The ripple effects of the COVID-19 pandemic are being felt across nearly every industry and sector. In higher education, colleges and universities across the country have had to quickly adjust as campuses have been closed, courses shifted online, and students, staff, and faculties’ lives, living circumstances, and academic plans have been disrupted.
The repercussions are further compounded for universities affiliated with academic medical centers (AMCs), particularly those universities that own the AMC. These institutions face a unique set of challenges as they may depend on their AMCs to provide in excess of 50 percent of their operating revenue, and an even higher percentage of operating Earnings Before Interest, Depreciation, and Amortization (EBIDA).
Current events demand that university finance leaders be proactive in projecting and planning for the potential short- and long-term financial implications of the pandemic, as well as the broader economic impacts. Many economists say a global recession has already begun.
Like hospitals and health systems worldwide, AMCs are part of an intense battle to scale resources to treat rapidly mounting numbers of coronavirus patients. In addition to immense operating challenges, AMCs face a variety of financial uncertainties due to changes in payer and service mix, supply chain issues, capital markets volatility, and other disruptions associated with combatting the virus.
From a financial perspective, these universities have always recognized the “double-edged sword” nature of operating a clinical enterprise. Under most circumstances, the clinical enterprise is a significant and important resource generator for the university. However, the entire financial position of the university can unravel very quickly when extreme circumstances impact the clinical operations, such as in the current crisis.
No one knows the future course of the COVID-19 pandemic, or when necessary social distancing policies can be eased and campuses reopened. These uncertainties make planning difficult for university officials, and for students, faculty, and staff.
Universities can be affiliated with AMCs under a variety of structures: 1.) as an operating division of the university, 2.) as a subsidiary of the university, and 3.) through affiliation agreements with health systems. Regardless of the structure, the current crisis calls for a pro-active approach to address the key challenges that will result, some of which include:
Disruptions to cash flow
Universities often operate with limited unrestricted liquidity that can be deployed quickly. For universities that rely on AMC cash flows, the AMC typically is a steady, positive source. That cash flow is currently being disrupted as AMCs cancel elective procedures and incur unbudgeted costs to increase capacity for COVID-19 patients. As a result, the AMC may become a drain on revenues and cash flows in the short term. For those institutions that rely upon support payments/funds flows from the clinical enterprise to cover education, research, and faculty practice plan operations, there is a critical need to proactively manage the potential for significant reductions to support payments.
Educational and research support
AMCs have a trifold mission of education, research, and clinical care. Positive margins from clinical care provide support to the education and research missions. Near-term impacts to external research funding may be minimal, as research grants typically are funded under multi-year contracts. But to the extent that the research and educational missions are supported by clinical revenues, these areas may face shortfalls. In the longer term, research funding may also see cuts as federal and state governments attempt to mitigate the impacts of a potentially deep recession.
Faculty practice plans
AMCs often support large faculty practice plans, with a high percentage of specialists and sub-specialists. The AMC may be able to redeploy some of these physicians to assist with care of COVID-19 patients, but the revenue generated by many of these physicians will be reduced—at least temporarily—as AMCs defer elective procedures. The university may have to provide financial support to the faculty practice plan until the AMC is able to stabilize operations.
Impact on credit rating
Rating agency policy is to “rate through” short-term disruptions that may have a temporary impact on operations, but universities with owned or affiliated AMCs should expect more questions focused on the healthcare side of their operations. Analysts will want to see projections as to how long the university expects disruptions to its healthcare operations to continue, the extent to which financial reserves or other funding sources are available to cover anticipated losses, as well as the types of operating responses that will be implemented to offset revenue reductions.
Other challenges mirror those being experienced at colleges and universities nationwide:
- Immediate financial losses such as lost income from university-affiliated, on-campus businesses or refunds for student housing, meal plans, and other non-tuition expenses.
- Declining enrollment due to students’ health concerns, financial hardship from a faltering economy, or other uncertainties about the pandemic’s future toll.
- Cuts to research as closed campuses halt research initiatives nationwide, and funding for research grants declines.
- Disrupted international programs as students face uncertainties about when they may be able to travel again, and whether they will choose to continue in those programs.
- Rising demand for financial aid as a poor economy drains students’ financial resources, and state and local funding.
- Negative impacts in other areas including sources such as philanthropy, pension plan funding requirements, and reduced endowment income resulting from a virus-induced economic downturn and capital market volatility.
By necessity, many universities and their affiliated AMCs are currently focused on addressing the short-term requirements of COVID-19. At the same time, however, university finance leaders must also turn an eye to preparing for future scenarios, and designate the resources needed to focus on both short- and long-term priorities.
AMC-affiliated universities across the country will suffer material negative financial impacts from the pandemic, with significant potential credit rating consequences. Many operate on lean cash reserves as it is, and some universities already are diverting funds away from major capital projects, or are seeking additional liquidity from the capital markets to address potential cash shortfalls.
University chief financial officers will need to work hand-in-hand with their AMC counterparts to identify risks, model potential scenarios, and determine how best to respond to sustain their institutions’ financial viability and health. Recommended steps include:
Identify the risks
As a vital first step, university and AMC finance leaders must thoroughly and objectively identify and categorize both the internal and external risks associated with the pandemic, and the resulting economic downturn.
Quantify potential impacts
Once risks are identified, institutions should assess the potential financial and operational implications of those risks. With the help of financial planning software tools, they will need to quantify factors such as decreased enrollment, or increased demand for financial aid, and loss of various funding sources, including revenue from AMCs.
Map contingency plans
The quantification of risks will equip university leaders to make informed decisions regarding potential action plans, and to better gauge when specific risk scenarios are coming to fruition. Contingency plans should account for multiple possible scenarios, both individually and in various combinations.
Communicate contingency plans
Once university leaders have mapped potential contingency plans, they should communicate those plans to their management teams, boards, and faculty leaders. Doing so will enable the institution as a whole to be better prepared and able to implement such plans more expeditiously, if needed.
The many uncertainties associated with the COVID-19 crisis are driving massive changes across both higher education and healthcare. With a foot in both sectors, AMCs and their affiliated universities must navigate the associated impacts of the pandemic and subsequent economic downturn by projecting and planning for multiple potential scenarios, and working together to build a quantified plan to sustain their institutions through the turbulence ahead.