As healthcare leaders grapple daily with the new normal of 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 quantifies 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 the same period last year, 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 12% compared to February, and was 17% above budget expectations.
- The effects of the first few weeks of the COVID-19 outbreak, in the second half of March, have plunged not-for-profit hospitals, which historically operate on thin margins, deep into the red.*
Those figures are scary, and we have no indication they’ll improve in April. 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?
We recently convened a roundtable of healthcare executives who lead organizations of varying size and type — from 100-bed critical access hospitals to large, multistate systems — to discuss strategies for stabilizing and protecting their organizations. Their strategies can be separated into three categories Kaufman Hall often uses to frame planning activities: 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 healthcare 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 for us, 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 be able to provide elective procedures — which were delayed to slow the spread of the virus and preserve inpatient resources — without a solid sense of when the outbreak will end.
“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 cancelled procedures. With the help of Axiom Decision Support Solution, 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 our 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 Axiom Rolling Forecasting have adjusted current budgets easily, but only about half of organizations use a rolling financial forecasting model, according to a 2020 Kaufman Hall report. Rolling forecasting enables leaders to respond with agility to changes in the market, improve resource allocation, and adjust strategies in close to real time.
“I wish we could say we had rolling forecast methodology in place, but we don’t,” said the vice president at the Midwestern health system. “Right now, we’re primarily 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 and, in select states, monitoring “persons under investigation” (those who may have the virus)
- Applying for federal relief funding for hospitals through the CARES Act
- Talking with financial advisers to determine how to improve liquidity in the short term, such as securing lines of credit
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 they face comes down to a single question: “How do we get those dollars back?”
One of the first actions taken by the CFO of a community hospital on the East Coast was to apply 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 area of focus.
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.
“I think 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 (85%) comes from outpatient and elective procedures. I’m concerned that a lot of the procedures that were previously scheduled 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 that are all forecasting differently. We’re building out 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:
- Determining the strategy for bringing elective procedures back into the mix and making sure essential resources are available — everything from anesthesiologists to personal protective equipment to supplies for surgery
- 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 as well as 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 the 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.
For example, a 2020 survey of healthcare finance leaders taken before the coronavirus crisis showed:
- Just 24% of respondents are “very confident” in their team’s ability to quickly and easily make adjustments to strategies and plans if business circumstances were to change suddenly, as they did this year. This number has largely remained unchanged over the past three years.
- 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 completely support efforts to lower costs without compromising the quality of care.
- Only 36% of respondents have a high degree of confidence in the accuracy of results from their existing cost accounting system.
And while 63% of finance leaders sought to improve operational budgeting and forecasting in 2020, those who didn’t do so prior to March 2020 are missing significant opportunities to use data analysis to support recovery efforts.
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 in the year after COVID-19 and beyond.
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 this shift will occur. 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.
*Source: April 2020 National Hospital Flash Report, which uses both actual and budget data over the last three years, sampled from over 800 hospitals on a recurring monthly basis from the Axiom Comparative Analytics™ tool. While this report presents data in the aggregate, Axiom Comparative Analytics™ also contains this real-time data down to individual department, job code, pay type, and account levels, which can be customized into peer groups for unparalleled comparisons to drive operational decisions and performance improvement initiatives.