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COVID-19 Outbreak Threatens Health Systems With New Financial Challenges

Analysis  |  By Jack O'Brien  
   March 19, 2020

The rapid spread of coronavirus has U.S. hospitals faced with several issues related to operating margins, revenue collection, and reimbursement for treating patients with this disease.

Within the past two weeks, coronavirus disease 2019 (COVID-19) has significantly disrupted the American way of life, sinking the country's economic system and placing hospitals under unprecedented financial and clinical stress.

The coronavirus has spread throughout all 50 states and the District of Columbia, accounting for over 7,000 confirmed cases and nearly 100 deaths, according to the Centers for Disease Control and Prevention as of Thursday afternoon.

As a result of COVID-19, which the World Health Organization declared a pandemic last week, hospitals and health systems are faced with a critical challenge to their operations and overall business model.

Provider organizations in nearly half of the country are likely to run out of intensive care unit beds by mid-April, according to a survey released this week, and S&P Global Ratings has stated that a global recession has already begun.

In this time of crisis, executives at hospitals of all sizes are feeling the economic stress and considering their options to ensure short-term stability and long-term growth opportunity.

Three healthcare financial advisors weigh in on what healthcare systems can do to deal with the financial challenges resulting from the COVID-19 pandemic.

Look at liquidity

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

Additionally, Jordahl says, most nonprofit healthcare organizations carry significant investment positions, which have been negatively impacted by the record decline of the stock market over the past 10 days.

He says that provider executives must not only maneuver the current market turbulence, but also account for the downstream effects as well. Some clients, Jordahl says, have even begun examining 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 right now," Jordahl says.

On the positive side, there are opportunities in a low-rate environment for CFOs to restructure their organization's capital structure to save money or access additional capital. However, he adds that most of his provider clients are focused on navigating the coronavirus crisis and may lack the bandwidth to take advantage of these low-rate opportunities.

Ride out volatility, but consider partnerships

Phil Kaplan, a managing director at Hammond Hanlon Camp LLC, tells HealthLeaders that as a result of the COVID-19 outbreak, provider organizations are likely facing challenges collecting revenues on time, which will create additional issues for paying for labor costs, medical supplies, and pharmaceuticals.

Kaplan says the largest source for securing a working capital line of credit are banks, which offer terms of less than a year and are annually renewable for health systems to draw down on in times of crisis.

Looking at the short-term volatility in the stock markets, Kaplan says most of his health system clients have not discussed 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?' "

Kaplan says that while the current economic downturn may not have the same underlying causes as those of the 2007–2008 economic collapse, crises typically arise from the overall expectations for the economy. Given that the calamity has only been occurring for two weeks, he says it is difficult for executives to know "where the bottom is."

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 dealing with razor-thin operating margins.

Given that hospitals may have to move toward focusing care on coronavirus patients, especially in the wake of the Trump administration's announcement calling on providers to temporarily cancel elective surgeries, smaller provider organizations are likely to face compressed profitability and cash flow, Kaplan says.

"To the extent that some smaller community hospitals that are strong other than this, they 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."

Examine financial projections 

Steven Shill, CPA, partner and national leader at the BDO Center for Healthcare Excellence & Innovation, tells HealthLeaders that disproportionate share hospitals and organizations that cater to a large Medicaid or Medicare population run the risk of facing excessive costs related to care for infected patients as well as the increased supply chain costs related to the virus outbreak.

"If you take a simple recipe of, 'We've got so many beds and they're all going to be filled up at negative margins,' this is going to be more financial pressure on health systems, which are going to find themselves even more deep in the red than they were before," Shill says.

Regarding the post-coronavirus period, Shill says hospitals will face the challenge of determining what the reimbursement rate is for care of infected patients, adding that it is "probably never going to be enough."

Shill says that health systems should make sure to avoid becoming “overextended” from a financial perspective, adding that providers are likely to feel both the immediate impact of a surge in patients as well as the effects of a reeling economy following the pandemic.

He urged health system executives to examine their financial projections and run sensitivity analyses related to how the pandemic will affect their organization’s bottom line.

Shill also warns that provider executives should be cognizant of the physical, mental, and emotional strain the outbreak has placed on healthcare workers. He says that leaders should prepare for the spread of coronavirus "almost like a war" and ensure that there are enough staffers and supplies on hand to meet the elevated need to care for patients.

"When you're fighting in a battle, you don't necessarily throw all of your troops headlong into the enemy," Shill says. "You have to plan, you have to be strategic about it, and keep your reserves back. This is no different than the almost military-like discipline that you're going to have to have."

Jack O'Brien is the Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.

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