Matt Houston, vice president, GHX.
With value-based payment, the healthcare industry is taking a more holistic approach to how it cares for populations – an approach that may prove to be most effective for dealing with the long-term impacts of the COVID-19 crisis. As financial leaders seek to better prepare their organizations for the world after COVID-19, they should adopt a similar approach to financial management.
The first wave of the COVID-19 pandemic has dramatically changed the financial landscape of the U.S. healthcare system, and to address the financial challenges presented by COVID-19, hospitals need to take remedial action.
The American Hospital Association estimated U.S. hospitals and health systems lost $206.6 billion from March 1 through June 30, 2020, while a study by FAIR Health found that provider revenue declined 48% in April compared with April 2019.[a] (See the sidebar, “Hospital balance-sheet impacts of COVID-19,” below.)
The priorities for hospitals in this environment are to preserve cash on hand, to reduce risk and to safeguard against financial volatility in the event of future pandemics or other disruptive events. But it also is important now, more than ever, for hospitals to rectify inefficient processes that often were given low priority under normal circumstances.
Success in these efforts will hinge on the extent to which hospitals are embracing new technologies and systems to bring higher levels of automation to business processes. Developing and implementing an integrated platform is an imperative first step in this process.
An integrated platform can offer benefits critical to long-term success, including:
- Providing standardization that enables providers to balance the variety of payment choices
- Improving transactional efficiency and offering visibility to improve working capital
- Linking payments data with value-added data from supply chain, clinical and other sources to provide more effective and faster decision support
Healthcare trends and the effects of the pandemic
COVID-19 emerged during a period of significant transformation for the U.S. healthcare industry. Before the pandemic, the healthcare industry was well on its way to adopting a more universal approach to wellness with ongoing shift to value-based care. Providers were increasingly entering arrangements to be paid for value over volume, with the result that many now bear significant financial risk in delivering care. Meanwhile, consolidation was occurring across the industry — a phenomenon that may well accelerate because of the pandemic — and new entrants to the market, including CVS, Apple and Amazon, were threatening disruption and increased competition.
Hospitals were already busy trying to determine how to hasten growth and minimize risk in this new environment when COVID-19 added critical new challenges to top-line revenue:
- The postponement of lucrative, higher-margin elective procedures
- The significant decline in the volume of typical (non-COVID-19) emergency department (ED) and urgent care visits
- Increased supply expense (e.g., for personal protective equipment [PPE]) and labor costs that exceed capacity because of service cutbacks.
- The new telehealth environment, which saw a surge in visits during the pandemic but with variable levels of payment.
- A loss of nonoperating revenue from investment portfolios as global financial markets have wavered due to the economic uncertainty.
As providers move forward, the road to financial recovery is fraught with uncertainty:
- Will patient volume return to pre-pandemic levels?
- Will telehealth continue to be a popular and lasting option for patients, and how will the new telehealth payment models affect the balance sheet?
- How and when will the economy rebound?
- How many individuals will be left uninsured because of the pandemic?
Forging new financial models
Meeting these challenges requires hospitals to adapt financial models to the new realities, which requires a dedicated investment in cross-functional collaboration and technology. An integrated platform will be needed to unify all the various methods of e-payments and the resulting data to optimize working capital and cash management. To ensure they are well prepared to effectively implement such a platform, financial leaders first must evaluate their organizations’ readiness in two areas.
1. Cross-functional collaboration. Before tapping the power of technology, finance leaders must understand that financial agility cannot be achieved in isolation. It must incorporate treasury management, the revenue cycle and payments, while also encompassing critical supply chain and clinical functions. After all, these team members are on the front lines of making critical product selection and utilization decisions that impact patient outcomes and payment, as well as the budget and vendor relationships.
Financial and clinical teams must be brought into early conversations about their respective objectives around contracting, procurement and vendor and financial performance to establish the visibility needed to leverage integrated platforms where processes and decision-making can be automated.
Although the time required to bring the teams together to build linkages and establish the data and criteria for informed, holistic decision-making may seem to translate into increased overhead, the resulting reduced overall effort and streamlined decisioning make it well worth the effort.
2. Technology. The goal for an integrated platform should be to have end-to-end visibility across internal systems (e.g., ERP, EHR) and external supporting systems (supply chain, bank/finance, logistics). Without this capability as a fundamental building block, teams will not be equipped to make fully informed financial management choices —or timely ones.
To assess their organizations’ technological readiness, finance leaders should be able to answer three fundamental questions with certainty:
- Are vendor negotiations resulting in the expected deliverables, outcomes and incentives?
- To what degree do current outcomes related to clinical product sourcing, pricing and availability as well as the impact of those things on the total cost of care delivery and care outcomes impact choices related to payments, working capital management, vendor relationships and future negotiations?
- To what extent does the hospital have the technological means to facilitate and accelerate these activities and decisions?
Such questions underscore the critical need for a unified approach that enables a provider to:
- Better utilize cost-effective capital sources
- Manage working capital and days cash-on-hand
- Avoid credit holds and negative effects on credit rating
- Drive toward increased automation and efficiency for overall supply chain process, including requisitioning, spend management, invoice processing and payment
- Bring transparency, visibility and predictability to cash process
Evaluating automation options
COVID-19 clearly has exposed the challenges of insufficient automation. As hospitals have shifted their workforces to a work-at-home model, finance teams without automated processes and systems have been among the least prepared for such a shift.
Many of these teams have lacked the appropriate tools to offer secure remote access to ERP and other accounting systems. They also have lacked automation to support critical underlying processes such as invoice processing, payment initiation and payment processing and to support rapid decision-making across financial and payment modality options, including all banking and finance relationships. Working at home has complicated and exacerbated routine challenges, such as interacting with banking systems, sharing and processing crucial documents and reconciling month- and quarter-end closes.
The good news: Choice abounds. Hospitals have abundant choices for using technology and automation to address financial pressures. For example, to better manage working capital, financial leaders have many options for supporting cash flow, including lines of credit, credit cards, traditional loans, terms-management and others. And they also have a broad range of options for managing payments, including traditional checks, ACH, credit cards and wire.
A large integrated delivery system (IDS) located in the Northeast, for example, reported it was able to leverage the versatility of its e-payment solution to continue to garner cash flow increases and enact seamless automation in its payment processes, regardless of adjustments in payment preference from their vendors.
The bad news: Choice abounds. Although providers have more ways to optimize strategies and tailor relationships and terms with vendors, the abundance of options also can create more fragmentation and complexity. All solutions are not created equal. Many do not work together, and most are not integrated.
For example, a provider could choose the same financing option with three banks. That seems like the “good news” side of the equation, right? Yet each bank likely has different requirements, might use a different system from those used by other banks and that system may not employ the same level of automation.
Despite all the options, few platforms reel in all the choice and make it more consumable. The challenge facing the industry is in maintaining choice and flexibility, while reducing the complexity generated from all the available options. Opportunities for improving payment — an important part of the cash flow picture — provide a glimpse of the way forward.
Payment automation opportunities
Most healthcare payment processes remain paper intensive and come at a significant cost. Data shows it costs as much as $39 to manually process each invoice and paper check.[b] That said, moving to a single, automated solution is complicated. Suppliers and providers have different financial objectives that drive their behavior. All use a variety of solutions with different levels of automation.
Looking again at provider’s multiple relationships with banks, these relationships enable providers use a variety of payment options to maximize cash flow, and that will likely remain the status quo for years to come. What providers lack is a way to aggregate those options, so they are efficient and deliver maximum value. For example, most providers have a credit card or line of credit with more than one bank. The way financial institutions process those transactions and then share data (including format and frequency) varies greatly. This lack of standardization has created a level of complexity that makes it harder for providers to efficiently manage their balance sheets.
This lack of simplicity and efficiency has been an impediment to automation, but there are other barriers within the hospitals themselves, such as a lack of end-to-end integration of business processes. Payments are tied to invoices and orders. It is impossible to fully automate payments if the related internal business processes around such items are not also automated and integrated.
Hospitals also need help in achieving end-to-end automation. For example, hospitals should more aggressively support an industrywide movement from paper to digital invoices. This shift would optimize the overall process, bringing about automated invoice matching, exemption handling and workflow routing with minimal manual touches. Providers then would be able to seamlessly process purchase orders and non-PO based orders, reducing payment delays and potential credit holds. The providers also would be better able to capture cash rebates from suppliers due to early payment.
A new imperative
Consolidation, consumerism, regulations, new payment models, population health and new market entrants are all having a significant impact on the healthcare industry. So too has COVID-19. As these factors together are forcing healthcare adapt its assumptions, business models and processes to a new reality that will enable healthcare leaders to better support our institutions and people we serve. Although patient care must always remain the top priority, COVID-19 has highlighted long-standing issues in healthcare finance that underscore the need to improve financial systems through increased automation. Now more than ever, our industry must move quickly to adopt modern financial management practices to enable providers to invest, innovate and adapt to better serve our patients.
[a] American Hospital Association, Hospitals and health systems face unprecedented financial pressures due to COVID-19, May 2020; Pifer, R., “Professional services revenue plunged nearly 50% in April as pandemic worsened,” Healthcare Dive, June 10, 2020.
[b] RPMG Research Corporation, 2018 electronic accounts payable benchmark survey results.
Hospital balance-sheet impacts of COVID-19
COVID-19 has created several balance-sheet challenges for providers, including the following, in particular.
1. Reduced working capital. Many hospitals find themselves with barely enough capital to cover short-term cash commitments, let alone long-term commitments. In response, hospitals have opened new lines of credit or increased existing lines of credit. This is a necessary short-term fix, but it also will affect financial flexibility in the future. As liabilities increase on the balance sheet, the debt-to-asset ratio is undergoing a fundamental shift that will limit organizations’ ability to provide capacity for future investments, put pressure on debt covenants and increase cash obligations related to debt payments.
2. Patient and payer payment delays. Delayed payment also is wreaking havoc on provider cash flows. Whether postponed procedures or economic hardship on the part of patients, cash collections have slowed and foretell continued risk of lowered cash collection in the months to come. As hospitals resume elective procedures, the typical revenue cycle time from procedure to payment in combination with the increases in overtime, incentive pay and other COVID-19 related impacts will have a compounded negative effect on cash flow.
3. Disruption to the normal flow of business. Business flows have been disrupted as employees work from home and access systems remotely. Although the fundamentals of financial management have not changed, the complexity of the financial picture has changed quickly. A lack of automated workflows and reliance on old technology and processes has exacerbated this complexity for finance teams.