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What boards can do to keep health systems solvent

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Senior doctor speaks in hospital board meeting The spread of COVID-19 has created or deepened financial distress for many health system providers, with some of them now needing to consider how to preserve a financial safety net to maintain future solvency. The industry is seeing a much greater number of bankruptcies and closures among hospitals of late than in recent years -- as of June 2020, the number has surpassed any one year in the past decade.

Due to numerous complex dynamics, it is challenging to predict how much cash is needed and what may become bigger issues over time as the industry continues to experience various disruptions. This points to an important role for the boards of these entities in governing risks and providing expertise and oversight to help ensure future financial flexibility and solvency. Looking at this from a cross-industry perspective, directors must consider factors regarding employees’ and customers’ health and well-being, business strategy and management of disruption risks.

David Tyler“As a board member of a large, national, not-for-profit health provider – it is incumbent on us to ask hard questions, push past management concerns and make certain that our organizations have the ability to withstand these challenging times. In all reality – most will but some will not. We need to know where we stand.”

– David Tyler
Grant Thornton LLP
Principal, Transformations
Board member, Youth Village
There are numerous factors that could create liquidity traps for healthcare systems. To name a few: various stimulus measures, including CARES Act payments of $175 billion to providers; payroll tax deferrals and Medicare Accelerated and Advanced Payments to the tune of $100 billion. The Center for Medicare and Medicaid Services is expected to recoup payments starting this fall. According to an article1 in Becker’s Hospital Review, as many as 20% of hospital systems that received these Medicare advance loans may be forced to restructure, consolidate or close. Health systems that are able to repay the Medicare advance payments will then have to contend with catching up on deferred payroll taxes as payroll tax deferrals will be due by Dec. 31, 2021 (50%) and Dec. 31, 2022.

The disruptions of higher unemployment, higher labor and supply costs, consumer behavior unpredictability and reductions in collections also create difficulty in predicting future volumes, revenues and expenses. All these factors contribute to significant losses for providers.

Patients and providers are delaying non-urgent medical care or receiving telemedical care in lieu of in-person care. According to the Kaiser Family Foundation, 48% of patients said they have skipped or postponed medical care because of COVID-19.

Considering this confluence of factors, and others, according to HFM Magazine, CFOs in healthcare systems are predicting annual income losses of 15% across the nation for 2020. HFM goes on to report that nearly 90% of healthcare executives predict their organizations’ revenues will be lower at the end of 2020 as compared to pre-COVID levels. Two-thirds expect decreases of greater than 15%, and one-fifth forecast decreases of more than 30%.

When looking at a liquidity metric such as days operating cash-on-hand, each organization has a “red line” that represents its structural level of financial flexibility before reaching potential insolvency. Taking action to effectively assess each entity’s financial standing and ensure there is ample cash on hand can create a “safety zone” of reserves to help sustain a healthcare system through potential losses. This is an important area of focus for the board of directors, both to examine key risks and consider the options for keeping healthcare entities more financially stable.

Due to the majority of healthcare systems being private, non-profit or government-private partnerships, often a number of the board members may be serving in a purely unpaid/voluntary capacity. The board may be comprised of major donors and/or individuals driven by altruistic intent. As a result, there may not be the same readiness to take strong action to preserve financial flexibility compared to public companies. This could result, for instance, in board members who are less inclined to take a hard look at certain measures, like headcount reductions, to protect future solvency of the entity.

Four considerations for healthcare provider boards To ascertain the provider’s position in the current environment, here are key questions for boards to consider:

  1. Does the board and management have an objective view of the current financial health, future financial position and level of financial flexibility?
  2. Does the strategy fit the organization’s challenges and opportunities?
  3. Have we assessed our markets in terms of financial health and the likely strategies our competitors and key stakeholders will need to employ?
  4. Do we have the skillsets to effectively assess today’s complex scenarios or should a consultant be brought in to ensure we are looking objectively at the metrics and help create a plan to get into or remain in the financial “safety zone?”

Three considerations for directors of all industries
  1. According to the Kaiser Family Foundation: State Health facts, published July 20, 2020, 37.8% of adults reported symptoms of anxiety or depressive disorder during this time of COVID-19, versus 11.0% in June 2019. We must consider how the mental health of patients, customers and employees, impacts business and governance. This is magnified when directors consider what is happening around potential insolvency from a healthcare industry perspective.
  • Is the board asking the hard questions and making sure the business is accounting for the increased anxiety and depression impacting employees’ and customers’ mental health?
  • Are we engaging and accommodating these issues for employees and customers in the governance oversight of strategy and risk?

  1. As directors of all industries face the economic and physical environmental uncertainty and how it affects the health of patients, customers and the economy, it’s critical to challenge typical assumptions and look at new information to be able to forecast scenarios and manage changes.
  • Do we really understand our customers and the changes in the patterns of customers or patients under the current environment?
  • What is the board and business leaders doing to doing to gather and analyze new types of information around environmental uncertainty?

  1. All industries face new competitors and new disruptions beyond the current horizon. For the healthcare industry, examples include increasing reliance on digital health and changing technologies for retail care. The need to consider these disruptions holds true for other industries as well.
  • How is the business strategy designed to address new competitors in your industry?
  • In today’s environment, is the business able to digitally connect with customers in meaningful and engaged way? What is truly driving your digital strategy -- is it the leadership team or has COVID forced the transformation of your business’s digital strategy?

Conclusion With healthcare providers experiencing big losses and a future that’s difficult to predict, our nation could be facing a decrease in the availability of critical care providers. The key is to detect early warning signals of healthcare system difficulties so the right action can be taken at the right time to preserve liquidity and, as a result, the health systems we rely upon. The board’s leadership and view of healthcare systems’ financial health is critical in this time to ensure future stability.

Learn more: Read the first in our series of three articles on healthcare solvency: “Is your health system in a ‘Safety Zone’?”

1 Kacik, Alex, Becker’s Hospital Review, “Health systems are facing unprecedented financial challenges” Aug. 6, 2020

Contacts:

Erik ShannonErik Shannon
Partner
Healthcare Strategy & Transaction Services
Grant Thornton LLP
T +1 832 487 1440

Brian BonaviriBrian Bonaviri
Managing Director
Healthcare Strategy & Transaction Services
Grant Thornton LLP
T +1 704 632 6815