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Analysis

4 Financial Opportunities for Health Systems Amid COVID-19

By Jack O'Brien  
   June 04, 2020

Though healthcare organizations have endured a global health crisis that has severely taxed their bottom lines, there are areas for growth coming out of the pandemic.  

This article appears in the May/June 2020 edition of HealthLeaders magazine.

The outbreak of coronavirus disease 2019 (COVID-19) caused one of the most financially crippling situations for healthcare in decades. Besides the clinical implications, hospitals and health systems that typically operated on razor-thin margins prior to the outbreak were now faced with unprecedented challenges to their bottom lines.

Prompted by state and federal lawmakers, most hospitals temporarily eliminated elective surgeries—which typically drive a large portion of revenues—to handle the influx of patients infected with COVID-19. In a move to address the sudden and severe financial crisis, President Donald Trump signed a $2 trillion economic stimulus bill in late March that included a $117 billion package for hospitals, but that alone wasn't enough.

Despite a proposed 20% reimbursement rate increase for treatment of patients infected with COVID-19, many hospitals were predicted to only have cash flows to survive for 60–90 days, according to Strata Decision Technology research at the start of the pandemic. Nearly all hospitals would lose an average of $2,800 per COVID-19 patient case if reimbursement rates were not raised, according to Strata, with some losing between $8,000 and $10,000 per case.

Yet, in a time of crisis, some leaders have looked at the economic downturn spurred by the pandemic and are seeing opportunities to harness emerging trends and salvage lost revenues, thereby maintaining financial solvency. 

Greg Feirn is the CEO of LCMC Health, a five-hospital system based in New Orleans with $1.7 billion in annual revenues. Feirn tells HealthLeaders that LCMC experienced its peak of handling COVID-19 patients in early April but is still dealing with the lingering financial pain associated with the elimination of elective surgeries.

Feirn, who spent several years as LCMC's Children's Hospital CFO before ascending to the top position, says that while the system was able to slightly offset the loss of elective care revenues with its COVID-19 patient load, the crisis forced him to be more concerned than ever about having enough liquidity on hand.

"We were fortunate to have a collaborative relationship with elected officials, so the state was able to accelerate Medicaid supplemental payments funding and disproportionate share [hospital] funding," Feirn says. "While that was an advance, it certainly went a long way to shoring up our liquidity. And just to be safe, we did put some additional lines of credit in place."

Dr. Stephen Klasko, CEO of Jefferson Health, a 14-hospital system based in Philadelphia, tells HealthLeaders that while provider organizations face challenges associated with the outbreak, there will also likely be opportunities to improve care delivery and the business model that supports it.

"My passion has been about how we move the predominance of healthcare from the hospital to the home," Klasko says. "If there was a pandemic 30 years ago, everybody would have been lined up at the bank on Friday to cash their check. That's not an issue anymore since 90% of banking happens at home. We think the same thing will happen with health, so our goal is to use this crisis to get people used to [care] happening at home, which will help us in the next crisis."

Feirn, Klasko, and other healthcare industry experts discuss four financial opportunities for health systems to alleviate the financial and operational impacts of the COVID-19 outbreak.

Opportunity 1: Virtual care

A key development due to COVID-19 has been the popularization of telehealth services. Though such care offerings were available prior to the pandemic, the increased reliance on telemedicine for acute care and behavioral health services seems unlikely to go away.

Klasko says he acknowledges that telehealth solutions had their moment in the midst of the outbreak and expects such digital innovations to continue to drive Jefferson's mission.

Since the health system's initial investment in telemedicine in 2013, the organization has seen its telehealth visits jump from 100 per day to around 2,500 per day during the pandemic, according to Klasko.

'Here to stay'

Prior to COVID-19's arrival in New Orleans, LCMC Health did not have a robust telehealth program, according to Feirn. However, he says LCMC was able to "ramp up" its services to assist patients while the organization handled the influx of patients infected with the coronavirus.

LCMC Health implemented an RN screening hotline, a telemedicine service that received more than 13,000 phone calls and helped the health system triage quarantined patients.

The service also helped lessen the impact of the pandemic on LCMC Health Children's Hospital, which lost a considerable amount of outpatient business and elective procedures. Feirn says the organization's roster of pediatric specialists utilizing telemedicine blossomed from 10 physicians to over 120 in a matter of weeks.

While it's too early for LCMC to report significant financial results from the uptick in telemedicine visits, Feirn says that he expects telehealth to play a significant role going forward.

"I do think a lot of [telemedicine] is here to stay," Feirn says. "We probably advanced ourselves three years forward just through this pandemic."

Low reimbursement rates had long hampered widespread adoption of telehealth services among provider organizations. However, in response to the pandemic, the federal government waived restrictions on telehealth services for Medicare beneficiaries and removed the requirement that providers must have seen a patient in person within the last three years.

Feirn adds that he expects CMS and commercial payers to recognize that telehealth services ultimately provide a lower cost of care and will choose to sustain the COVID pandemic reimbursement rate for these services.

Opportunity 2: Liquidity planning

Eric Jordahl, managing director of treasury and capital markets at Kaufman Hall, says that most markets were "significantly dislocated" by the spread of the coronavirus, forcing healthcare organizations to reexamine their existing debt portfolios.

Most nonprofit healthcare organizations carry significant investment positions, Jordahl says, which experienced rapid deterioration as the Dow Jones Industrial Average collapsed from record highs in late February to below 19,000 points by mid-March.

He says that in an acute crisis such as the pandemic, provider executives must not only maneuver short-term market turbulence, but also account for the downstream effects. Some clients, Jordahl says, examined options to increase short-term liquidity and lines of available credit.

"I think liquidity planning, thinking about how much liquidity [organizations] have in operating cash positions, what kind of liquidity is available in those longer-duration investment portfolios, and how much more liquidity [executives] might be able to access with other external partners is an important conversation to be having," Jordahl says.

Feirn says that when LCMC entered the surge period of the pandemic in New Orleans, one of his organization's primary concerns was maintaining liquidity and not being forced to sell investments at a low.

In addition to assistance from state and local leaders, Feirn says that LCMC also benefited from an asset allocation strategy that focuses on rebalancing the organization's investment portfolio. Looking at the system's standing post-surge, Feirn says that the organization's investment portfolio is in a "pretty good place," with an eye on the long-term view.

Ride out volatility

Phil Kaplan, a managing director at Hammond Hanlon Camp LLC, says that as a result of the COVID-19 outbreak, provider organizations faced problems collecting revenues on time, creating additional issues of paying for labor costs, medical supplies, and pharmaceuticals.

This dilemma forced some hospitals to furlough workers, ration personal protective equipment, and compete against other organizations to secure sufficient amounts of prescription drugs for treatment.

To maintain operations, Kaplan says hospitals have mostly turned to banks, the largest source for securing a working capital line of credit. Banks can offer terms for credit lines that are less than a year and are annually renewable for health systems to draw down on in times of crisis.

Looking at the volatility in the stock markets after the virus began its spread in the U.S., Kaplan says most of his health system clients did not discuss the idea of withdrawing their organization's investments to secure liquid cash.

"I'm sure it's disturbing to see [the markets] go down, but at the same time, I think most sophisticated health systems and chief investment officers understand the volatility," Kaplan says. "We expect the volatility from time to time—this isn't the first crisis that people have gone through—so I think from a certain perspective [executives] say, 'OK, what do we need to do to manage the expectations of our board so that we don't act too hastily and can still manage for the long term?' "

Opportunity 3: Partnerships and mergers

One unintended consequence of the crisis that can serve as an opportunity, Kaplan says, could be for large, well-capitalized health systems to partner or acquire community hospitals—which are already at a high risk for closure—as patients continue to out-migrate to care sites beyond the community they live in.

Especially in the wake of temporary cancellation of elective surgeries, smaller provider organizations are likely to face compressed profitability and cash flow, he says.

"Smaller community hospitals that are strong other than [the impact of the pandemic] may be encouraged to go out and find some sort of a partner to help weather the storm," Kaplan says. "[Community hospitals may] join up with a larger system that may have better access to capital or may just have the scale and the operating expertise to manage in environments like this."

Potential with independent physicians

Feirn says that while he has concern for community hospitals that may not have had a strong balance sheet before the pandemic, he says he believes the additional stimulus funds from the federal government should have softened the financial crunch caused by the virus.

He says that he thinks implementing virtual care services and partnering with independent physicians can be a viable path for community hospitals to retain their patient population and secure their financial footing.

"I think that if those hospitals, like larger healthcare systems, think through how to manage the workforce, start to plan for more virtual care, and work with the independent physician [groups], then I don't think that there's going to be a mass failure of the smaller community hospitals," Feirn says.

Opportunity 4: Infrastructure and supply chain investments

Richard Bajner, a partner at Navigant, a Guidehouse company, says he expects the federal government's post-pandemic response to have "much longer-lasting" implications.

For example, Bajner says he expects a "hardening" of the country's infrastructure, including investments in information technology, cybersecurity, ambulatory services, and physician outreach or relations. He also says that, like the country's move to achieve energy independence over the past decade, there will be a push for an independent healthcare supply chain.

"We're going to see some response related to our supply chain and being able to harden our supply chains domestically so that we have the resources available to our patients and to our providers in these types of needs," Bajner says. "We think that there's going to be funding and a federal response that, once we get through this current emergency, will have significant implications on the industry."

'A new normal'

Klasko says the spread of the virus has created "a new normal" for health systems and hospitals.

He says he expects the "most inefficient and most costly parts of the healthcare ecosystem," namely hospitals and insurers, will give way to "more personalized and preemptive care" options like genomic sensors and artificial digital therapies.

Additionally, the push for this change in care delivery will not come from payers and providers, Klasko says, but rather from consumers adjusting to new expectations of care because of the pandemic. He also says that the crisis might create more support for forces that seek to dramatically reshape the healthcare system, including healthcare startups and politicians like Sen. Bernie Sanders (I-VT) who advocate for a "Medicare for All"–style single-payer system.

To compete with the increased threat from nontraditional healthcare players, Klasko says payers and providers must work to enhance coordination efforts and establish "creative partnerships" that meet consumer expectations and modernize care.

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


KEY TAKEAWAYS

Telemedicine and virtual care services will be a key component of the hospital business model going forward.

M&A activity among health systems is likely to increase because of the pandemic, but the impact of consolidation on the industry is still up for debate.


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