By Tyler Layne and Jay Greathouse
Steep inflation, staffing shortages, supply chain disruption, the continuing impact of COVID-19 and other factors are putting financial pressures on hospitals the likes of which we have not seen before. The grim reality is that the current financial condition of the hospital industry is worse than it was in 2008 at the peak of the Great Recession.
Last year, hospital coffers were bolstered with federal COVID-19 relief funds, including the benefits of payroll tax deferrals and the Accelerated and Advance Payments Program implemented in early 2020 by the Centers for Medicare & Medicaid Services. While the largest hospital systems were able to use these funds and programs to conserve cash for a potential downturn, many smaller systems and independent hospitals were forced to spend most or all of the funds they received. These hospitals now face a liquidity crisis as funds are depleted while expenses remain high and the cost to borrow capital is growing ever more expensive.
One big cause of the downturn is required repayments for the Medicare loan program. Providers must repay the amount in 29 months, a time frame that ended this summer for those that received the advance payments in early 2020. The repayment period should end for providers by the end of 2022. As of May, about three-quarters of the outstanding amount had been repaid but it isn’t a difficult leap to imagine that much of the remaining repayment burden is borne by the smaller healthcare systems and independent hospitals mentioned above.
Higher expenses, largely driven by increased labor and supply costs, and the resulting squeeze on operating margins are other factors dragging down cash on hand. Hospital costs have been rising as inflationary pressures, workforce shortages, supply chain disruptions, and pharmaceutical expenses combine to drive up overall operating costs. To make matters worse, there is no additional federal financial support for hospitals in the foreseeable future.
It isn’t difficult to see that hospital leaders across the country are at a crossroads. While communities and their hospitals are unique, all U.S. hospitals – particularly standalone, general acute care facilities and small- to medium-sized non-profit hospital systems – face many similar challenges, including decreasing inpatient census, decreasing revenues, a move toward a value-based business model, and capital-intensive needs, such as physician and nurse recruitment, information technology and facility improvements. In light of the growing challenges standalone community hospitals and small- to medium-sized systems face, the expectations and challenges for boards, management teams, and elected officials have grown significantly.
While hospitals and smaller health systems undoubtedly face unprecedented challenges today, these times also present unique opportunities if tackled swiftly and proactively. The process can seem daunting, but management teams, boards and community leaders are tasked with preserving healthcare in their communities and having the tough conversations and evaluating the current situation now can reap the benefits for years to come. With that in mind, before acting, hospital management and boards should make the following considerations:
- Remember your duties to the mission of the hospital or system and the provision of high-quality care in the geographic area served by the hospital or system.
- Identify the ideal end game and several alternatives and work backwards to assess what actions need to be taken in the near- and long-term to succeed.
- Think long-term in tandem with the short-term fixes that the hospital or system may need. Repeated short-term fixes may jeopardize long-term goals.
- Revisit your strategy regularly as facts and circumstances are fluid, and options and end games may materialize or become unavailable.
- Surround yourself with experts who have helped management and boards with creative financial, operational, and legal decision-making to preserve care.
- Make a plan to communicate with your constituents, including physicians and the public, and follow through on that plan regularly.
- Identify potential roadblocks and work proactively to address them. Being reactive lengthens the process and lessens the prospects for success.
- Address regulatory compliance and ensure that day-to-day operations are as unaffected as possible by the strategic decision-making being undertaken.
Tyler Layne is a partner at Waller where his legal practice focuses on advising healthcare clients in restructuring matters.
Jay Greathouse is a partner at Waller where he advises not-for-profit and investor-owned healthcare clients in acquisitions and divestitures and complex joint ventures.