It’s not all bad news when it comes to not-for-profit hospital financial performance. Some hospitals and health systems are navigating labor pressures and reporting improving results, even as CARES funds dissipate, and FEMA funds will pale in comparison.
How are high performers bucking the trend?
Here’s a look at some of the common characteristics and playbooks of hospitals that are doing just that.
Location in high-growth areas
Growth is a tailwind. Many of the organizations that report improving margins are located in growth markets with diversified economies and affordable housing. The latter is particularly important in recruitment efforts. Many of these growth areas are experiencing the in-migration of young families and younger, healthy retirees.
While growing, some of these locations may not have experienced high surges in December and early months of 2022 because they are not densely populated. Locations with high urban density, like New York City, reported an escalating number of cases of Omicron given the variant’s highly contagious nature.
Growing volume can cover a large portion of fixed costs and contribute to net income if the hospital runs efficiently. That said, rising volume doesn’t solve all problems. In some cases, increasing volume can delay the need to address fundamental operating challenges such as efficient patient hand offs. Likewise, halting transfers into the hospital because length of stay is too high can have a long-lasting negative impact if physicians begin referring elsewhere.
Jump started expense management
As COVID cases began to wane in the spring of 2021, many hospitals quickly enacted expense strategies and are showing traction as a result. Even while Omicron surges occurred for many toward the end of 2021, cost reductions were underway, contributing to better financial performance.
Identified levers…and pulled them
In the early days of COVID, the industry responded to this unprecedented health crisis with unprecedented urgency. Tough choices were made in the form of furloughs, layoffs, suspended pension contributions, and delayed capital spending, to name a few.
With no new federal or state funding on the horizon to cover escalating labor costs, management needs to again identify immediate levers to improve performance and meet financial covenants. These will require tough decisions. High-performing hospitals of all sizes are making those decisions quickly and analytically. For many high-performing organizations, very few areas are “untouchable” or off limits. No legacy or provincial ties can impede the turnaround. Once a lever is pulled, the list is refreshed and updated with the next set of action steps.
Maintained manageable debt positions
Most high-performing hospitals have not over-leveraged their balance sheet relative to liquidity, still allowing for some cushion when margins or investment values decline.
In most cases, debt is used judiciously to fund future growth strategies or to replenish reserves for prior capital, but only after an analysis shows the organization can absorb the increase. Sometimes organizations stretch their rating bandwidth when they issue a material amount of debt relative to operations and liquidity and the amount of debt outstanding. In some cases, a rating is downgraded as the increase in leverage pushes the rating out of the current category. In other times, the rating is affirmed as there is a demonstrated a track record of adding leverage, then absorbing and de-leveraging over time with improved cash flow.
Made tough decisions on services
The pandemic and ensuing labor crisis have required some hospitals to consider exit strategies for certain services or facilities. Many of the hospitals and systems that are performing well have discontinued certain clinical services where there is low volume or margins, looked for partners that can do it better or more efficiently (such as behavioral health), or are consolidating clinical services that were previously maintained at several sites into one location. These are tough decisions given the social mission of not-for-profit healthcare, but there is a mission to be fiscally responsible as well. Providing all services to the community will need to be revisited in difficult times. And faster than ever before.