For leaders of any type of organization, two current top of mind questions are – How long will this last? When can we get back to business as usual? What we mean is – When can we get our revenues back on track and financially stabilize our organizations?
There are no concrete answers to these questions at this point. Worst case, we could say normalcy will start to be restored when a coronavirus vaccine is available. Last week, the White House announced “Operation Warp Speed,” a sort of coronavirus vaccine task force that has identified 14 potential vaccines to fast-track so one can be released by January 2021 (see Health Officials Eyeing At Least One Of 14 Potential Coronavirus Vaccines To Fast-Track). That’s a bit faster than the original 18-month estimated timeline suggested by Dr. Anthony Fauci. But there is also the possibility that none of the vaccines will work.
In the meantime, states are “reopening” at different rates, with widely different rules. Having just read the rules for reopening offices in Pennsylvania (see Guidance For Businesses Permitted To Operate During The COVID-19 Disaster…), I find them confusing at best. So far, 26 states have announced that they are allowing health care organizations to resume “non-emergency, non-virtual” services (see 26 States Resuming Elective Surgeries). With this development, some provider organizations will be able to resume some services and have the opportunity to return to pre-crisis levels of service and revenue.
However, the path to resuming service delivery is fraught with challenges. Managers need testing for their staff and consumers but that is hard to find (either antigen testing or antibody testing). Personal protective equipment (PPE) is still in short supply. For example, a recent survey of behavioral health organizations had 83% of managers respond that they still had inadequate PPE (see COVID-19 Economic Impact On Behavioral Health Organizations).
The question is how long can health and human service provider organizations last if the current economic environment doesn’t change and if they do not receive financial subsidies? The available information is troubling. Primary care organizations are challenged. Nearly 53% of primary care practices responding to a mid-April survey by the Primary Care Collaborative (see Primary Care Practices Endangered From Steep Declines In Revenue And Staff, New Survey Shows) have enough cash on hand to stay open for the next four weeks. An April survey of physician-owned medical groups (see COVID-19 Reality: Medical Groups Face Financial Meltdown While Their Communities Face Devastating Loss of Access to Health Care), found that 60% said they will deplete their cash reserves within two months. Physicians in nearly all of the groups have taken pay cuts, and about a third of the groups’ physicians are providing uncompensated care to assist local hospitals.
For hospitals, the situation is not much better. Between February and March 2020, median hospital operating margins fell from 4% to -8%, about 11 percentage points, in one month. Both revenue and volume declined. Revenue was 13% below budget expectations in March 2020 compared to the previous year. Inpatient revenue was 13% below budget expectations, and outpatient revenue was 17% below budget. At the same time, expenses remained generally the same because hospitals maintained front-line caregivers and incurred added expenses to maintain and expand inventories of drugs, supplies, equipment, and capacity in preparation for a surge (see U.S. Hospital Margins Down 11 Percentage Points From February To March 2020). An AMGA survey of integrated health systems (see Medical Groups And Integrated Health Systems Face Closure Without Immediate Financial Relief; Initial CARES Act Fund Covered Less Than A Week Of Lost Revenue) found that 40% of respondents say revenue has declined by more than half, with nearly all reporting declines of 25% or more, and 55% report having less than six months cash on hand.
The specialty provider organizations serving consumers with intellectual and developmental disabilities (I/DD) are not faring better. In a just-released survey, Impact Of COVID-19 On Organizations Serving Individuals With Intellectual And Developmental Disabilities, 68% of organizations surveyed had to close at least one of their I/DD service lines. On average, each of the organizations closed three service lines, with day programs (54%), supported employment (31%), and transportation (19%) being the most frequently closed services. These closed service lines accounted for 32% of the annual revenue. Half of respondents stated they would not be able to stay in business for more than another month.
And behavioral health specialty provider organizations are in similar financial conditions. The National Council for Behavioral Health’s survey (see COVID-19 Economic Impact On Behavioral Health Organizations) found that 62% have closed at least one program, and 93% have reduced their operations. This is just “the tip of the iceberg” as National Council President and Chief Executive Officer Chuck Ingoglia says. Nearly two-thirds of the responding organizations believe that they can only survive financially for three months or less under the current COVID-19 conditions. Sixty-two percent of provider organizations cannot survive more than three months without emergency financial assistance. Only 9% of organizations believe they could survive a year or more. The situation does vary by state. In Kentucky, more than 85% of provider organizations have already closed programs, while 80% of South Carolina provider organizations and nearly 90% in Florida expect to close their doors by July.
Like the rules for reopening, the financial support for provider organizations is spotty. Four federal bills passed in March and April had financial support for provider organizations. Hospitals and other health care provider organizations on the front lines of the coronavirus response were allocated $175 billion through the Coronavirus Aid, Relief, and Economic Security Act, the Paycheck Protection Program, and Health Care Enhancement Act. While hospitals got the lion’s share of these funds (the relief targeted for hospitals covered about one week of lost hospital revenue, according to the AGMA survey), $50 billion was distributed in April to provider organizations proportionate to their share of Medicare fee-for-service reimbursements in 2019 (see CARES Act Provider Relief Fund).
And many provider organization management teams are competing with other non-health care businesses for the Paycheck Protection Program. And in an interesting political bit of jujitsu, non-profit organizations with more than 500 full-time and part-time employees are prohibited from applying. Some states and counties have extended supplemental financial support to provider organizations. But without a significant infusion of cash to stabilize provider organizations, expect many to seek bankruptcy protection or a sale of cash-poor organizations to the “cash-rich” in the months ahead.
For more on cash and revenue management and mergers and acquisitions, check out these resources in the OPEN MINDS Circle library:
- Short-Term Cash Management – To Assuring Continued Operations – An Overview
- Rethinking Revenue Cycle Management: How To Optimize Operations For A Value-Driven World
- Best Practices In Financial Optimization: A Provider Checklist For Maximizing Revenue
- Mergers & Acquisition Options As A Crisis Management Strategy: OPEN MINDS Announces A New Virtual Assessment Program
- The OPEN MINDS Mergers, Acquisitions & Affiliations Summit: Best Practices For Non-Profit Health & Human Service Organizations
- Challenges In Making Mergers & Acquisitions Work
- The OPEN MINDS Guide To M&A: A Framework For Merging, Acquiring, Or Being Acquired
And, for a deep dive into how to use mergers, acquisitions, and affiliations as part of a recovery strategy, register for the web briefing by OPEN MINDS Senior Associate Ray Wolfe, J.D., Collaboration As A Strategic Tactic – Using Mergers, Acquisitions & Affiliations To Achieve Your Strategic Objectives & Assure Sustainability.