Richard L. Clarke, DHA, FHFMA

"I look forward and see no good news." I heard this quote recently from the CFO of a large, successful healthcare system.

Given the turmoil in the financial markets, a slumping economy, and growing federal and state budget deficits, this level of gloom is not surprising.
In this issue of hfm, Keith Moore, Dean Coddington, and Deirdre Byrne predict that this economic downturn will be worse than the recession of the early 1980s, and may be the most serious since the Great Depression. They note, however, that during past economic downturns, healthcare organizations tended to perform reasonably well-better than most other segments of the economy. I believe that this time it may be different.

This time, both the debt and asset side of the balance sheet have been affected. Not only are debt instruments problematic, but also investments have taken a hit as global financial markets have tanked. Significant reductions in market value of investments have weakened the equity positions of most organizations.

Operational performance will suffer because of increased capital costs, increased write-offs for bad debt and charity care, and reduced price
flexibility as all payers actively constrain price increases. This convergence will subject healthcare organizations to greater risk during this recession.

If there is any good news, it's that the healthcare sector tends to lag other sectors during an economic downturn. Given the potential that this downturn will be serious for the industry, healthcare leaders need to take this time to formulate reasoned plans for action. Some suggestions:

First, sound the alarm. Seek to gain consensus with executive leadership and governance about the seriousness of this downturn and its impact on your organization. Financial leaders probably have the best insights into what is happening to the financial markets and economy and will need to communicate those insights clearly to fellow leaders. Significant change happens only when there is a shared sense of urgency.

Second, push to become a "low-cost provider." Given the foreseeable future, this strategy will pay dividends because of increasing capital costs and potentially decreasing volumes and payments. But cost decreases must be driven by system redesign aimed at sustainable changes to care and service delivery, not simply across-the-board reductions.

Third, preserve cash. While always important, positive cash flow is critical during economic downturns. Revisit capital plans and seek alternatives to achieving the organization's mission and vision, and generating a reasonable return on invested capital. Again, organizations need to employ a disciplined, long-term approach to cash management and capital evaluation and allocation, not short-term fixes.

A happy new year is possible if your organization is prepared for the challenges ahead.

Publication Date: Thursday, January 01, 2009

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