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Following the Right Turnaround Indicators

 |  By HealthLeaders Media Staff  
   August 17, 2009

We're all looking for a sign that better times are on the horizon, whether it is in healthcare, our communities, or the nation at large. In this week's news, Cain Brothers in New York said there were 321 healthcare M&A deals worth $130 billion in the first two quarters of 2009, a 60% increase over the first half of 2008. This is a strong sign that healthcare deals—while not returning to the super years of 2005 to 2007—are on surer footing. The commentary went on to say that healthcare was the only sector that outperformed itself compared with 2008. That means healthcare will most likely be leading the charge when the economy turns around.

Stronger M&A activity is a good indicator that the economy is starting to correct itself, but what other signs should we be watching that tell us a healthcare turnaround is imminent? In the August issue of HealthLeaders Magazine, industry experts pointed to the employment rate and Medicaid reimbursement as two key external indicators to follow. One hospital CEO in Chicago even said that for every 1% increase in unemployment, his hospital system sees a 7% increase in bad debt and charity care combined. While we just heard this week that healthcare jobs are on the rise, I don't think we can say that we are in turnaround mode with unemployment hovering around 9.4% in July. And with so many state budgets still in fiscal crisis, Medicaid reimbursement continues to be in jeopardy.

While hospitals obviously are affected by what is happening in their states and the economy at large, there are also key internal indicators that tell leaders their organizations are financially sound enough to move forward with a capital plan or to purchase that big piece of equipment such as a new CT scanner, say industry experts.

"I would say the majority of them are looking internally at what is happening in their own place of business from a volume perspective, says Todd Nelson, technical director and senior financial executive/accounting, with the Healthcare Financial Management Association. "Volumes and the breakdown of where those are happening is a good marker for a lot of people to look at," he adds. Nelson and others also say hospitals are also closely monitoring their operating income and following the same metrics as credit agencies.

"An indicator we talk a lot about is days in accounts receivable," says Rick Langosch, senior vice president and CFO at the Coker Group, a healthcare management consulting services firm in Alpharetta, GA. One hospital he is currently working with is at 38 days. "That is about as good you can get," says Langosch. Just a few days less can mean millions of dollars in cash. Also, he adds, "When they pay me quicker, it means I have a better chance of collecting it. When it is out there 90 or 120 days people kind of forget to pay me."

Hospitals should also be paying close attention to days cash on hand, he says. A few years ago, he says, "It wasn't unusual for hospitals to have 100 to 120 days cash on hand." However, "in these hard times," he adds, many have 60 to 75 and some have as little as 30 days cash on hand. Langosch also says margin per patient is important to follow as is employees per occupied bed. "It is not unusual for an acute care or a medical surgical hospital to have 3.0 employees per occupied bed. Hospitals that are in trouble might have 4.0 or 5.0 employees per occupied bed."

Nelson, with HFMA, like many others, seems optimistic that healthcare will come back. But he's not committing just yet. "It's like the stock market," he says. "We saw it dive way down and we have seen it have a little bit of a rally and come back. Things are turning around and changing but it is not going to happen overnight," he says.


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