Organizations must act now to manage revenue, contain costs
The pandemic disrupted healthcare in many areas, such as spurring the adoption of digital technologies, but it also exacerbated issues that healthcare providers were already dealing with. Now, after surviving their worst financial year since the beginning of the pandemic, U.S. hospitals and health systems are bracing for a new set of challenges. For example,
“While the bigger organizations are set up to get through this a bit better, the mid-size and smaller health systems and practitioners are really struggling.”
- With no more economic stimulus funding, hospitals are now left on their own to contend with labor challenges and rising supply costs.
- The slow rebound of demand is constraining revenues, with inpatient admissions, emergency department visits, and senior living occupancy rates still well below pre-pandemic levels.
- Hospital revenues continue to decline as profitable procedures shift out of the hospital to ambulatory care.
- As health systems are forced to increase wages to keep clinical talent from leaving, many have become over-reliant on staffing agencies and travel nurses.
Even though the pandemic is in the rearview mirror, hospitals and health systems need to overcome these challenges and regain their financial strength. “These certainly have been tough times for a lot of healthcare organizations,” said Grant Thornton Audit Partner Derrick McGrow. “While the bigger organizations are set up to get through this a bit better, the mid-size and smaller health systems and practitioners are really struggling.”
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Moving forward in tough times
“Assessing the current runway by conducting a short-term cash flow forecast can help you understand your cash position and cash burn over the next quarter on a week-to-week basis.”
So, how can healthcare organizations build sustainable financial resilience to help them survive and thrive in a post-pandemic world? In the opinion of Brian Bonaviri, Grant Thornton Managing Director of Advisory Services, “You’d want to look at your different service offerings and assess their profitability — and assess the levers you need to push in order to make changes.”
According to Bonaviri, a good place to start would be with an assessment of the organization’s current situation. “Assessing the current runway by conducting a short-term cash flow forecast can help you understand your cash position and cash burn over the next quarter on a week-to-week basis,” Bonaviri said. A cash flow forecast can be a valuable tool for identifying steps you can take to prevent cash shortfalls or buy time to develop more long-term strategic options.
If you do not have a substantial cash runway, you may be able to identify ways to generate or conserve cash, such as by not making payments as quickly to certain vendors.
If an organization’s cash position is good, it can look at options for the future by developing longer-term forecast models. Does it make sense to invest — or divest? Is there an ability to take on more debt? With rising interest rates, this can be a challenge, but for organizations not currently carrying substantial debt, this could be a viable solution.
Because maintaining credibility and a positive relationship with any financing source is critical, assessing where the organization stands with its lender or investors is also key. Bonaviri stresses that a good relationship with a lender makes it easier to collaborate to find mutually beneficial ways to free up cash. It also makes it easier to be transparent if and when additional funding — or a forbearance agreement to extend the cash runway — is needed.
Post-pandemic financial strategies
Armed with a good understanding of your current situation, you can better identify your best options for building financial resilience for the future of the organization.
Today’s healthcare organizations are operating in unprecedented times. McGrow said that health systems are accustomed to stabilizing by refinancing their debt, getting new money, and starting over. “That’s not an option today. They need to come up with new strategies now,” McGrow said.
Following are a few new strategies that healthcare organizations may want to consider to remain resilient:
1. Maximize asset utilization
Many healthcare organizations are taking a new look at their brick-and-mortar assets to find opportunities to reduce expenses or generate a new cash flow. Some approaches to consider include:
- Consolidating office space or reducing leased space: With the increase in work-from-home policies significantly reducing the need for hospitals to maintain administrative space, it often makes sense to find ways to make more productive use of those newly emptied workspaces. In some cases, it may be time to negotiate with landlords to release some of the organization’s leased space — or to use less square footage over a longer lease period. Adrianne Boylen, Grant Thornton Managing Director, Health Care Advisory, said, “A number of health systems have already given up leasing space and, as the workforce has gone remote, they have reduced their footprint.”
- Reconfiguring or repurposing clinical space: The shift from inpatient to outpatient services is reducing the need for clinical space. Health systems may want to consider consolidating their clinical space or repurposing unused clinical space for other service lines.
- Monetizing real estate assets: With the reduction in elective procedures cutting into revenues, many hospitals are compensating for that lost revenue by monetizing some of their real estate holdings. According to Bonaviri, “A health system may have land or facilities they have acquired over time. If they can divest underutilized assets without negatively impacting other operations, it could be a simple way to add cash to the balance sheet.” Another way for a hospital to generate cash flow is through a sale-leaseback transaction, in which the hospital sells a portion of its real estate and leases it back, thereby unlocking passive equity that can be invested back into its core business.
2. Reduce operating costs
Because of financial stresses and staff shortages, many hospitals and health systems are reviewing their service lines and the profitability of each and making changes that include:
- Shifting volume: In some cases, a health system may want to consider shutting down a department or a facility and shifting the volume to other hospitals within the system, so that the system’s consolidated costs are reduced and revenue remains the same.
- Shifting staff: To help contain the costs of contract labor, health systems may want to consider shifting clinical or nonclinical staff to a different hospital within the system. Boylen suggested that another option for retaining control while reducing labor costs is to shift crucial, back-office tasks to offshore teams that can provide hospitals with the ability provide valuable services at a lower cost.
- Sharing costs: McGrow believes that now may be a good time to explore affiliations through group purchasing organizations (GPOs) or joint ventures with other health systems or other providers to share costs, patients and risk. “If you combine forces, you can go to market together or negotiate better rates with a bigger population.”
3. Optimize the value chain
The increase in M&A, supply chain challenges, staffing shortages, and other factors are driving many health systems to explore options that can help them use economies of scale to save costs and to improve their ability to provide services efficiently. These options include:
- Acquiring an entity that enables diversified services: Vertical integration of a healthcare organization with another entity at a different level of the value chain can enable new economies of scale and reduce transactional costs and administrative financial burden. According to Bonaviri, “This isn’t an option for all players, but for the ones that can and do pursue it, it may provide them with a diversified portfolio and make them be better able to withstand blips in the future.”
- Acquiring a smaller provider: Horizontal consolidation of providers has the potential to improve efficiencies and care coordination. The current economic landscape makes this an opportune time for certain organizations to be acquisitive.
With all the financial challenges that still lie ahead for hospitals and health systems, it will be important for decision-makers to act now to contain costs and find new ways to manage revenue, all while continuing to provide quality patient care.
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