After several tumultuous years, including industry-wide financial challenges in 2022, many health leaders likely approached 2023 with hope that the year would bring a return to normalcy. However, several factors, ranging from the curtailing of federal pandemic-era support to high-levels of inflation, elevated interest rates and supply chain costs, and ongoing labor shortages, have combined to prolong a challenging financial landscape for a startling number of healthcare organizations.
With dwindling cash on hand, many healthcare organizations are in the uncomfortable position of deciding to cut back some services, eliminate certain departments, reduce headcount, and, in extreme cases, close entire facilities. In addition to these difficult decisions, many increasingly find themselves, often for the first time, trying to negotiate with their creditors, including their critical suppliers, as part of their efforts to maintain or return to normalcy, and/or achieve compliance with certain debt covenants.
Critical access and rural hospitals pinched
Although margin deterioration is present across all healthcare organizations, rural and critical access hospitals face an especially challenging financial environment without significant endowments and other investments to draw from as costs rise.
The end of national pandemic-era emergency measures in spring 2023 brought even more financial challenges to these facilities, given the socioeconomic status of many of their patients. As emergency measures were lifted, healthcare facilities were once again required to re-enroll patients in local state-based programs. The added administrative burden resulted in greater labor costs, chiseling into already slim margins. Furthermore, many saw an increase in bad debts as some would-be beneficiaries no longer qualify for Medicaid or did not provide hospitals with the necessary documentation to support their enrollment.
Prepare for a new normal
Across the healthcare landscape, one thing is clear: we are operating in a new normal. And, savvy leaders are preparing for this new reality, one where the expense base continues to increase at a pace greater than revenues can increase.
To ensure the continuity of business and clinical operations during times of financial duress, it is crucial that health leaders focus on establishing and maintaining transparency with creditors, employees, and additional stakeholders. Credibility, along with a focus on operational integrity, strategy execution, maintaining the patient experience, and adhering to debt agreements with banks and vendors, are not only the key elements to alleviating creditor pressure, but critical for re-establishing a sound financial foundation.
Transparency’s role in maneuvering a cash crunch
When a severe cash crunch emerges, vendors are often the first to go unpaid. Rather than remedy the underlying problem, some organizations further compound their financial difficulties by switching to a new supplier, even though they lack the ability to pay in full or on time. This form of invisible financing, which should be avoided, simply forestalls the inevitable and complicates efforts to eliminate debts.
At this point, it is essential for leaders to devise a plan to restore financial stability. Executives should refrain from embarking on negotiating with creditors, bargaining units, and other impacted stakeholders without a strategy. The plan needs to be credible, and the organization leaders need to be committed to its achievement.
Whether leaders seek to establish payment plans with unpaid and underpaid vendors, or obtain outside financing from banks and other lenders, it is critical health organization executives focus on effective, transparent communication to form the centerpiece of their plan. Clear communication is paramount to the success of any organizational turnaround, especially in mission-driven, not-for-profit healthcare organizations that often prioritize connections to and care for their community above financial considerations.
Transparent communication also builds trust internally and externally, which is critical to repairing strained relationships with creditors and developing open and effective relationships with lenders. However, before seeking new terms with creditors or applying for outside financing, focus on:
- assembling a team of C-suite executives to identify and execute on strategies that contain costs and grow revenue;
- crafting realistic operational plans that banks and vendors will review before extending any sort of financing or agreeing to any payment plan; and
- seeking counsel to advise on contracts before signing them.
Prioritize execution and capital allocation for business continuity and long-term credibility
When developing payment and operational plans with lenders, including suppliers, and outside consultants, be realistic. Many new to financing negotiations try to paint a rosy picture and offer unrealistic terms or revenue expectations to improve a soured relationship. This will quickly backfire and result in defaults, which not only incurs additional costs, but can rupture trust and spoil relationships.
Devising a plan is only part of the equation. To shore up revenue, leaders need to commit to executing on the operational plans they develop, no matter how painful or severe. Of course, any elimination of underperforming service lines, facility closure, or headcount reduction should only be realized once it is determined appropriate patient safety requirements can be maintained.
During the execution period, it is also vital to not lose focus on patient experience and clinical quality. Cuts alone cannot alleviate financial strain. Create centers of excellence that focus on driving revenue to services with healthy margins.
In the short-term, growing sources of revenue ensure the continuing of business operations and can protect some essential service lines with little or no margin from elimination. Building a strong financial foundation for the future can also equip healthcare organizations to allocate capital for long-term challenges, like facility repairs and enhancements.
Now is the time to prepare
While many organizations wait until negotiations are at their doorstep, there is an opportunity to proactively address challenges before it’s too late. With the ongoing healthcare workforce shortage, which is expected to only grow more acute, as well as other market uncertainty on the horizon, getting and staying ahead of the financing complexities of healthcare should continue to be a priority.
In the near term, this may require new forms of financing to ensure access to care and the continuity of business operations. But, in the end, the goal is to build a sustainable organization that can thrive in the new era of healthcare.
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