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Analysis

OSF HealthCare CFO: Future Revenues May Be Less Than Pre-COVID Levels

By Jack O'Brien  
   July 09, 2020

Michael Allen says proactive forecasting in mid-March following the outbreak and subsequent shutdowns allowed OSF to navigate a challenging financial time.

About four months into the coronavirus disease 2019 (COVID-19) pandemic, hospital finance leaders have had to reconfigure their strategies to adapt to the 'new normal' and guide their respective organizations through unprecedented challenges.

Since the domestic spread of the virus began in mid-March, compounded by the subsequent cancellation of elective procedures to handle the influx of patients infected with COVID-19, several new market dynamics have appeared before health system CFOs along with an acceleration of existing trends.  

Michael Allen, FHFMA, CPA is the CFO at OSF HealthCare, a 14-hospital integrated health system based in Peoria, Illinois, and operated by The Sisters of the Third Order of St. Francis. In fiscal year 2019, OSF reported total net revenue exceeding $3 billion.

In an interview with HealthLeaders, Allen details how his organization dealt with the significant financial disruption and revenue declines that began in mid-March and how the outbreak has redefined the traditional budgeting process.

The revenue guessing game

In the early days of the crisis, Allen says the system paid careful attention to its liquidity situation, but noted that it isn't as much a concern now given that OSF received advanced Medicare advance payments, extended its lines of credit, and took proactive steps to manage cash and reevaluate capital spending.

Regarding the clinical challenges related to protective personal equipment (PPE) shortages, Allen says that the 'burn rate' for those products peaked at about six times the average while overall supply chain costs also rose dramatically.

Related: Illinois' OSF HealthCare Announces Unpaid Time Off, Salary Reductions and Transition of Employees

To mitigate those issues, he says the organization has stocked up its inventory to more than twice its normal levels and will soon begin manufacturing its own N95 masks ahead of a potential second wave in the fall.

Allen adds that he has concerns moving forward about how much patient activity is going to return to OSF and what the large-scale unemployment claims will mean for the organization's payer mix. He estimates that every percentage point of patients that move from being insured by a commercial payer to a government payer represents about a $25 million hit to the health system's bottom line.

"We may be facing a future where our revenue stream is less than it was pre-COVID," Allen says. "The only adjustment you have, if that's the case, is growing your market. It's going to be challenging to do that in a market that's shrinking, if that's in fact the case; whether it's shrinking in activity because people are being more cautious about getting their care, or it's shrinking because of your payer mix, it's going to be harder and harder to try to grow market [share] in those environments."

Allen continued: "The other option is to adjust [the] cost structure. We are fully planning for a future environment where we're having to permanently adjust cost structure. That could [include] certain facilities we don't have open anymore, it could be adjusting staffing levels to activity levels, and other sorts of things. Everything will be on the table at that point."

Looking forward, not backwards

Like other health system CFOs, Allen says that the pandemic has changed how OSF approaches its budgeting processes and planning strategies for future challenges and trends related to the virus.

Pre-COVID, Allen says the organization was budgeting in 12-month increments, analyzing what has happened, and “looking backwards.” In October, OSF eliminated its annual budgeting process, according to Allen, and started its fiscal year without a traditional budget.

He says that the organization set certain financial goals but didn't go into detailed budgeting, pivoting its processes to be more forward-looking and more "quarter-by-quarter and forecasts-oriented." Allen says the shift towards this new approach had been slow until the pandemic began, which accelerated the change and ultimately served as a positive. 

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

According to Allen, proactive forecasting in mid-March during the immediate aftermath of the outbreak and subsequent shutdowns allowed OSF to navigate a challenging financial time and make decisions that have paid off.

"What this [new budgeting process] has done for OSF is shifted that [approach] from rearview mirror to windshield," Allen says. "It's now looking forward and spending more of our energy projecting, forecasting, and then observing results against that, and continuously updating that to help guide the organization about what steps to take next."

Allen continued: "One of the best lessons learned is to shift your focus to the window versus the rearview mirror. That doesn't mean you ignore the mirror, it's just rather than spending 75% of your time with the mirror and then 25% with the window, spend 60% or 70% with the window and a little less with the rearview mirror."

Technology will have a role

Like many other health systems, the pandemic has prompted OSF to factor virtual care services into its business model and reexamine its real estate holdings.

Allen says the organization doesn't have any immediate plans to unload its brick-and-mortar facilities, but recognizes that telehealth will have a more mainstream effect on care delivery going forward, and that will affect physical care sites, though not entirely replacing them.

Allen says the system is looking at its smaller clinics and communities that only have one or two providers and considering whether they can be better serviced by telehealth, instead. OSF is also reconfiguring its approach to urgent care with the rollout of 'OSF Urgo,' the organization's modern urgent care model replacing its legacy urgent care model across its markets.

OSF has already implemented technological features to help adjust to care delivery in the age of COVID-19. Earlier this spring, OSF debuted an artificial intelligence chatbot as well as a behavioral health app, which handled more than 50,000 encounters in its first month.

Related: How OSF's 6 Digital Approaches Handle More than 50,000 COVID Encounters

Pandemic ripple effects

Last week, a Kaufman Hall report found that provider mergers and acquisitions (M&A) activity experienced a "much less dramatic decline" than expected in Q2.

M&A activity was strong prior to the outbreak, according to Allen, and is likely to pick up again during the pandemic, especially among organizations that he says weren't well-equipped or positioned properly to handle this level of disruption.

Many provider organizations have applied for or received funding through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2.2 trillion stimulus package passed in late March.

Regarding the relief effort, Allen says the federal government did a "decent job" to help health systems facing acute cash flow issues related to the cancellation of elective surgeries due to the COVID-19 outbreak.

"The Medicare [payment] advances and the CARES Act dollars could delay some [consolidation], but I think you're going to see a wave of facilities and health systems say, 'You know what, we've examined all of this and it's been a bit of a stress test on our organization and our resources, and we're not sure how many of these we can weather, so we probably should find a partner,'" Allen says.

Beyond the politics surrounding the CARES Act, Allen says, "I feel like the federal government and CMS acted quickly and did the best that they could given the circumstances. In many cases, they had to start doling money out, either advancing it or granting it, and without all the rules in place. Sitting in my seat, I don't know that they could have done it any other way."

On the topic of an additional stimulus package this summer, Allen says that the federal government still needs to decide how to distribute the remaining $75 billion in CARES Act funding before they focus on another round of economic relief for hospitals.

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


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