While hospitals were stocking up on PPE and investing in protocols to keep patients and staff safe during the pandemic, elective procedures were canceled. Patients put off appointments they decided weren’t urgent. At the same time, residents are staying home, driving less and doing fewer activities, resulting fewer accidents and injuries, another source of income for hospitals. It’s been the perfect financial storm.
Multiple factors have contributed to hospital layoffs and other cuts. “Some could include a systems balance sheet position, particularly with regard to cash availability, and payer mix differences that make collections of revenue more difficult for some than others. Also, overall expense structures — some hospitals are more efficient than others — and different perspectives on how long this situation will last can inform decisions,” says Pamela Stoyanoff, President and Chief Operating Officer of Methodist Health System. “Some chose to make these decisions now and others will choose to wait it out.”
“None of these answers is right or wrong, it’s all judgement for each individual organization based on their unique circumstances,” Stoyanoff says.
Most health systems have outstanding debt, so the organizations are incentivized to keep enough cash on hand to maintain their debt rating, Stoyanoff says. But when a pandemic cuts into that cash reserve, adjustments have to be made to keep the rating where it needs to be. The amount of cash on hand varies, depending on how much the organization decides it needs to fund emergencies, investment, and operating costs. The Dallas Morning News reported that Baylor Scott and White’s cash on hand had been shrinking over the past year even before the pandemic. On June 30, 2019, it had 219 days worth of operating expenses, but on March 31, 2020, it had just 187 days of unrestricted cash. Baylor had to lay off about 3 percent (1,200 people) of its workforce last month.
Because COVID-19 upended so much of the healthcare system and economy as a whole, health systems made the jump to telehealth, but it is still unclear how reimbursement will work for these services, especially if telehealth continues at such high rates. While government and private payers have been reimbursing for telehealth visits at comparable rates to an office visit, health systems may be nervous about the long term financial impact of virtual care. If those reimbursement rates are reduced and most patients want to transition to telemedicine, systems will lose dollars.
Systems also vary in their integrated services. Is the focus on hospitals, or has it moved into employing physician groups, outpatient clinics, or other diverse service lines? This diversification can allow for many points of contact with patients, and can provide balance if one area of service drops off. If a health system gets a large portion of its revenue from elective surgeries and non-emergent hospitalizations, the cancellation of those procedures is going to have a major impact. “Systems that have integrated delivery networks can be better positioned to weather many storms because of their ability to flex care in the multiple settings that they control,” Stoyanoff says.
Sometimes health systems decide to move their reimbursements away from one area of care and toward another in negotiations with payers meaning, for example, they might seek an increase in outpatient reimbursement in exchange for a decrease in reimbursement for hospital services, according to Dr. Edward Schumacher, the Department Chair for Health Care Administration at Trinity University in San Antonio. “If there is a big rush to get things out of inpatient and into outpatient care, health systems may have structured contracts to get patients on the outside and conceded on inpatient,” Schumacher says. “It was a double whammy when outpatient went to zero.”
Payer mix is also important. Most hospitals in DFW are reimbursed at about 250 percent of Medicare, but when privately-insured patients are staying away, finances suffer. The systems that stay lean and can function on reimbursement levels nearer to what Medicare pays are better prepared to survive a downturn like the one caused by COVID-19. In general, Schumacher says, for-profit companies run leaner than nonprofits, which are more likely to have larger administrative costs. Labor and salary plays a huge role, Schumacher says. Labor is about half of a hospital’s cost, and and the number of employed versus independent physicians can impact a hospital’s bottom line. Employed physicians have something closer to a guaranteed salary, meaning drops in patient numbers impact the company’s finances more than the physicians’.
Schumacher says that health systems may retreat back to their bread and butter of running hospitals if outpatient work continues to be slow, and return to outpatient work when demand returns.
In addition, if corporate overhead, real estate, and administration costs become too high, a downturn can put health systems in a difficult position. Keeping fixed costs low is key, Stoyanoff says. Moving forward, she sees hospital construction shifting to add versatility. “In general, we can’t do much about our existing real estate but in building for the future, our physical footprints (in hospitals for example) will be smaller to allow for greater flexibility and less fixed cost.”