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Peter Urbanowicz and Martin McGahan, chief executives of consultancy Alvarez & Marsal, are not optimistic that the financial challenges facing health systems will improve soon.
Both are advisors to CEOs and CFOs.
The financial landscape has changed dramatically since COVID-19, and healthcare systems know it, said McGahan, a restructuring adviser who has worked more than 30 years in the healthcare industry. But nonprofits have been slower to respond than for-profit health systems.
“For-profit companies need to react faster when stocks fall,” Urbanowicz said. “The pressure comes when it comes to liquidity issues. Then they come under pressure.”
McGahan said: “Access to capital has changed dramatically over the past three months in both the public and private sectors. We have seen an increase in lease sales.”
Or simply sell assets, like when Steward Health in Utah agreed in 2021 to sell the operations of five of its hospitals to HCA Healthcare.
Steward Health Care Chairman and CEO Ralph de la Torre said at the time that the transaction would free up additional capital.
In the current climate, McGahan said, “The first thing I would do as CFO is make sure I don’t have an investment plan that’s more than three months old.”
WHAT IS THE IMPACT ?
The bottom line is that CEOs and CFOs need to figure out how to balance their service offerings with dwindling financial resources, they said.
Nonprofits operate with their mission in mind, which often means being everything to everyone.
“The streamlining of the service line is that hospitals are like department stores,” Urbanowicz said. “It’s hard to be all of those things.”
When a health system closed its trauma center, it received huge political and community backlash, with opponents saying it would impact access to care.
“How do you rationalize that?” McGahan said.
Maternity care deserts have been well documented. A March of Dimes report shows a 5% increase from 2020 in counties with less access to maternity. This includes hospitals, birthing centers and obstetrics providers.
The lack of access is not entirely attributed to health systems that have closed these services in several hospitals in an area in favor of their offer in a single hospital, but rather to hospital closures, especially in areas rural areas – and a shortage of obstetrical providers. Dr. Heidi Altman, professor of anthropology at Georgia Southern University, was interview women in Georgia on the effect on care and health equity of long-distance travel to see a provider.
THE GREAT TREND
Health systems, McGahan said, are “just coming into the storm” of realizing their current business model needs to change.
The first thing executives talk about is labor costs and the current shortages of nursing and clinical staff, he said. Recruitment costs increase by 20%.
Staff represents the largest percentage of expenses. Usually, for a business, that means layoffs if expenses can’t be cut elsewhere, but hospital staff can’t be cut if the doors are to stay open, McGahan said.
Other issues for hospitals include competition – which has continued since before the pandemic – from outpatient surgery centers encroaching on outpatient services, to Walmart, Walgreens, CVS and Amazon, UnitedHealth Group and others buying up medical practices or opening primary care clinics.
Supply chain disruptions related to COVID-19 and inflation are affecting spending.
Medicaid reimbursement remains low. Medicare rates are slightly better, but there’s a lot of cross-subsidization, Urbanowicz said.
In the recently published final rules, reimbursement of doctors and hospital outpatient services fall short of what these providers say they need to function.
The end of the public health emergency (PHE), currently scheduled for mid-January 2023, would undo the additional payments and regulatory flexibilities that hospitals have enjoyed.
“We need to make some of them permanent,” Urbanowicz said.
The Department of Health and Human Services has promised providers 60 days notice before terminating the PHE. That deadline was Friday, according to CNBC.
During COVID-19, hospitals received financial assistance from the federal government through the $175 billion Provider Relief Fund established under the CARES (Coronavirus Aid, Relief and Economic Security) Act.
Politically, Urbanowicz does not believe there is an appetite for increased federal spending.
Urbanowicz is a former executive vice president and general counsel for Tenet Healthcare and a former assistant counsel for the Department of Health and Human Services. He served as chief of staff under HHS Secretary Alex Azar.
Beyond looking at service lines, hospitals can alleviate financial hardship by having clinicians work at the peak of their license and creating strategies around automation, which would help free up staff. Value-based care contracts would help hospitals get paid if another pandemic takes people away from elective care. Hospitals that relied on fee-for-service at the height of the pandemic have not been paid.
Leaders also need to look at vendor pricing and system footprint, such as deepening a lower-cost day surgery structure.
“A lot of people are going in that direction,” McGahan said.
“The pressure is on a shrinking revenue stream,” he said. “You have your biggest cost rising dramatically to unprecedented levels. Add in a declining volume situation. Revenues are down, costs are up, it’s a short-term disaster.”
Email the author: SMorse@himss.org