Building a Hospital’s Financial Recovery Program

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Posted By: Industry Expert September 24, 2020

Many organizations around the country are dealing with tremendous financial strain – particularly small to mid-size hospitals. These organizations face even more pressure to manage costs, which have risen sharply as they struggle to shift their operational setup while still providing care for patients. In this podcast episode, Daniel J. Marino and Shaillee J. Chopra introduce Steven Berger, principal at Lumina Health Partners, to discuss how hospitals can create a revenue plan that addresses metrics/key performance indicators (KPIs) and financial opportunities.

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Episode Discussion Areas:

  1. Framing the issue
    • The COVID-19 pandemic has placed tremendous financial pressures on hospitals. Many are projecting negative operating losses for 2020 and into 2021.
    • As hospitals develop their financial recovery plans, they should consider not only how to reduce costs but also how to increase revenue opportunities.
    • Each recovery plan must be designed specifically to the hospital’s operations, payer environment, market, and patient needs.
    • Questions:
      • What should hospital CFOs consider as they design their recovery plan?
      • What initial considerations should CFOs look to as they build their plan?
      • What KPIs should be measured now and during the recovery plan?
  2. Considerations when building a financial recovery plan
    • Effective financial planning includes analysis of cost opportunities (i.e., labor, supplies), margin analysis, key performance indicator (KPI) outcomes, and general financial management issues involving accounting and reporting.
    • Ability to negotiate payment differentials with payers
    • Review revenue cycle activities and optimize performance
    • The financial recovery plan must address the specific issues of the organization and reflect the community’s position regarding the pandemic.
  3. Where to start
    • Begin with the balance sheet review. The two most useful metrics are:
      1. Long-Term Debt to Capitalization Ratio
      2. Days Cash on Hand
    • Note your KPIs to measure success:
      1. Operating Margin Percentage allows leaders to understand the “net profits” of operations against operating revenue.
      2. Total Margin Percentage focuses on the total operating revenues and non-operating revenues less total operating expenses (i.e. the total profits including interest and dividend earnings).
      3. Non-Operating Revenues are the organization’s interest and dividend income earned on any investable assets.
      4. Capital Expense Percentage represents the percentage of dollars spent on buildings and equipment in relation to total spending throughout the year. This is generally in the 5% to 7% range for most hospitals.
      5. Average Age of Plant denotes a general level of oldness to the buildings and equipment in the organization. It is a corollary to the Capital Expense Percentage. The more money spent on capital items, the lower (newer) the buildings and equipment.
  4. Considerations to future planning
    • Hospitals leaders must be proactive in planning for the potential surge in COVID cases and the financial impact of treating COVID and non-COVID patients
    • Hospital finance leaders should look at the data and models to anticipate any potential surges and the financial impact a surge might have.
    • As leaders plan for COVID activities in the fall and beyond, hospital finance leaders must incorporate a results-oriented financial recovery program focusing on revenue recovery, cost management, financial planning, and strategic partnerships to ensure ongoing financial viability.

6 Key Takeaways: Building a Hospital’s Financial Recovery Program

  1. There is tremendous financial strain on hospitals right now.
    • Small to mid-size hospitals are feeling particular pressure.
    • From March through May, elective surgeries either stopped or decreased, reducing revenue for hospitals anywhere from 30% to 70%.
    • Organizations that anticipated a shift in revenue and adjusted their expenses accordingly have found themselves ahead of the pack.
  2. Each recovery plan must be unique.
    • There are multiple elements that make it impossible for one size to fit all. Healthcare organizations must take into account their size, financial structure, system infrastructure, location, level of exposure to COVID, patient confidence, and so much more.
  3. Build the foundation of your plan by taking a deep dive into the data.
    • An economic recovery plan has to include a margin analysis and a good look at how costs can be realigned and, ideally, reduced. From there, organizations should look at revenue opportunities and streams to fully establish their roadmap.
  4. Focus on strategic KPIs.
    • Particular KPIs to look at include Long Term Debt to Capitalization Ratio as well as Days Cash on Hand. Cash remains king, and CFOs should be examining how they can favorably refinance debt obligations to reduce some of their liabilities. “Cheaper money means more reasonable cash.”
    • Organizations should also look at Operating Margin Percentage and Total Margin Percentage, as these allow CFOs to work with hospital operators to realign operational activities and reduce expenses.
  5. Leave no revenue opportunity stone unturned.
    • Healthcare organizations should prioritize negotiations with payers, and can also look at clinical variation issues to enhance revenue. Effective revenue cycle management will be a key factor in financial recovery.
    • Leaders should have a plan for how they will increase revenue, how long it will take, and how much revenue they project. That will help them determine what their costs should be in order to preserve a healthy margin.
    • Non-operating revenue is also a viable option. Some organizations have a considerable amount of investible assets and have been setting them aside for a rainy day. This is that rainy day, so if long term cash has been put aside, this is a good time to use it.
  6. Expect the unexpected.
    • Taking the steps now to develop a strong financial recovery plan will help healthcare organizations weather the next three to six months, and perhaps even another surge of COVID-19. Planning for financial recovery now puts organizations in a better position to survive whatever is coming next.

About The Show
From HealthcareNOW Radio, Value-Based Care Insights is a podcast that explores how to optimize the performance of programs to meet the demands of an increasing value-based care payment environment. Hosted by Dan Marino and Shaillee Chopra, the VBCI podcast highlights recognized experts in the field and within Lumina Health Partners. This article was originally published on the Lumina Health Partners blog and is republished here with permission.