Hospitals’ Need to Operationally and Financially Plan Due to COVID-19
April 07, 2020
By Bert Orlov and Steven Bisciello
The COVID-19 pandemic presents numerous business and operational challenges for hospitals, including:
- Decline in revenues.
- Staffing and supply shortages.
- Expansion pressure.
While no strategy can obviate the impact of this pandemic, recognizing each hospital’s unique circumstances and developing a careful plan of action can at least mitigate the long-term impact. Furthermore, fully leveraging government stimulus programs can assist with cash flows.
Decline in Revenues
With the still-growing spread of COVID-19, hospitals face dramatic financial and operational burdens. First and foremost is revenue loss. To help flatten the infection rate and reduce exposure, the CDC has directed hospitals to cease elective procedures/surgeries. Historically, these cases brought disproportionately high revenues—especially surgical cases like orthopedics. Thus material reduction in “elective” surgical cases drives disproportionate revenue declines. Furthermore, hospitals face a flood of generally poorly reimbursed, but costly, COVID-19 patients. While the federal government has approved a 20% increase on payment for such cases, those may not adequately cover the increased staffing costs for critically ill patients. Furthermore, treating these patients puts demands on supplies and generates anxiety among clinical and administrative staff. In addition, there are costs for barriers to protect staff and potentially for surge expansion.
A clear financial projection for the coming months and a thoughtful plan of modifications to provider schedules, expenses, and the leverage of financial resources (e.g., deferral of sequestration and DHS cuts, as well as Medicare’s Advance Payment Program) are critical. Close monitoring of cash flows will become more important than ever.
Due to falling patient volume, hospitals face difficult choices on managing expenses. There may be a surfeit of staff for the reduced volume, especially in ambulatory areas. We have seen hospitals begin to make short-term reductions in staffing. Conversely, there is a risk of personnel shortage due to exposure, illness and the required self-quarantine. Furthermore, planning additional capacity for inpatient admissions surges, as seen in places like New York City, likely require adding staff. And, demands of COVID patients and staff fears for their own health put demands on management to maintain morale.
Maintaining adequate inventory of medical supplies and protective gear has become a major challenge. The diagnosis and treatment of potential COVID-19 patients have greatly depleted current stock and generated extreme delays in the restocking of key supplies, especially personal protective equipment (PPE) such as gloves, masks, gowns, goggles and facial shields. High demand and low supplies drive up costs. Managing both the levels and costs of staffing and supplies reinforces the imperative of creating a clear financial plan that covers months, as the timeline seems only to be expanding.
To service the anticipated surge in volume of COVID-19 patients, hospitals must create additional treatment capacity. New York City, for example, estimates a need for 10,000 additional beds. Said beds will include critical and non-critical care, as well as increased capacity for offsite/remote operations, such as “step-down” facilities, remote testing centers, registration areas and isolation areas. Contingency locations being fitted for COVID-19 include former rehabilitation facilities, skilled-nursing facilities, and legacy non-care structures (e.g., hotels, event spaces). Such expansion is resource intensive, both in capital and management talent. Furthermore, such expansion stresses the finances and operations, including staffing and supply chains. This pattern has already devastated New York City, and projections for the spread of the virus indicate a high likelihood that other locales will follow.
The March 27 Coronavirus Aid, Relief, and Economic Security (CARES) Act offers a package of initiatives and funding for practices, to the tune of billions of dollars for health care providers, including:
- Medicare Advanced Payment Program provides up to six months of guaranteed revenues based on historical billings.
- Suspension of the 2% sequester for Medicare payments and cuts to DSH payment.
- Add-ons to inpatient Medicare payments of 20% for treating COVID-19 patients.
- Other programs:
- The Paycheck Protection Program may apply to hospitals with fewer than 500 employees.
- Support for the costs of purchasing PPE and COVID-19 testing.
How Business Advisory Specialists Can Help
A team of experienced health care business consultants can help provide realistic projections of activity and the resulting revenue, as well as corresponding cost profiles, thereby assisting in framing out liquidity concerns. These financial experts can plan for cash flow maintenance by optimally leveraging government programs and prudently managing the revenue cycle. Specific examples are:
- Conduct financial projections/cash flow planning:
- Model likely revenue declines.
- Project required changes in operations and resulting expenses, such as staffing levels, supplies and equipment, and capacity.
- Re-engineer operations:
- Target staffing levels and furlough plans.
- Plan remotely for revenue cycle management (RCM).
- Collaborate on purchasing.
- Leverage government programs.
- Provide interim executive-level support (e.g., CEO, OO, CFO, CRO, etc.):
- Manage exposure and implement appropriate clinical protocols.
- Establish surge plans for inpatient and related ancillary services.
- Cope with supply challenges.
- Support RCM to address:
- Old A/R.
- Shifts to remote operations.
- Prioritize account cash flow.
With the juxtaposition of increasing patients due to COVID and the likely need to cut costs, it is more imperative than ever for health care entities to reach out to their business advisors to develop sound financial and operational strategies going forward.