The financial health of most hospitals in the country is based on a flow of elective, non-urgent procedures reimbursed by commercial payers. Hospital margins for medical patients and from government payers are either narrow or negative. With the COVID-19 pandemic, we are beginning to see what could happen when this lifeblood of hospitals’ financial health goes away for a significant period. The central financial planning challenge for hospitals now is to deal with the immediate threat to their financial viability, and to envision the new revenue, cost, and operational picture of a recessionary, post-COVID environment.
Some Are Waiting, and Some Are Overwhelmed
At this point, organizations could be put into two broad categories in terms of their interaction with COVID-19. One type of organization is waiting. As a consequence of the pandemic, many have decreased or stopped elective, non-urgent procedures. They are buying N95 masks, gloves, and all the other supplies that they need for the surge. Based on anecdotal reports, the inpatient occupancy of these hospitals, is a small percentage of their usual occupancy, and revenues are obviously following in the same direction. Yet, some of these hospitals may have few or no COVID patients at this point. They are bracing for the surge, but in the meantime they are facing serious revenue erosion and expense increases. These organizations will need to decide how long they can remain staffed for usual and customary occupancy when they’re only a small percentage of that level of utilization.
The other broad category is organizations that are in the midst of the surge. The executives in these organizations have shifted all focus to ensure they have the capacity, staff, and equipment to test and treat COVID-19 patients. These organizations, too, will face major financial consequences of this disbalance of revenue and expenses. For the most part, the organizations in this category have found that the virus hit them more quickly than they ever could have imagined, and the impact was more profound that they ever could have envisioned—a sobering insight for the organizations still waiting for the surge.
Organizations of both types are challenged to capture a range of data and information that can inform their current financial position and begin to prepare for immediate and longer term next steps:
Volume and revenue:
- Elective volumes
- COVID-19 volumes
- ED visits
- Service mix
- Payer mix
- Intensive Care
- Bad Debt
- Physician visits
- Governmental support
- Supply chain
- Physician productivity and compensation
- Emergency preparedness
- Capacity implications
- Interest expense
Balance sheet and cash flow:
- Collections of receivables
- Accounts payable management
- Invested asset portfolio/ investment income
- Near term liquidity requirements and capital access
- Capital structure disruption
- Pension funding
- Debt capacity
- Swap collateral posting requirements
Immediate Threats and a Possible New World
We are also seeing that the longer term scenarios are more difficult than many believed even just a few weeks ago. If we get through the peak of the virus by June, but the virus continues to take its toll through the summer, hospitals will find themselves in a very different recessionary and post-recessionary world. The rebound in elective and nonelective procedures is unpredictable.
Again, we can put organizations into two broad categories in how they think about the immediate and longer term financial implications.
One category comprises organizations that, before the virus, were operating with marginal profitability and relatively weak balance sheets. For these hospitals, the immediate concern is how to navigate the virus and recessionary pressures in the short term. They need an understanding of exactly what financial damage has been done and is expected in the coming months in order to make precise financial decisions that will best serve the hospitals and their communities in the short and long run.
In addition, this group needs to start as quickly as possible to determine changes to their cost structures in order to weather the current storm and a potential longer term decrease in volumes. For some independent organizations, partnership options may need to be assessed.
Organizations that are stronger financially, many of which are larger systems, have a somewhat different financial planning perspective. Like all hospitals and health systems, these organizations need to track additional expenses and lost revenue carefully to position themselves for whatever funds that may be available from third-party sources. In addition, these organizations, like others, need to focus immediately on liquidity. A financially strong organization that goes from a robust, positive operating margin to a significant negative operating margin—a realistic scenario—will likely face an intense short-term scramble for liquidity.
For these organizations, the longer term financial issues have to do with how to remain a financially sound organization when the major source of margin is dramatically reduced for a significant period of time. Such organizations will need to look at costs through a new lens. They may look for substantial reductions to their capital budgets. They may cancel certain large initiatives. They will need to look very hard at their hospital portfolios, overhead costs, and labor. The level of cost reduction is likely to be meaningful in every respect, and the cultural and political adjustments could be very significant.
In general, larger organizations need to plan for the possibility of unexpected stresses on credit ratings, weakened balance sheets, and profitability that does not match existing budgets. Boards will have to be well educated about the situation and the new state of hospital economics. Executives will have some opportunities; for example, new competitive positions and partnership options might exist compared with the pre-COVID environment. In general, however, these organizations will need to develop a new mental model accompanied by a new and more sophisticated financial plan.
A New Hospital Economy and New Planning Paradigm
The financial instability of the nation’s healthcare system has been apparent for some time. For hospitals, a critical element of that instability has been reliance on commercial insurers and surgical procedures to maintain margins. The COVID-19 pandemic has revealed that vulnerability in the starkest possible terms. Lost revenue and higher expenses are a big problem in the short term and an even bigger problem depending on the length of time until these cases return to the hospitals.
The COVID-19 virus is challenging hospitals not just to plan for a short-term financial hit, but possibly for a new healthcare economy. This new planning paradigm has exposed the inadequacies of traditional annual operating budget processes.Organizations whose fiscal years end on June 30 are currently attempting to approve Fiscal Year 2021 operating budgets based on actual results and year-end projections that were developed in the absence of the COVID-19 virus impacts. Organizations whose fiscal years end on December 31 will not be far behind, and while they may have the advantage of a few actual months of performance to inform their Fiscal Year 2021 budgets, they will nonetheless be making 12-months’ worth of assumptions in an unprecedented time of operating and financial instability.
Each organization will need to determine which procedures are to be resumed and when. Organizations will need to identify the factors likely to affect volume of each type and modality of care—such as consumer demand, sufficiency of clinical staff coverage, and supply of personal protective equipment—and forecast based on careful analysis of these factors.
Whether tracking for the immediate needs of the crisis or forecasting for the post-COVID-19 environment, healthcare organizations find themselves with new demands for timely data, sophisticated analysis, and forecasting and budgeting methodologies that are flexible enough for a highly unpredictable near term and long term.