The global coronavirus pandemic and the resulting economic chaos has significantly heightened the risk and uncertainty facing all healthcare organizations. Hospitals and health systems are experiencing or anticipating rising patient volume and supply and capacity shortages, at a moment when their balance sheets are significantly more precarious than just a few weeks ago.

Organizations looking to both survive the current crisis and thrive in an uncertain future must carefully prepare for both the short-term and long-term fall-out of the pandemic. Kaufman Hall Managing Director Jason Sussman explores how a structured process can help organizations identify risks, quantify and project potential impacts, plan for potential scenarios, and implement plans as those scenarios come into focus.

This interview was conducted on March 18, 2020.

 

Q: How would you describe the increased risk and uncertainty hospitals and health systems are currently facing?

A: I see the risk and uncertainty in two pieces. There are the short-term risks around immediate physical capacity, human resources capacity, and supplies. Those are issues that must be addressed immediately. I had a conversation with a CEO recently, and I asked him how he was doing. He said, “It’s okay, except I’m losing $8 million in revenue a week.” So, there’s a significant revenue issue being exacerbated by the market volatility, which is undermining the investment income organizations might otherwise use to buffer decreases in operating revenue. It’s a perfect storm.

But you can’t lose sight of the fact that this is more than a financial issue. It’s a community issue and it’s a human issue. Behind each of the numbers is a person, and you really have to be thinking in that context all along the way. For our clients—and especially for those in not-for-profit healthcare organizations—that’s why they’re working at their organizations in the first place.

So, there are these short-term immediate consequences, and then you have to look further down the pike and say, “What are the medium to long-term risks that we face?” In the broader economy, we’re heading to—if we’re not already in—a recession. We know the impacts from the 2008/2009 financial crisis and the resulting recession, so we have to think about responses over a longer period related to a recession, and say, “How are we going to access capital? And how do we deal with reduced financial capability in our organization, and among our patients and our communities?”

There might be vendors who don’t make it through a recession or have reduced capabilities to provide ongoing supplies. It could be completely overwhelming. I had a conversation recently with a hospital CFO, who said his organization was fortunate in that they had focused on building financial reserves. The CFO was wondering how smaller hospitals, or organizations that haven’t focused on building those reserves, were going to deal with this situation over the medium to long-term.

What’s the right way to approach this? From my perspective, it’s a question of preparation. Part of the organization must be focused on addressing immediate and operational concerns. However, other parts of the organization should really be stepping into the planning and preparing mode. From a leadership standpoint, you need to designate the resources to make that happen.

 

Q: What do organizations need to do now to prepare?

A: There are four basic steps. First, you need to honestly and objectively identify what the risks are environmentally, and then specific to your organization. Everyone is going to be dealing with supply chain issues, bed capacity, critical care beds, and so forth. But for your organization, critical care beds may be paramount. Or maybe it’s retraining and attracting staff, and making sure your staff can work and take care of themselves and their families.

The identification of risks is vitally important. There are organizations that will sit down and talk about risk, but will ignore a whole series of risks because they think they could never happen. Or they’ll dismiss a risk because, “If that happens, we’ll have to shut the doors.” In this situation, you can’t ignore those risks.

Second, after identifying the risks, it’s a question of quantifying the impacts of those risks and incorporating them into your projections. Maybe it’s lost revenue, or increased costs to get products you could otherwise get easily, or paying premiums to get temporary staff in place. Quantification provides a fact base for decision making. Organizations should focus on facts and use all of the tools they have, especially financial planning software tools, to enable a comprehensive discussion of risks and impacts.

You need to understand the risks, so they can be layered on top of a business-as-usual projection in order to run scenarios that will enable you to quantify the impacts. If you ignore the really bad ones—or even the more minimal ones, for that matter—you’re handcuffing the organization in terms of preparation and planning for actions to be implemented. By quantifying, you’re also able to start to identify key indicators that will tell you that Risk A or Risk B is coming to fruition. This can be done within the context of your financial planning process, using in-place software tools.

Third, as you start to identify and quantify risks, the process then needs to create a management plan to respond to each contingency. It may also be that you have two or three scenarios that are coming together. Hopefully by planning for these scenarios, you will have assessed groupings of potential problems and the magnitude of the issues that result as you group them. In the end, you may have identified 20 different risks. At that point, it is possible to say, “Individually, here’s what the impact would be, but if A, B, and C were to happen together, that’s a potential scenario that needs evaluation. Organizationally, we want to develop a plan for that.”

Fourth, if you do the work to have specific plans to respond to each potential scenario, management won’t be thrashing around in a panic trying to figure out what to do when the scenario actually occurs. You’ve already worked through that plan. Not only that, management would have had the time and opportunity to communicate its contingency plans to the board, the medical staff, the management team, and, perhaps, the community, so everyone will understand that if “X” happens, here is how the organization will need to respond. As a result, the organization’s ability to implement will be enhanced, because it’s reduced pushback and barriers from constituencies claiming not to understand why the actions are being taken.

 

Q: How should organizations identify risks?

A: This is perhaps the hardest part. It’s human nature to avoid tough issues. The way I think about the approach to this is to categorize risks, starting with volume-related impacts. For instance, if we eliminate elective procedures, there will be a volume impact that clearly cascades into revenue. What if we have a shortage in capacity because we’re filling beds with COVID-19 patients? Well, not all volume is good volume from a financial perspective. COVID-19 patients are medical patients, and if you look at the revenue and cost impacts of a medical patient versus a surgical patient, it’s very significant.

And if you’re creating shortages and you’re using all the ventilators, and all the ICU beds for these patients, what does that mean, and what does that look like? What if these patients are in the hospital longer than your current mix of patients, what impact does that have? If you’re getting a payment on a per-discharge basis, what is the magnitude of that problem? And as your length of stay increases, effective bed capacity is reduced, and staffing is affected. The risk identification process needs to focus and home in on not only the level of the potential issue, but the timing of it as well.

The assessment should identify operating impacts as well – not only the ones that are driven by volume, but also issues such as staff availability. Nuvance Health furloughed staff, including anesthesiologists, because they’d been exposed to COVID-19 patients. It raises the question, “Do you have experienced, trained staff to fill in for those who have been furloughed?”

There are also supply chain disruptions, reduced investment income, and potential reductions in philanthropy. There are reports of increased philanthropy to support hospitals in the short run, but as individual portfolios are negatively impacted through a recession, philanthropy will go down for a quite a while. For upcoming or current projects whose funding is based on projections of philanthropy, you’ll need to take a second look.

Management needs to carefully differentiate for organizational circumstances. I was talking recently to the CFO of a children’s hospital. From a capacity perspective, his hospital has not been nearly as affected to date as a hospital for adults, because the prevalence of the virus in kids has been relatively low to date. That said, his team is still are grappling with the same issues around market volatility impacts to their balance sheet, supply chain disruption, and staffing. While there are certain risks that may not apply to their situation, others may be more material. And it’s entirely possible that children’s hospitals might have to use some of their capacity for adults, or, if there’s ambulatory capacity, to do testing.

When you think about rural providers versus urban hospitals, or academic medical centers (AMCs) versus community hospitals, all of those sorts of hospitals will have different levels of risks. And that differentiation is an important piece of the analysis to play out. For instance, before the coronavirus, AMCs in general were running very high occupancy levels. But when you go out into communities, especially in rural areas, you find some hospitals at low occupancy levels. For those hospitals, there is bed capacity available, but whether it can be appropriately staffed is another issue.

It may be that the result of this crisis is that we, as an industry, start to think very differently in terms of providing access to care, and where that’s done. In 2008 and 2009, when we at Kaufman Hall sat down to consider the impacts of that recession, one of the things that was clear to us was that there would be a wave of consolidation, because there would be hospitals without the financial wherewithal to stay afloat.

Today’s situation could result in another wave, not only for financial reasons, but in terms of accommodating care in broader and different ways than how we’ve always done it. For instance, we have telemedicine technology we didn’t have in 2008—not just video but remotely recording vital signs and performing exams. As a result, the need to have specially trained staff on site can be mitigated. In intensive care, for example, an organization can have centralized intensivists remotely managing nursing care at the local level.

Balance sheet risks come under the category of medium to longer-term impacts. The first impact we are all experiencing (personally and corporately) is watching our investment balances dwindle. With lower investment balances and lower liquidity, there is less cash available to support strategic investments and less investment income cash flow to support operations.

As part of the analytics, you also have to ask, “What impact do all these scenarios have on our balance sheet relative to the debt covenants we have in place? Do we have a liquidity covenant we have to maintain? How about debt service coverage?” Some organizations have a days-cash-on-hand minimum. If liquidity falls below that number, they’re technically in default. There are clearly consequences to that. Similarly, debt service coverage is another key covenant. Under what scenarios would the organization run afoul of the covenant levels? This is an area where financial planning software can be very effective. Not only can assumption-specific projections be generated, but the software can be used to project scenarios and test against covenants and other operating and financial targets.

 

Q: What are the prospective and proactive initiatives that can address that?

A: Some organizations are looking to refinance debt to generate interest savings because rates are still low. Others are talking to local banks and trying to get a liquidity facility in place. It’s important that there’s a structure in place so should you need it, it’s available at reasonable cost. Debt and liquidity support are much like health insurance. When you need it, you can’t get it or it’s very expensive, and when you don’t need it it’s easy to get.

Then there’s more standard activity: reducing or deferring capital spending, addressing the revenue cycle, payables management. It’s all about protecting the liquidity of the organization and making sure that you don’t break the balance sheet, because a broken balance sheet takes a long time to fix.

The overall point is to position management to be able to do is say “Okay, under any scenario we may have, maybe there is a roadmap to long run sustainability and, hopefully, thriving, but in some cases there may not be.” In that latter situation, the question is, what are your organization’s strategic alternatives, and how do you go about pursuing those in terms of partnerships or other types of capital support?

 

Q: How can organizations quantify and project potential impacts?

A: Structurally, the first requirement is to make sure the base projections are up to date. For consistency, this should be done using your organization’s financial planning software. The base projections should reflect your year-to-date performance prior to the impact of the virus. From there, incremental impacts related to each identified risk and risk scenario can be layered on top. By taking this approach, it allows you to understand and manage isolated impacts. Then, when you start to group them together, management can define more meaningful strategies.

Armed with an updated base projection, management needs to quantify incremental impacts and be realistic about the ranges of those risks. For instance, when it comes to eliminating elective procedures, that’s fine, but for how long? Two weeks, two months, a year? At what point does it become untenable? At what point are we able to bring that volume back?

As the risks are quantified, you can create a matrix with risk, the range of risk, and the related outcome arrayed across the whole range of outcomes. At this point, you’re mixing and matching each risk with other risks to create scenarios. It’s a somewhat complicated math problem, but when you have all the pieces done well within the financial planning context and software, it’s relatively straightforward to put them all together.

You’ll start to understand under each potential scenario, what’s the result and the related shortfall that needs to be made up? That’s when you get to the strategies you could put in place, hopefully for each scenario. However, for some scenarios it may be that there's no amount of strategy that will fix things. Or perhaps your organization has significant capability to handle a wide range of scenarios. Regardless, you will still want to know and quantify that up front.

A lot of organizations have established specific financial targets. In that instance, the starting point is, can we get back to those targets? The next level is, if we can’t do it, maybe it will take longer to reach the targets than originally planned and we should start to think about interim targets. From there, the focus should move to what strategies will actually have short-term impacts, and which ones will have longer-term impacts. Ultimately, the goal is to layer those all together to achieve a trajectory of ultimate success.

 

Q: How should hospitals plan their responses to each scenario?

A: Management needs to define specific mitigation steps and key indicators for their implementation. Clearly, on the operational side there will be a need for a number of classic performance improvement solutions. It may be furloughing. At a minimum, you’ll certainly be looking at productivity and an enhanced focus on workforce optimization in a new operating structure.

As an industry, we’ve done very well lowering the cost of what we do given the way we do it. This current situation may be the opportunity to start really looking at the hard stuff, like clinical variation and transformation, or providing care in completely different ways.

Given that the current chassis will be strained so significantly, we’re going to need to change the way we provide care. This is an opportunity to have that tough conversation. Management will need to think about not just the usual suspects, but also more difficult issues that involve staff, physicians, and the community.

If we’ve done our scenario planning well, and communicated it and identified the financial and operating impacts, we can start to look at the responses and say, “How do they address the trends we’re seeing that indicate we are missing on these indicators?” If we find out we’ve been more draconian in our responses than needed in our projections, good for us. But at this point, given the level of uncertainty, you want to be prepared for anything. You want to look at responses across the board, without regard for internal political consequences, so you can focus on long-term survivability and sustainability.

Supply chain issues are only somewhat controllable. We can have a highly efficient supply chain, but our sources may not be available. It’s not just caps, gowns, and booties. We’re in a one-use society where everything’s disposable, so organizations need to constantly replenish stocks. You will want a strategy and contingency plan to obtain supplies and certain drugs—especially the more generic ones—that might be produced or packaged overseas. Each organization will also want to understand which drugs are a priority for its patient populations. That analysis could lead to asking, “Hospital X has supplies of a drug that Hospital Y doesn’t have. How do we make information available and create the potential to more effectively allocate inventories and create inter-organization transferability?”

Perhaps your organization has been using only one type of prosthetic, a practice that has saved costs and improved quality. Does that practice create a short-term risk if a particular vendor doesn’t have availability? Defining the correct response will have to be a concerted effort of not just management but the provider community.

Communicating how management is thinking about addressing these issues and the broader strategic context becomes vital. The providers are in this day to day in the trenches, so it’s harder for them to step back and say, “What does this all mean?”

 

Q: How can organizations implement their plans once scenarios come into focus?

A: If management really has gone through the first three steps, implementation should be seamless and no surprise. The types and timing and extent of initiatives will have been defined in a robust way in the third step of the planning process. Implementation timing should be governed by monitoring and measuring against identified key indicators. When we run afoul of an indicator, management needs to say, “We had Response Plan B, which related to that indicator. Time to implement it.” It is important that the indicators not be set to trigger at the point when the organization is in deep trouble, but as a forward indicator that will trigger based on trends heading in a direction that could get us to a serious situation.

It all goes back to communication, because some of these initiatives will need to be pretty significant steps and responses. If the broader organization doesn’t understand the strategies, you may get short-term compliance, but there will also be significant pushback from all sorts of constituencies, which is the last thing you want when you need to implement an effective response.

It’s not just communicating in the moment, but pre-communicating, “Here’s what we’re going to do, because this is what we’re trying to achieve.” This is not a time to be opaque or to minimize the situation or to prevent folks from having full information. In a situation where there’s a lack of information, it is human nature to go to the worst possible outcome and come up with something that may or may not be true.

Providing information is extraordinarily helpful to manage organizational behavior and move the organization forward. In this approach, you’re defining plans in advance to meet a variety of potential situations, so people aren’t surprised at the moment of implementation.

 

Q: What else should be top of mind for hospital leaders at the moment?

A: It’s important to be thoughtfully proactive. One extreme reaction is to put your head in the sand and hope the bad news goes away. I don’t think anybody’s doing that right now. Another reaction is, “This is bigger than us, and we have to wait and see.” That’s reactive management and not particularly helpful.

If you’re thoughtfully proactive, you’re understanding that yes, there’s an aspect of the current situation that’s out of your control. But it is possible to understand what the potential impacts are going to be, and how your organization might react to each of these impacts with a plan in place. That ability to articulate and establish strategies is filling a leadership gap. It’s also a way to effectively eliminate potential panic that could ensue if your organization doesn’t have that kind of plan. It’s vital in these kinds of situations to do real planning and to communicate the results. Then you’re at least one step ahead of the curve, which will be vital for effectively serving your community in both the short term and long term.

Meet the Expert
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Jason-Sussman

Jason Sussman

Managing Director
Jason Sussman, a Managing Director of Kaufman Hall, directs the Capital Planning and Allocation division of the Strategic and Financial Planning practice. Mr. Sussman provides planning and financial advisory services for hospitals, health systems, and physician groups nationwide. His areas of expertise include strategic financial planning, capital allocation, mergers and acquisitions, financing transactions, and management software.
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