Overview
Before the pandemic, many providers already were operating on thin margins, with enough cash and patient receivables to cover only three to four months of operations, according to an analysis of hospital finances by PwC’s Health Research Institute (HRI).
Deferred procedures and visits have led to depleted revenues and the payer mix is shifting because of swelling unemployment; fixed costs, however, remain static. Many solutions that worked in the past—rethinking service mix, bumping up capacity—are ineffective in the COVID-19 period. The American Hospital Association (AHA) estimates that hospital losses between March 1 and June 30 of this year will total $202.6 billion.
Hospitals have options when addressing a liquidity crisis caused by the pandemic
- Use targeted models to understand the short- and medium-term implications of the pandemic on liquidity and economic recovery planning;
- Address capital structure by dealing with covenant breaches, creating headroom in existing facilities and raising new capital;
- Carefully roll out strategies to preserve cash and minimize costs so efforts undertaken now don’t hamper business down the road;
- Consider their workforces with care and forethought;
- Take advantage of funding and other opportunities available under the CARES Act and other federal and state aid efforts, and;
- For hospitals, exempt and for-profit, consider tax strategies that can free up liquidity now and bolster finances in the long term.
Healthcare providers, in particular, have been challenged financially even as they scrambled to prepare for surges in COVID-19 patients. Adjusted discharges are down 13% year over year for March, a month that included just a few weeks of state shutdowns, according to the AHA.
Some rural hospitals, with less than two months’ cash on hand, fear they may have to close their doors. “If we’re not able to address the short-term cash needs of rural hospitals, we’re going to see hundreds of rural hospitals close before this crisis ends,” Alan Morgan, who runs the National Rural Health Association, told Modern Healthcare.
Many hospitals likely were operating on thin margins when the pandemic hit. An HRI analysis of financial data primarily from fiscal 2018 and 2019 collected by the American Hospital Directory on 4,688 hospitals found that the national mean operating margin was less than −3%, with enough cash plus net patient accounts receivable to cover an average of nearly four months of operations.
Hospitals’ financial situations varied by region and by type. Focusing on days cash on hand, urban providers, which experienced some of the nation’s earliest, highest caseloads, could cover an average of about 45 days of operations in the fiscal years before the pandemic. Meanwhile, rural providers tended to have slightly more, an average of nearly 70 days cash on hand, according to HRI’s analysis. Rural hospitals, HRI found, tended to have much lower operating margins than their urban peers. They also tended to have less ability to cover debt.
Across most regions, private for-profit hospitals tended to have the lowest days cash in the fiscal years before the pandemic, as did urban and teaching facilities. On the debt side, HRI also found that large, national for-profit health systems and some academic medical centers maintained relatively large levels of undrawn revolving credit compared with their peers. And private, for-profit hospitals appear best equipped to service their debts, with coverage ratios greater than 1 or positive and among the healthiest operating margins. Other hospital systems tended to have debt service coverage ratios near or below zero, according to HRI’s analysis.
Hospitals can take steps to strengthen their financial positions now and in the near and more distant future.
- Understand liquidity requirements. Providers facing a liquidity crisis should start with a short-term cash flow forecast and then work to update business plans, budgets, and forecasts.
- Deal with the capital structure. Providers should not delay when it comes to reaching out to financial institutions. Engage early and support any requests with robust documentation.
- Identify working capital and cost management options. Providers should set up a central point of control and visibility. They should prioritize and focus the efforts of operational teams by using analytics to support cash collection.
- Consider short- and medium-term tax strategies. Providers should consider the availability of the employee retention tax credit. Under the CARES Act, eligible employers can use a new temporary refundable payroll tax credit for 50% of qualified wages paid to certain employees after March 12, 2020 through Dec. 31, 2020.
- Think through a workforce strategy. Health systems already are asking themselves what can be done to manage workforce costs. They should reevaluate and set up continuous processes to adjust based on volume as COVID-19 continues to drive uncertainty from a demand perspective.
- Evaluate reporting requirements. Healthcare companies should evaluate financial reporting needs and resources earlier than usual. This could include evaluating the impact of remote work arrangements and other staffing matters on the company’s financial reporting systems, including its internal controls over financial reporting and its disclosure controls and procedures.
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