Increase your financial flexibility
If your health system is not in a financial “Safety Zone,” you’re not sure, or you would like to strengthen your financial position, consider the steps we outline to move your organization into a more secure place.
In the previous article, Is your health system in a ‘Safety Zone’? we examined two hypothetical health systems at seemingly similar starting points. One served as a shining example and the other, a cautionary tale. Pre-COVID-19, Health System A and Health System B were in identical, solid financial positions. By the end of March 2020, cash on hand was dropping for each. Both received the same level of CARES funding, Medicare Accelerated and Advance Payments, and payroll tax deferrals. Even though Congress delayed recoupment of the Medicare payments and the tax payments aren’t yet due, it was obvious from financial reports in fall 2020 that finances would become dire if nothing was done. At this point the two systems diverged.
“The lesson is to prepare so that when necessary, your team is ready to act.
The sooner you act, the more options you have.”
How did you fall out of the Safety Zone? Two ways. Gradually, then Suddenly.*
* With a nod to Ernest Hemingway, in The Sun Also Rises: “How did you go bankrupt?” “Two ways. Gradually and then suddenly.”
The earlier you determine you are out of the Safety Zone or trending out of it, the more optionality you have for moving into it. “The difference,” said Brian Bonaviri, Grant Thornton managing director of Strategy and Transactions, “was that System A had prepared to act. Early in the downturn, leaders completed an assessment, identified key actions and cleared barriers so that when thresholds weren’t achieved, they were able to quickly return their organization to the Safety Zone. Health System B was operating on optimism and had not defined an action plan. By the time leaders tried to make changes, they couldn’t see a way to return to the Safety Zone. The organization lost credibility with physicians, staff, lenders and other constituents; insolvency loomed. The lesson — as always — is to prepare so that when necessary, your team is ready to act. The sooner you act, the more options you have.”
As the Decline Curve chart shows, in a deteriorating situation, over time the value and options available to stakeholders diminish. In the “Early stage,” typically, organizations identify financial challenges through insights from the income statement (or statement of activities). In other words, issues arise because revenue is not growing as fast as anticipated, or expenses are increasing out of line with revenue. At this point, organizations have many options available to them to right the ship. A top option is focusing on revenue enhancing or cost reduction opportunities to stabilize the organization before it’s too late. Once an organization reaches the “Late stage,” the balance sheet (or statement of financial position) will exhibit signs of distress. By this point, management was too slow to address revenue and cost issues, resulting in reductions in liquidity, stretching of payables and increasing debt loads. Now, options are more limited. Growing revenues or cutting costs may not be enough to stabilize the organization. Once an organization reaches the “Insolvency stage,” the challenge has culminated in not having adequate cash to meet obligations. At this stage, addressing revenue and cost concerns alone will not bring the organization back from the brink. Just meeting payroll is a small victory as management assesses its options, including negotiating with vendors and lenders.
It’s imperative for any management team, especially when operating in an uncertain environment, to be familiar with the Decline Curve and to understand where your organization falls on the curve so that your strategy fits the situation. However, where you are on the Decline Curve is only part of the picture. To fully understand your best strategic options, it is important to understand the speed at which the organization is likely to decline down the curve. We refer to this as strategic resiliency.
Determine your strategic resiliency
As the strategic resiliency chart shows, all else equal, a healthcare provider in a financially low-performing market with a vulnerable competitive position is more likely to move more quickly along the Decline Curve toward the “Insolvency stage.” As the market position and/or the competitive position improves, organizations have higher strategic resiliency. These organizations have financial stability and more options at their disposal because they will move more slowly along the Decline Curve. In other words, moving up and to the right on the strategic resiliency chart will give you more time and more options. Your strategic resiliency is what dictates the level of urgency needed and the number of options you have. However, don’t be lulled into the false security of having a strong strategic resiliency position.
“More than ever it is important to understand the demand and profitability of your services, in the locations where you offer them.”
“More than ever it is important to understand the demand and profitability of your services, in the locations where you offer them,” said Erik Shannon, Grant Thornton partner in Strategy and Transactions. “If demand is down, it might be that the market is down and not that you’re losing market share. Directly survey patients and carefully monitor physician referral patterns. Research how well the local competition is doing. If you are struggling, competition might be, too. Are you currently a dominant player? Equal to other players? A weaker player? Can you foresee new competitors in the market? Look for signals of aggressiveness and plan a judicious response. Be careful because sometimes a defensive move can result in greater harm to yourself (can you afford the investment to keep that physician group?). Additionally, in this environment the equilibrium among competitors can easily change and result in an escalating battle that hurts all organizations involved.”
Prepare for action
This pandemic era is not the norm, and some strategies in response are not the norm for any leader, but they may be the most appropriate. Now that you have determined your position relative to the Safety Zone and Decline Curve in combination with your strategic resiliency, you have the parameters and context needed to identify the systematic actions you will take at defined stages. This approach builds corporate resolve, confidence in contingency plans and the appropriate sense of urgency for health system boards, leadership and key stakeholders. While there are many options that a health system can consider, we categorize those options into three categories:
- Performance improvement
- Restructuring
- M&A
The options chart is intended to summarize certain actions that can be pursued under each option. As expected, the number of options or levers available to leaders decreases as an organization moves down the Decline Curve (and the speed at which it likely will move), in part because there is no longer time to implement and realize the benefits of that action. Also, not surprisingly, the potential financial impact of each option changes depending on how far down the Decline Curve an organization is operating. For example, expense management may be an option available to organizations operating throughout the Decline Curve; however, the financial impact of managing one’s expenses declines as an organization’s financial challenges increase. The gradient is intended to represent the potential impact of the option/lever on the organization.
Note that each of these defined options or levers require focused resources to assess and implement based on a prioritized basis. As an example, the performance improvement chart provides additional detail as to the potential levers within performance improvement.
Obviously, these actions do not guarantee success, and are not all easy to implement. In the course of any attempt to return to the Safety Zone, your organization will face barriers such as those discussed next.
Avoid barriers to timely action
Early on, it’s important to recognize barriers for what they are and to not give in to them. Consider three examples.
Barrier 1: Hopefulness and reluctance to make painful decisions
“Hope is not a strategy,” said Bonaviri. “Often management or boards are slow to act because their strategy is based on hope, e.g., ‘Volumes will return’ or ‘COVID is a blip.’ You must prepare for undesirable scenarios.” In the same vein, resist hesitation about painful decisions — those with lasting impact and/or upsetting to certain constituencies. Maintain your resolve, knowing that any decision will cause some upset. This is where preparation is key. The earlier you can identify how your organization will react in certain scenarios, the more comfort you will have in following through with a decision.
Barrier 2: Lack of stakeholder buy-in
If you have been holding out hope, hesitating to discuss reality and plan for scenarios, and then are forced to act, you’ll catch constituents off guard. Transparency in a crisis is even more important than during business as usual. Use the time immediately after discovering Safety Zone peril to partner and communicate to earn buy-in from key constituents. Keep stakeholders informed and engaged by socializing plans before implementing them. Change can be hard but is easier if stakeholders are prepared ahead of time and know that you have been thoughtful in your approach and decision-making process.
When assessing your market position, take your stakeholders into account. As you make critical strategic decisions, consider the impact on and the reaction of these stakeholders. In most instances, it’s vital to generate alignment or buy-in from various constituents prior to making a final decision and acting upon it. Management, the board and others will likely optimize success by being transparent, communicating with and listening to various perspectives. The stakeholder map graphic provides an illustrative list of certain stakeholders whose views should be considered prior to implementing any decisions. This list may not be comprehensive. Before taking any action, we recommend identifying which stakeholders may be most impacted. Understand what is most important to key stakeholders and which stakeholders have influence over others. With this perspective, you can design a plan that can meet the highest priorities of key stakeholders from whom you may need to ask concessions. You can also identify key hurdles that may need to be overcome, as well as avoid unintended consequences. This enhanced level of thoughtfulness and communication — understanding their perspectives and discussing them as appropriate — will improve stakeholder buy-in and optimize outcomes.
Barrier 3: Governance/process
The decision-making process is often slow and bureaucratic. Anything you decide on today can take a long time to execute and take effect. For results in 12 months, it’s likely that you need to make decisions now. This is why you must act sooner rather than later to return to the Safety Zone. Once there are signs that you are falling from the Safety Zone, the sooner you act, the easier it will be to return to financial stability.
In times of success as well as uncertainty, it’s best to be prepared. This enables organizations to adjust and be flexible, as well as preserve optionality. If your health system is financially deteriorating — or worse, already — outside the Safety Zone, you may be able to return to it through the right combination of performance improvement, restructuring and/or M&A activity. However, no matter which strategy you pursue, it’s imperative to start early, assess your market and competitive position, identify the best options available to you and avoid barriers in order to act. You will face barriers in your strategic decision-making process and implementation, but by following the steps outlined, you can overcome those barriers and successfully return to the Safety Zone.
This is the second in our series of three Safety Zone articles to help you understand your financial position and plan strategically to reach and maintain a stronger one:
- Is your health system in a ‘Safety Zone’?
- Move your health system into a ‘Safety Zone’
- Keep your health system in a ‘Safety Zone’
For additional information, read “What boards can do to keep health systems solvent.”
Contact:
Brian Bonaviri
Managing Director
Brian is a Managing Director in Grant Thornton’s Restructuring practice based out of Charlotte, NC.
Charlotte, North Carolina
Industries
- Healthcare
- Not-for-profit and higher education
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- Advisory
- Restructuring and turnaround
- Mergers and acquisitions
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