have started but could be slowed down or delayed
- Initiatives that have not yet begun
Although initiatives in the first group will likely have a priority claim on organizational resources, management should assess whether the rationale for these initiatives is still compelling. If not, the team should consider whether the initiative can be scaled down or reconfigured, or whether it could be divested or monetized upon completion.
For initiatives in the second and third groups, management should consider whether new considerations have emerged that would justify accelerating, delaying, or cancelling those initiatives. For example, an initiative to expand a health system’s ambulatory footprint might be delayed until management has a better sense of the speed with which volumes are returning to pre-pandemic levels. On the other hand, the organization might see an opportunity to accelerate an initiative for service or portfolio rationalization. For those initiatives that the management team decides to pursue, clear exit strategies or alternatives should be defined to adapt to unanticipated changes in the environment.
By coupling a broader portfolio review with an initiative review, leaders can better assess what initiatives should go forward, and how to approach new opportunities.
3. Capitalize on opportunities
Review of the organization’s portfolio and existing plans for initiatives should also include an analysis of whether new opportunities or needs have emerged that should be included in the organization’s planning process.
In many markets, the traditional healthcare delivery system will no longer meet patients’ and consumers’ evolving needs. The delivery model will need to be redesigned to meet enhanced safety requirements, increased patient demand for remote and contactless interactions, accelerated technological innovation, lower emergency department utilization, and in some cases, lower patient volume. This realignment may create opportunities for new or expanded services across the continuum of care and create new reasons for collaboration with other participants.
Partnerships forged to better coordinate response to changing consumer preferences will likely have value over the longer term. However, organizations may only have a narrow window for action, so having a clear point of view on new needs or priorities, and having completed the necessary planning in advance, will support rapid and appropriate responses when opportunities emerge.
4. Build a common understanding of needed adjustments between management and the board
Self-assessment and analysis of existing and proposed new initiatives, services, and partnerships may require adjustments to the organization’s long-range plan. In addition, resulting changes to the organization’s underlying clinical and market strategies will impact other aspects of organizational management and decision-making, including revisions to performance benchmarks, capital structure, and capital allocation.
Depending on the degree of adjustment required, management should be prepared to have potentially difficult discussions with the board. Frank and transparent discussions that detail the challenges faced by the organization, the resources at its disposal, new opportunities which may stretch near-term financial capabilities, how the organization will be able to financially manage ongoing risk in the future, and the assumptions underlying any changes in direction should help the board understand why adjustments must be made. The management team should not only describe the processes it will employ to monitor progress against the targets embedded in the long-range financial plan, but also define the key market and performance indicators that will be tracked and communicated to the board.
5. Monitor and manage to the long-range financial plan
Many organizations have historically utilized the long-range financial plan to inform annual budget targets, but finance leaders may now be reevaluating the ongoing value of an annual budget. Given the many unknowns related to volume, revenue, and staffing needs, not to mention the new time demands that response to the pandemic has put on operational leaders, alternative, more efficient and flexible approaches (e.g., rolling forecasting) are being assessed. Such approaches will enable management to focus on the trending of key performance indicators so operational problems can be identified quickly and appropriate interventions implemented early on to keep the organization aligned with its long-range financial goals.
Organizations that have implemented a rolling forecasting process will already have the necessary structure in place to accomplish this. Rolling forecasting is particularly suited to today’s disruptive environment, bringing participants together for short blocks of time on a monthly or quarterly basis to provide efficient and timely updates on key indicators and answer one simple question: “Has anything changed in the preceding period that changes our view of present and future performance?” The answer to this question can guide necessary course corrections and keep the organization on track to achieve its goals.
Additionally, in the current, dynamic environment, operational leaders’ time will be best spent developing operating scenarios based on demand modeling. This modeling should include a range of scenarios in which recovery and restoration of pre-pandemic volumes occurs at varying speeds, including scenarios where demand for services remains suppressed for an extended time. Once those scenarios are defined, needed expense adjustments can be quantified and used to identify remaining potential gaps between performance and the long-range financial plan.
The size of the gap between projected outcomes and the long-range financial plan targets will guide efforts to define performance improvement requirements or initiate other interventions (e.g., portfolio divestitures or partnerships) needed to close the gap.
Strengthened decision-making helps build resiliency
It is increasingly clear that recovery from the COVID pandemic and the related industry disruption will be more of a marathon than a sprint. Building organizational resiliency to not only survive but thrive through this period will require informed and agile decision-making squarely framed by the discipline of comprehensive long-range financial planning. By taking the steps outlined in this article, management can reinvigorate and strengthen its decision-making framework. With the strategic direction of the organization adapted to reflect new realities and a more nimble, scenario-driven monitoring process in place, management can maintain a disciplined, integrated financial planning process that is able to respond quickly to changes in the operating environment and ensure the organization’s long-term viability and success.
Figure 2: A Revitalized Decision-making Framework