Remember the good old days of American hospital finance?
In this case, the good old days I am referring to are only about 10 years ago. Back then, as hospitals were implementing the 2008 Affordable Care Act (ACA), margins were single digit thin. Predicted financial futures were already keeping Health System CFOs up at night. The Baby Boomer population, representing nearly 70 million Americans, was planning to retire in droves over the coming decade. With the Boomer Medicare insurance looming, hospitals would collect 30% less per case reimbursement from their publicly ensured patients.
Complicating these financial issues, hospitals were typically experiencing steady growth in their operating expenses. Year over year, the cost of running a hospital increased by double digit percentages in critical areas, like clinical supplies and services. Key hospital spend categories, like IT, routinely grew by 20% annually. The ability to maintain an operating margin was quickly becoming more about cost control and less about revenue expansion. As such, hospital CEOs began showing more interest in the business discussions happening between service lines and financial staff, and buzz phrases like “Value Management” became all the rage.
Then came the oncoming innovations to clinical services, promising to revolutionize patient care. With the advent of Population Health, Telemedicine, Inpatient/Outpatient rebalancing, and patient consumerism, how would hospitals pay for these transformative clinical strategies amidst juggling financial chains saws? They did it with investment and focused cost control. Suddenly, a high performing hospital Chief Financial Officer was a hot commodity and the center of attention in the C-suite.
Ah the good old days…
Then along came COVID-19.
COVID-19 will reveal to the public something professionals running hospitals already know. Hospitals primarily make their money on surgeries, especially the expensive ones. Brick and mortar hospitals are no different than a restaurant in a high-rent part of town. They both need to sell the expensive dishes to survive. Just like most restaurants cannot pay the bills only selling kids’ chicken fingers, hospitals will not break even by treating only flu patients, no matter the strain. Right now, a large majority of hospitals are experiencing lower than normal bed occupancy, and fewer patients requiring high-cost care. Like everyone else trying figure out what it means to be “in this new normal”, COVID-19 has instantaneously flipped the hospital financial world on its head.
With so much media attention on the pandemic and the fear of getting sick, it may seem insensitive to consider the financial challenges hospitals are facing. Hospitals, however, do go bankrupt. Struggling or underfunded hospitals are often bought out and downsized. Doctors, nurses, and other clinical staff are not always immune to hospital work force reduction. Sometimes hospitals even close their doors permanently, over forty have already done so this year. From my experience, it is local community health that suffers the greatest fallout from financially short-sighted hospitals.
Since the onset of the COVID crisis, I have spoken to a handful of C-suite professionals, in order to gauge the state of hospital financial health. The consensus I am hearing is quite grim. Entire departments of hospitals are being suddenly furloughed or laid-off. Some of the bigger systems are already forecasting nine-digit financial losses. Predicted annual margins are immediately and deeply in the red. The average hospital makes an annual 3-4% margin under normal circumstances. Under our current state of crisis, many are already predicting to be in the red by double digits for the foreseeable future.
Digging out of this financial mess will require unprecedented rapid cost recovery. This is not a minor pruning of low hanging fruit. It is a call for drastic and transformative action. The importance of Hospital CFOs today is higher than ever. In many cases these will be the executives leading the hospitals to greener financial pastures, or to bankruptcy and closure, and it will be up to them to keep struggling health systems off life support.
The task at hand: Rapid Cost Recovery
The financial turnaround required in the months ahead will take unprecedented focus and effort. Hospital C-suites, Insurers, and the Federal and State governments will need to work together to keep hospitals afloat. Hospital CFOs will be at the center of this struggle.
As elective surgeries return, revenues will go up, but there is only so much ground a finite number of beds can cover. The government may intervene with Federal funding, but the quantity, timing and value of their support is unknown, and its likely to be rolled out slowly.
Financial futures will be determined by the ability to execute rapid cost recovery immediately. A CFO’s ability to recover cost quickly, predictably, and of an appropriate magnitude will not just be valued, it may be the only thing keeping the lights on. Doing so while maintaining clinical efficacy will take a special kind of mastery.
In the year ahead, Rapid Cost Recovery will be more than a buzz phrase. It will be the most important strategic imperative of the last several decades. Things like Population Health, Telemedicine, and Patient Consumerism will remain the topics that shape the decades ahead. For now, though, they remain in the on-deck circle while every hospital in America fights for its financial life.
Today, a high performing CFO is not just a hot commodity or the center of attention, they are a necessity for survival.