Instead of rubberstamping your proposed 2018 budget, ask yourself, “Has the budgeting process become stale? Is it simply a roll forward of the prior year?”
Healthcare sector predictions in 2018 are varied and speculative, but one thing is clear: The movement to achieve better, more cost effective, and more convenient healthcare will continue throughout the year. This movement will be pushed forward by corporations that seek to disrupt the status quo to capture market share and benefit from favorable demographic trends. The competitive dynamics facing healthcare organizations will remain fierce, and the need for management teams—including finance professionals—to continue to adapt will remain.
Role of Finance Professionals
Finance professionals in healthcare organizations play key roles in driving competitive adaptation. As the stewards of financial information, finance professionals are best positioned to analyze, understand, and communicate to the broader organization the financial realities of the changing competitive, regulatory, and care environments.
The challenge for finance professionals within is to identify the symptoms (e.g., slowing growth rates, compressing profit margins, and slowing cash conversion cycles) and convert them into actionable information that can be used to drive value-enhancing decisions.
With that in mind, here are four ideas to help you remain competitive 2018.
Tip 1: Reinvigorate the Budgeting Process
Instead of rubberstamping your proposed 2018 budget, ask yourself, “Has the budgeting process become stale? Is it simply a roll forward of the prior year?” If so, leverage the momentum of the process and this time around use it as an opportunity to revisit the direction of the business.
Work with the operations team to break apart the elements of the business and associated costs. By investing the time to understand the processes and costs, organizations can isolate areas for improvement.
Organizations can fall victim to making decisions based on old or incorrect information. In 2018, make sure that the decisions you make are informed and rooted in a careful review of the operations and cost of service. If done successfully, this process can unlock value buried under years of status quo. After all, organizations can’t fix what they don’t know or what they think they know but is incorrect.
Tip 2: Preserve the Top Line
In 2018, price transparency will continue to be an area of focus for both healthcare providers and payers. The increased scrutiny on revenues will require organizations to view pricing within the context of value to customers and to brand reputation. Disconnects between value delivered and costs could lead to lost business, forced concessions, and/or reputational harm to organizations.
For many healthcare subsectors, top line growth will be challenged by a stagnant and even downward rate environment. The full extent of rate pressures will depend on where organization sit in the healthcare value chain. The most susceptible are those in highly competitive, fragmented, and commoditized products/services.
Regardless of subsector, eventually everyone should expect they will be asked to make concessions from customers or payers, and the best prepared for those discussions will be best positioned for success. Leveraging learnings from process reviews and cost analyses will allow organizations to negotiate within the boundaries of their cost models. Those that don’t have this clarity are at heightened risk of making decisions focused on volumes instead of profitability.
Tip 3: Think Fresh to Beat New—and Old—Competitors
Stripping down your business to evaluate the component pieces is an important discipline to practice on a regular basis, as it helps fight the natural tendencies of organizations—especially successful ones—to feel overly secure about their market positions. The line between healthcare and non-healthcare is becoming increasingly blurred as non-traditional healthcare companies push into healthcare products and services. These new entrants are unencumbered by the burdens of the old ways of doing things and often succeed because they find more effective and efficient ways to serve markets.
As companies face more competition from broader sets of competitors, taking time to understand your hospital’s business operations and its costs from the bottom up is imperative. This process encourages fresh thinking as well as constant adaptation toward the goals of better, cheaper, and more convenient healthcare.
Tip 4: Use Balance Sheets as Weapons for Opportunity
Many healthcare organizations are challenged by unfavorable balance sheets. During the last few years, healthcare companies have generally not had difficulty raising money or refinancing existing debt, thanks to low interest rates and encouragement to borrow. Consequently, many have put their balance sheets in precarious positions to take advantage of cheap financing.
While both equity and debt markets remain active and receptive to healthcare organizations, having highly leveraged balance sheets can restrict growth opportunities and limit options should rates rise or performance suffer. Many subsectors of healthcare remain fragmented and, as a result, are attractive for investors. We expect investors to continue to look for opportunities to invest in businesses that can be scaled and expanded.
If your organization has a fully leveraged (or over leveraged) balance sheet, you might not be in a position to be offensive in your corporate strategy. It might prevent you from taking advantage of opportunities and, potentially worse, leave you flat footed as others do.
If overall leverage is an issue for your organization, it may be time to discuss this reality with the appropriate stakeholders to ensure the financial health of your hospital or health system. A key differentiator between winners and losers can be as simple as the health of hospital balance sheets.
This year likely will be characterized by continued uncertainty and risk for the healthcare sector, which may lead to unexpected developments. This should prompt management teams, and in particular finance leaders, to push their organizations to become more efficient and adaptable. A commitment to these principles will help maximize the value of enterprises and help them conclude 2018 as stronger and more creative organizations that build value through making the healthcare system better, more cost effective, and more convenient.
Jonathan Killion is a managing director at Carl Marks Advisors.