Building resilience in healthcare provider organizations

If you do not have a substantial cash runway, you may be able to identify ways to generate or conserve cash, such as by not making payments as quickly to certain vendors.

If an organization’s cash position is good, it can look at options for the future by developing longer-term forecast models. Does it make sense to invest — or divest? Is there an ability to take on more debt? With rising interest rates, this can be a challenge, but for organizations not currently carrying substantial debt, this could be a viable solution.

Because maintaining credibility and a positive relationship with any financing source is critical, assessing where the organization stands with its lender or investors is also key. Bonaviri stresses that a good relationship with a lender makes it easier to collaborate to find mutually beneficial ways to free up cash. It also makes it easier to be transparent if and when additional funding — or a forbearance agreement to extend the cash runway — is needed.

Armed with a good understanding of your current situation, you can better identify your best options for building financial resilience for the future of the organization.

Today’s healthcare organizations are operating in unprecedented times. McGrow said that health systems are accustomed to stabilizing by refinancing their debt, getting new money, and starting over. “That’s not an option today. They need to come up with new strategies now,” McGrow said. 

Following are a few new strategies that healthcare organizations may want to consider to remain resilient:

1. Maximize asset utilization

Many healthcare organizations are taking a new look at their brick-and-mortar assets to find opportunities to reduce expenses or generate a new cash flow. Some approaches to consider include:

• Consolidating office space or reducing leased space: With the increase in work-from-home policies significantly reducing the need for hospitals to maintain administrative space, it often makes sense to find ways to make more productive use of those newly emptied workspaces. In some cases, it may be time to negotiate with landlords to release some of the organization’s leased space — or to use less square footage over a longer lease period. Adrianne Boylen, Grant Thornton Managing Director, Health Care Advisory, said, “A number of health systems have already given up leasing space and, as the workforce has gone remote, they have reduced their footprint.”
• Reconfiguring or repurposing clinical space: The shift from inpatient to outpatient services is reducing the need for clinical space. Health systems may want to consider consolidating their clinical space or repurposing unused clinical space for other service lines.
• Monetizing real estate assets: With the reduction in elective procedures cutting into revenues, many hospitals are compensating for that lost revenue by monetizing some of their real estate holdings. According to Bonaviri, “A health system may have land or facilities they have acquired over time. If they can divest underutilized assets without negatively impacting other operations, it could be a simple way to add cash to the balance sheet.” Another way for a hospital to generate cash flow is through a sale-leaseback transaction, in which the hospital sells a portion of its real estate and leases it back, thereby unlocking passive equity that can be invested back into its core business.

2. Reduce operating costs

Because of financial stresses and staff shortages, many hospitals and health systems are reviewing their service lines and the profitability of each and making changes that include:

• Shifting volume: In some cases, a health system may want to consider shutting down a department or a facility and shifting the volume to other hospitals within the system, so that the system’s consolidated costs are reduced and revenue remains the same.
• Shifting staff: To help contain the costs of contract labor, health systems may want to consider shifting clinical or nonclinical staff to a different hospital within the system. Boylen suggested that another option for retaining control while reducing labor costs is to shift crucial, back-office tasks to offshore teams that can provide hospitals with the ability provide valuable services at a lower cost.
• Sharing costs: McGrow believes that now may be a good time to explore affiliations through group purchasing organizations (GPOs) or joint ventures with other health systems or other providers to share costs, patients and risk. “If you combine forces, you can go to market together or negotiate better rates with a bigger population.”

3.    Optimize the value chain

The increase in M&A, supply chain challenges, staffing shortages, and other factors are driving many health systems to explore options that can help them use economies of scale to save costs and to improve their ability to provide services efficiently. These options include:

• Acquiring an entity that enables diversified services: Vertical integration of a healthcare organization with another entity at a different level of the value chain can enable new economies of scale and reduce transactional costs and administrative financial burden. According to Bonaviri, “This isn’t an option for all players, but for the ones that can and do pursue it, it may provide them with a diversified portfolio and make them be better able to withstand blips in the future.”
• Acquiring a smaller provider: Horizontal consolidation of providers has the potential to improve efficiencies and care coordination. The current economic landscape makes this an opportune time for certain organizations to be acquisitive.

With all the financial challenges that still lie ahead for hospitals and health systems, it will be important for decision-makers to act now to contain costs and find new ways to manage revenue, all while continuing to provide quality patient care.

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