Back to Basics
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After a year of frozen credit markets, rising bad debt, and a host of other economic challenges, the first part of 2009 isn't looking much better for hospitals as the recession wears on. The strategy for surviving the downturn? Invest in core strengths, scrutinize staffing and operations, seize partnership opportunities—and get down to work.
Franklin Roosevelt's inaugural speech is most often remembered for that beautiful staccato, "The only thing we have to fear is fear itself." What often gets left off is the rest of the line, in which he describes fear as that "nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance." Hospitals have much to fear in the first quarter of 2009. All the problems of 2008 are still there—vanishing access to capital, shrinking operating margins, climbing bad debt. And then there are the folks showing up at the door for help, from the newly uninsured with no place to go for care to the physicians with nowhere else to turn but the protection of the big building.
Medicaid budgets are near bankrupt because of rising numbers of enrollees. Baby boomers are still getting older, so volume is not going to provide any breaks. With a new president who wants a better use of healthcare IT, now would be a good time to invest in infrastructure—but again, that requires access to capital. Oh, and pension funds need more money.
"It's everything all at once," says Rich Umbdenstock, president and CEO of the American Hospital Association. "Obviously that is what the whole nation is experiencing. Hospitals are no different than other enterprises except that our patients turn to us at their time of most need."
Any healthcare executive around long enough to be in a leadership position has seen ups and downs before. Not like this one. What is new and different this time around is the combination of drops across the balance sheet, and the speed.
"It is really weird," says John Bigalke, vice chairman for U.S. health sciences at Deloitte. "In the past we have had the benefit of a regulatory change—a Medicare this or a modernization that—and you had some lead time to sort of anticipate it. What hit us here is the capital market came out of nowhere. We were an industry that had a history of easy access, low cost, and low risk. This came up and slammed us. All of a sudden it became high cost, high risk, and difficult access. It could not have come at a worse time for the healthcare industry."
Contraction that had long been feared came hard in 2008. Some vulnerable smaller hospitals, like Physicians Medical Center in Carraway, AL, shut the doors after a century. Even giants like the University of Pittsburgh Medical Center were hit, laying off 500 employees a year after a record $612 million fiscal year profit. Even in relatively healthy markets like Minnesota, Park Nicollet Health Services and North Memorial Health Care announced cuts of more than 600 jobs. HCA laid off an unspecified number of employees at its corporate headquarters.
Unfortunately for healthcare leaders, merely retreating during a recession just digs a bigger hole to climb out of when the recession ends. So hospitals are shrinking to grow and seizing the downturn as an opportunity to pursue strategic relationships or mergers with physicians—or even with their competition. They may pull out of some unprofitable service lines but are looking to invest in areas of core strength, especially those that maintain a dominant market position.
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