By David Williams
During the most recent economic downturn, what has been the most difficult task aimed at keeping health care organizations healthy? As the rating agencies have continued to downgrade healthcare organizations, how are these changes affecting access to capital?
I posed these questions recently in speaking with healthcare CEOs and CFOs about the future of their hospital systems.
After the first couple of conversations with health care financial executives, it became quite evident that ‘business as usual’ will not be acceptable in the current environment.
While most organizations are maintaining their current financial position, everyone is strategically evaluating and positioning to address the expected delivery of services and how it will be paid for.
Keeping a healthy organization requires new concerns from the leaders of healthcare entities.
One CEO, located in a non-urban setting, said maintaining patient market share has been the most difficult part of maintaining the health of his organization. Attracting the needed physicians—based on the changing patient demographics—has been especially challenging. Without an adequate medical staff, the system has seen a decrease in volume of 3 percent. This is somewhat higher than the national average of 1 to 2 percent.
In addition, the economic conditions have produced soft patient volumes nationally, as 56 percent of hospitals have seen a decrease in volume. Many patients have tightened their healthcare budgets, which have in turn required the system to take a closer look at marginal services.
An urban hospital system’s CFO said people have become the most difficult part of maintaining his organization’s health.
He said to take a look at every hospital across this country and you will see that greater than 50 percent of the expenses are related to personnel and benefits. When looking to improve financial health there is no way to consider reductions without taking people into account.
As a result, hospitals and health systems are focusing on physician alignment strategies as preparations for continuing shortages of medical and surgical specialties and challenges associated with retention and growth of market share.
In addition to market share and people, other areas of focus seem to be national patient safety goals, core measure scores, and coding and documentation as a way to position hospitals for payment bundling and/or value based purchasing.
Access to capital has also been affected significantly with the downturn in the economy.
One CFO told me that his organization’s ability to keep pace with equipment upgrades that are essential to offering quality health care and maintaining the confidence of the patient may be adversely affected. This comment was based on this CFO’s challenge in fulfilling the capital requests needed in his organization.
He pointed out that routine additions of technology and equipment are being met, but plans for major renovation phases will require a critical evaluation. In order to deliver to the community in accordance with the facility’s mission, capital needs are a must and not an option.
Until the current economic conditions improve, healthcare facilities will have to look for partners, defer or lengthen the time for deployment of major capital projects, and re-evaluate its mission and future for delivery of care with the available capital resources.
With the most recent announcements of the healthcare sector having a 3-to-1 downgrade ratio, the main point that healthcare CEOs are making is that the possibility of abundant capital market access is highly unlikely, even for a healthcare organization with a solid balance sheet. Based on these discussions, it is quite evident that as operating margins continue to be flat and nominally growing, the credit markets, which are pretty much frozen right now, are not going to be generous to organizations looking to forge ahead with major projects.
On a side note, the merger and acquisition activity in the industry is basically dormant. This is another indicator that until the major healthcare initiatives of President Obama are proposed, and the financial impact of those changes is reviewed, most are holding their current positions with capital.
Healthcare providers seem to be focusing on making investments today that will position them to deal with any reform initiatives. The common goal is to be more efficient no matter what the measure, and ensure that what an organization efficiently produces currently also becomes more effective.
The picture will become clearer as the new administration’s footprint becomes clear for the national healthcare system. But no matter what form healthcare reform takes, physicians and hospitals will need to work in a more cooperative and efficient fashion, to continue to meet the demand for healthcare services in the future.
David Williams is leader of the Health Care Services Reimbursement and Advisory practice, HORNE LLP, Jackson and Hattiesburg, MS, and Nashville, TN: www.horne-llp.com.
