What’s the Financial Prognosis for Your Health Care Facility?

August 10, 2020

By Michael Sandnes

The American Hospital Association is predicting huge losses (to the tune of $50 billion) for hospitals by 2021 as a result of COVID-19 due to government cutbacks, which account for 70% of their income.

These are undoubtedly tough times for private equity firms holding hospitals in their health care portfolios. The situation is particularly dire for many community-based hospitals whose struggles have only been compounded by a combination revenue losses from elective procedures as well as their often poor credit worthiness in the eyes of lenders. Government subsidies provided to hospitals and health care organizations were simply not enough to sustain them.   Many hospitals’ leadership and shareholders are already losing sleep over increased competition from investor-owned chains, aging treatment facilities, the growing cost and complexity of technology, continuing labor shortages, the nearly 60 million uninsured Americans who remain dependent on the health care system, and continued federal and state pressures to cut Medicare and Medicaid reimbursements.

The news is unlikely to get better. Many industry experts expect a period of prolonged difficulty characterized by increased revenue uncertainty and cost pressures, reduced access to capital, and a continued erosion of public and political support in the face of COVID-19. Coupled with the ongoing operational challenges of aging facilities and equipment, there is growing concern for the long-term health of the industry and its ability to meet the needs of our communities—especially the poor and underserved. 

A Case in Point

A leading investment bank lender for a community-based hospital system in Texas went through a detailed review of its health care portfolio and found that many its client organizations—a chain of five continuing community hospitals—had entered into a new venture to purchase a free-standing, 130-bed acute care hospital that needed a quick influx of cash to avoid Chapter 11. This resulted in the hiring of a turnaround consulting firm to develop an action plan.

The consulting firm reviewed management capabilities, clinical and operational systems, quality indicators, environmental issues, billing and collections practices, marketing referrals, medical staff, and survey history. After a 60-day evaluation of the five facilities, the consultant offered some tough recommendations for the private equity firm and owner. Based on this report, the lender decided that the owner lacked the experience and resources to accomplish a turnaround. The advisory firm then found an interested party who—by agreeing to purchase the five facilities, provide financing, and arrange for a management agreement—offered a win-win situation for the owner. The owner eventually chose to sell the entities to focus on his other business.    Value-Added Solutions

Many hospitals at various stages of distress are being forced to seek outside counsel. An effective management advisory firm should have the necessary industry experience and expertise to effectively review business operations and operating expenses, financial statements, contact labor expenses, overtime, staffing patterns, recruitment plans and corporate leadership, all with the goal of recommending needed improvements. At a minimum, a competent health care business consultant should be able to:

  • Review the processes for developing and executing marketing programs to develop new business.  
  • Review and assess the strength of financial, expense and other internal controls. This includes a review of selected operating and financial reports, including overhead costs, supplies, leased equipment, labor, per patient day, and staffing schedules.
  • Interview key management personnel and perform organizational evaluation. 
  • Review and assess organizational structure and management reporting.
  • Prepare a report highlighting observations and recommendations.
  • Keep the lender apprised of progress.

When the written report is finalized, these consultants then meet with representatives of the company as appropriate to review the findings, offer recommendations and begin the implementation of operational strategies. 

The lender will also want to review the necessary information to see the game plan moving forward. This may involve options such as an exit strategy or securing funding to turn the operation around with outside management oversight in preparation for a sale. A consultant can spearhead this process, creating a win for both the company and the lender. Lenders are increasingly viewing this as a preferred choice over a bankruptcy reorganization. 

Short-Term, Chapter 11 and Reorganization

Increased Chapter 11 filings will become common in high-cost provider states like New York, Pennsylvania, New Jersey, California, Texas and Hawaii, which are among the highest in health care delivery costs.    Hospitals and nursing homes have experienced turbulence, but reimbursement will continue to decrease and affect margins. The recent bankruptcy filing a health care system with six locations in three states is an example. Another major academic medical center in California reports $2 billion in losses. The nursing home sector has many aging facilities that lack the resources to update their buildings. The assisted living care industry will continue to exist under competitive pressures for private pay patients and increased market competition. Sunrise Senior Living is just one example of a company experiencing increased competition and tight cash flow that adversely affect margins.   Hospitals, LTACs and health care organizations are an invaluable resource in fighting the coronavirus pandemic, but they need the right leadership to combat what could be a lingering crisis.

The present health care business is certainly not for the meek of heart. Yet, all is not lost. Acknowledging the adverse conditions and identifying opportunities to turn around the situation offer hope. Despite all the turmoil, savvy and experienced health care leaders will not only survive but thrive in 2021—often with management consultant firms assuming vital roles.  

About Michael Sandnes

Michael Sandnes is a Director in the Financial Advisory Services Group, with over 15 years of expertise in the health care industry.