COVID-19 has placed enormous financial pressures on healthcare provider organizations. The American Hospital Association estimates American hospitals experienced losses totaling $202.6 billion from March through June 2020.1
That’s an average loss of $33 million per hospital in just four months. And based on the resurgence of COVID-19 across the country, we have a long way to go before losses subside and hospitals recover to levels anywhere near their prior financial position.
Health system leaders are making many difficult decisions to address the financial implications of COVID-19. Layoffs, furloughs, pay cuts, and overhead restructuring have become common among health systems trying to adjust to dramatically reduced revenue. But the reality is that many health systems were in financial trouble before anyone had ever heard of coronavirus. For years, health systems have been functioning on operating margins barely over 0% and relying on investment income to finance capital investment.
Many health systems are recognizing the need for not just short-term solutions to survive the financial challenges accompanying COVID-19, but also long-term strategies to rebuild, reposition, and recreate themselves. Some are making bold strategic moves related to their market position, service portfolio, and/or physician network. Others are building off lessons learned during their response to COVID-19 to change the way they engage patients and consumers and springboarding into new models of care delivery. Almost every hospital has had to reprioritize capital investments and focus on strategic and operational solutions that result in immediate margin improvement.
ECG conducted over 50 interviews with health system leaders to explore the impact of COVID-19 to their business model and discern those strategies deemed most essential to achieving a sustainable recovery. Five initiatives surfaced as those that health system leaders are pursuing to improve their financial and strategic position as they plan for the future of their organizations and how best to serve their communities.
1. Secure an Ambulatory Footprint
No one wants to go the hospital these days. Hospitals experienced a decline in ED visits of 42% after the declaration of the public health emergency.2 But the truth is, no one has ever wanted to go the hospital. Health system leaders have known for years that consumers are demanding greater convenience, and when they fail to meet the demand, it gives other organizations the opportunity to enter the market. Building an ambulatory care network meets this consumer demand while creating opportunities to partner with physicians, target market segments, and expand a health system’s service area. Many health systems are aggressively pursuing acquisitions and joint ventures of ambulatory surgery centers (ASCs) as the migration of surgical, and now cardiac, cases to ASCs accelerates.
2. Engage Consumers and Expand Access
Prior to COVID-19, widespread adoption of virtual care was hindered by inconsistent reimbursement policies and an acceptance of the status quo by health systems. That’s changed. COVID-19 has created a surge in virtual visits that most believe will continue and will reshape healthcare delivery. Nontraditional, retail oriented market players who are unencumbered by historical norms have entered the care delivery space and are a threat to more traditional ways of providing care. Healthcare organizations that do not adopt this shift to consumer-focused digital health will continue to fall behind. Doing so requires redesigning ambulatory operations, including changes to scheduling models, support functions, clinical operations, and staffing models.
3. Regionalize and Rationalize Service Lines
Regionalization refers to the coordination, centralization, and/or colocation of similar service offerings within a given service area. When effectively designed and implemented, regionalization allows health systems to coordinate care, eliminate duplication and redundancies, reduce costs, optimize resource utilization, and improve outcomes. Many health systems have failed to rationalize service lines that have previously been cross-subsidized by other service lines. On the surface, decisions to eliminate duplication, standardize clinical processes, and reduce care variation within a system may seem obvious, yet many organizations have only recently started focusing on this opportunity to achieve a high return on investment and drive increased quality in a more efficient delivery platform.
4. Create Liquidity
Credit downgrades for health systems have grown substantially this year. But not because of COVID-19. Most were based on 2019 performance—before the pandemic. However, COVID-19 has greatly exacerbated the cash flow and liquidity challenges that many health systems were already experiencing. Most health systems have taken the many steps necessary to meet financial covenants at their next testing interval. And a technical default won’t necessarily result in a downgrade, because credit agencies recognize the pandemic is not a reflection of the overall financial performance of a health system.3 Many health systems are looking longer term and see advantages from operating with less capital tied up in buildings and equipment. Initiatives like DBOOM—design, build, own, operate, maintain—allow health systems to liquidate their central utility plant and/or other assets to access cash while gaining efficiencies in the services that are outsourced. In some cases, health systems are able to sell capital assets for cash while reducing ongoing operating expenses.
5. Restructure the Physician Enterprise
On average, health system–sponsored medical groups have “invested” more than $300,000 per physician annually.4 During COVID-19, the required investment has increased dramatically. And hospitals frequently pay stipends to independent medical groups that provide hospital-based services to supplement the shortfall between each group’s costs and professional collections. Stipends paid by a hospital can amount to several millions of dollars annually to anesthesiology, emergency medicine, and hospitalist groups. Yet despite these investments, care is still often poorly coordinated among providers, quality is poorly measured and managed, and patients find it difficult to navigate the system. The strategies health systems are pursuing to address these issues vary widely, but there is consensus that the status quo is unacceptable.
A Lasting Recovery
Prior to COVID-19, ECG’s proprietary financial and operational health index found that 35% of hospitals were marginal/at risk, and another 27% were technically failing or at high risk of failure. Health systems are not only taking actions to “weather the storm” of COVID-19—they are pursuing initiatives that will enhance their long-term financial performance. In many cases, the actions taken in the coming months will position health systems to emerge from the pandemic stronger than ever.
1 American Hospital Association, “Hospitals and Health Systems Face Unprecedented Financial Pressures Due to COVID-19,” May 2020. https://www.aha.org/guidesreports/2020-05-05-hospitals-and-health-systems-face-unprecedented-financial-pressures-due.
2 Kathleen Hartnett et al., “Impact of the COVID-19 Pandemic on Emergency Department Visits—United States, January 1, 2019–May 30, 2020” (Morbidity and Mortality Weekly Report, 69(23); 2020; 699–704).
3 Jeff Lagasse, Healthcare Finance, “Credit downgrades aren't attributable to COVID-19, but cash flow will be a challenge,” June 24, 2020.
4 ECG 2019 National Medical Group Cost and Infrastructure Survey.