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Analysis

Key Advice for Hospital CFOs Facing Next Stages of Pandemic

By Jack O'Brien  
   July 02, 2020

Health system leaders need to be mindful of three factors as care services return.

The financial health of hospitals and health systems still has a ways to recover since the coronavirus disease 2019 (COVID-19) pandemic began in March, as certain markets deal with a surge of new patient cases.

Given that the challenges emerging from the pandemic have not fully subsided, hospital finance leaders must focus on key elements of the business model to maintain financial solvency and pursue long-term opportunities.

This involves a balanced approach of addressing issues that change from day-to-day while also establishing a strategic planning approach for the weeks and months ahead.

Related: Hospitals See 'First Signs' of Financial Recovery

Michael Tierney, a director in the Chicago office of Hammond Hanlon Camp LLC (H2C), says, "This was a bit of a wakeup call for a lot of hospitals that they assess how they're going to position themselves to sustain long term. I think we have seen hospitals start to evaluate their portfolio of businesses, start to focus on long-term strategic planning and, ultimately, they're going to make the decision to focus on their core services where they provide excellent care and the economic situation is positive."

Below, healthcare analysts weigh in on the three most important factors hospitals and health systems must consider as they emerge from the pandemic.

1. Think M&A

In mid-June, Manatt Health published a report by Thomas Enders, senior managing director, and Brenda Pawlak, managing director, outlining key imperatives for health system leaders emerging from the COVID-19 outbreak.

In an interview with HealthLeaders, Enders says COVID-19 has served as a catalyst for larger health systems to focus on achieving new efficiencies.

"I think we are seeing a very particular moment in time in which these big health systems are going to evolve rapidly from their decision and organizational structures," Enders says. "They're going to consolidate and grow because they feel that's in their interest and mission to do so, and they're going to become much more engaged with their communities for public health issues and health equity issues. That's going to have many effects, some positive and others, I think, ultimately, we just can't tell [since] it's still an ongoing story that's evolving."

Looking at the current provider landscape, Enders remarks that rural hospitals faced significant financial challenges prior to the outbreak and now might be absorbed by larger health systems due to even further distressed margins.

He says that he expects a consolidation of rural hospitals will occur but adds that he thinks policymakers should enact payment reforms to assist rural providers, specifically citing global budgeting programs used in a few states. 

An all-payer global budget model, according to a recent JAMA article, acts as a financing program where payers "agree to pay hospitals a fixed amount (ie, a budget) to deliver care to a population over a specified time period."

Related: 4 Financial Opportunities for Health Systems Amid COVID-19

While many in the healthcare industry are expecting a rise in M&A activity, as is normally the case following sharp economic downturns, Enders says one force working against consolidation are nonprofit balance sheets, which he expects will undergo a lengthy recovery after the damage sustained this spring.

Enders adds that as more healthcare organizations invest in telehealth services and distributed ambulatory sites, there could be less pure hospital M&A activity in the nonprofit segment.

Tierney says H2C has seen many urgent care partnerships emerging across the country, a dynamic he says he expects to see continue as well as providers establishing joint ventures for behavioral health services. He says that several clients have begun to reexamine their real estate holdings, with some looking at ways to monetize these assets and optimize their value, because a brick-and-mortar approach to care delivery may not be part of the strategic vision going forward.

Tierney says some hospital finance leaders fear a potential uptick in M&A activity and that they might lose control of their respective organizations, but others view the additional resources and ability to move patients around a larger system during a crisis as a good thing.

"Some hospitals are fiercely independent and want to remain that way, and others are more open to finding an alternative and maintaining some autonomy locally but, ultimately, being part of a larger network and all the benefits. It's a case-by-case example of who you’re talking to," Tierney says.

Independent organizations at risk?

Nick Beale, a director in H2C's San Diego office, tells HealthLeaders that independent hospitals might be at greater risk of significant change post-pandemic and need to watch their cash position more closely than large diversified health systems that can more easily spread risk across geographies, multiple assets, or business lines.

"We are taking a particularly close look at the risk profile of independent organizations that are smaller and more concentrated in geography and service lines, and what they might be able to do to mitigate the new risks that they're facing and the challenges that they have uniquely coming at them as a narrower-scoped organization," Beale says.

2. Understand current cash position

Ryan Cochran, a partner at Waller, a Nashville-based law firm, tells HealthLeaders that hospital finance professionals should be managing their business from a 13-week cash flow perspective.

"During the course of the COVID-19 crisis, the government has instituted a lot of plans or assistance to provide hospitals with additional cash right now," Cochran says. "My fear is that those hospitals have that cash [but] they're not making the plans that they need to be making for when that cash goes away and they return to business as it was before COVID-19 hit."

Related: Following the COVID-19 Surge: 5 Hospital Impacts

Cochran's primary recommendation for hospital executives is to undergo a cash flow analysis to better understand their organization's cash position. He says provider organizations should anticipate what their cash flow is going to look like when the government relief funds are spent or have to be repaid and then use the extra cash they have to fund a strategic plan.

He suggests partnering with other facilities, considering service line rationalization, and focusing efforts on the most profitable lines of business.

"To put an example out there, a lot of hospitals may own a supplemental line of business, like a nursing home," Cochran says. "It may be a strategic alternative that they no longer own the nursing home; so, they sell it or hire a management company to manage the nursing home. I would like to see facilities start planning for what they're going to do to be financially sound after COVID-19."

3. 'Build for resilience'

Pawlak tells HealthLeaders that provider organizations should also focus on stabilizing their business models with an aim to "build for resilience."

"We're rebuilding in a lot of ways, but it's a different kind of building moving forward [with] a real focus on revenue flows and cash being unpredictable in some cases; so what does that resilient system look like?" Pawlak says. 

Related: LCMC Health CFO Reexamines Financial Standing at the 2020 Mid-point

Both Enders and Pawlak say that among their clients, primarily academic medical center executives, there is a growing awareness of health equity issues and disparities that have worsened during COVID.

According to Pawlak, some leaders are examining what their organization's role within the community is and what their relationship with Medicaid beneficiaries should be, which have increased significantly since the start of the crisis. Enders suggests that one solution has been the continued embrace of population health models to address issues and reduce disparities in care faced by Medicaid beneficiaries.

"I think we're going to see continuing innovation; continuing efforts at joint venture relationships with payers and innovation around the model for delivering population-based medicine," Enders says. 

Jack O'Brien is the finance editor at HealthLeaders, a Simplify Compliance brand.


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