By Ryan Cochran, Waller, and Mitch Galloway, Galloway Consulting
As the nation’s healthcare industry grapples with the impact of COVID-19, many hospitals are facing financial pressure. This article will address how COVID-19 impacts the finances at hospitals, and some immediate ways hospitals can respond.
Struggling providers fall into two categories. One, hospitals that are or were partially overwhelmed with COVID-19 patients, experienced shortages of Personal Protective Equipment (“PPE”) and significant staff stress. Two, facilities that were forced to shut down strong margin-producing services, and spent money stocking up on supplies and urgently preparing for COVID-19 patients that never came.
Elective surgeries are a significant portion of hospital revenue. During the early days of COVID-19, many hospitals were ordered to stop performing elective surgeries to preserve PPE and capacity for COVID-19 patients. In addition, even as orders to stop elective surgeries are lifted, some surgery candidates may delay surgery due to fears of continuing exposure to COVID-19. Both the shutdown orders and patients’ preference to put-off elective surgeries delay the receipt of revenue. Further, shutdown orders may come and go. Recently, Texas Gov. Greg Abbott suspended non-urgent procedures in four of Texas’s largest counties. Other states may follow with shutdown orders in COVID-19 hot-spots.
At the same time, hospitals are also facing additional COVID-19 related costs. All employees will need gloves, masks, gowns and possibly face shields to prevent or mitigate the spread of COVID-19. Staffing costs also rise. Staff also get COVID-19. Ill staff must quarantine. As a result, facilities must pay overtime to staff covering additional shifts or use more expensive staff from an outside staffing agency.
In many markets, demand for staff has outpaced the supply. Staffing agencies charge higher hourly rates for temporary labor. In addition, facilities may increase pay of current staff for “hazard duty” or pay “hazard bonuses” to retain staff or encourage staff to be present. Cleaning and housekeeping costs increase. There is an increase in costs for cleaning supplies that are used more frequently, and potentially an increase in labor costs for more frequent and “deeper” cleaning. Training costs may increase. Outside consultants may be hired to provide additional training on COVID-19 guidance on new requirements from the WHO, CMS, CDC and state regulations. Staff must be paid to attend training sessions which results in additional paid time. It is counter-intuitive, but the current health crisis may negatively impact the hospitals’ financial ability to respond to the crisis.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) has provided funding to hospitals to respond to the pandemic. However, the CARES Act funds will not be here forever, and when the relief funds are depleted, the financial impacts of COVID-19 will still exist. The impacts of COVID-19 prevention, mitigation and treatment will leave some organizations short of cash. The hospital industry as a whole is estimated to have lost $50B per month between March 2020 and June 2020. One hospital known to the authors who normally has $330M in annual revenue experienced losses of $30M per month during that time. Without a strong balance sheet, it is difficult for organizations to survive those types of losses. An organization on a short cash runway should consider the following action steps. Start with a detailed, weekly cash flow forecast which outlines specific sources and use of cash to highlight potential vulnerabilities. A 13-week cash flow model is the general practice. A cash flow forecast can inform the need to stop or delay all non-essential cash payments, request forbearance of debt payments, restructure debt, sell assets or close services. A cash flow forecast can also reveal the need to make changes to future business plans and models.
The healthcare industry is facing unprecedented times that are challenging the most talented hospital executives. Many hospital leaders have never had to face such difficult financial projections
or such rapid change. To facilitate this review, hospitals may need to supplement their existing finance department’s abilities with an outside turnaround professional or a financial expert who has specialized experience in quickly anticipating and addressing financial challenges and then assisting with the timing and implementation of difficult changes.
As a lender to one of these institutions you may be called upon to permit the funding of financial, turnaround, public relations and legal consultants. Their involvement should occur early in the process. They can provide an objective opinion on what services the revenue can support, a projection of how changes in the services will impact expenses and revenues, and can be invaluable in implementing critical next steps. Further, sometimes an outside party is the better choice to communicate the struggles and challenges facing a hospital to its lender. The cost of experienced professionals early in the process will almost always save all constituencies money in the long-term – often saving crucial medical care for an entire community, and jobs while offering the most flexibility for future stability. Those organizations who start the process early will be best positioned to implement a strategic plan that results in a better performing organization, and, thus, a better performing borrower.
Ryan Cochran leads Waller’s Finance & Restructuring practice. In his role as Practice Group Leader, Ryan oversees strategic initiatives, including client service and case management for the firm’s Finance & Restructuring practice. Mitchell Galloway with Galloway Consulting is among the country’s foremost authorities on organizational strategy. He built his reputation helping healthcare executives transform their organizations, often achieving landmark results on seemingly impossible timetables.