Scenario planning can help providers withstand unexpected disruptions.
Conventional wisdom has long held that health care is a “recession-proof” industry. Until 2020. The pandemic-driven recession created a host of new financial challenges that many health care providers are still working to address.
The shockwaves are broad, affecting demand for services, supply chains, and payments. From changes in virtual visit reimbursements and ongoing trepidation around lucrative elective surgeries to the skyrocketing cost of much-needed personal protective equipment (PPE), COVID-19 caused health care practices to face a different financial landscape than anything they’ve seen in the past.
“There’s a whole lot of uncertainty as we go into 2021,” says Mike Mauldin, Senior Vice President and Managing Director of Group Health at Regions Bank.
In an industry with a mandate to serve and razor-thin margins, staring down an uncertain future means taking a fresh look at the financial scenarios that may unfold in the coming months, and girding your finances against a number of possibilities.
While the financial impact varies depending on geography and specialty, nearly six in 10 health care providers said that they lost income due to COVID-19, according to a 2020 survey by Medicus Firm. That’s after the federal government implemented several programs that have helped mitigate losses. Most notably, the Coronavirus Aid, Relief, and Economic Security (CARES) Act sent $175 billion in relief to health care providers, while Paycheck Protection Program (PPP) loans also provided a measure of relief for small-to-medium sized practices.
There’s no guarantee of future aid, however, and the unknown duration and availability of many of these programs have made it difficult for many providers to plan for the future. As a result, nearly all health care providers are facing uncertainty ahead.
According to Maudlin, the best way to prepare for such financial uncertainty is to plan for it. He encourages health care providers to engage in financial scenario planning, in which you explore different plausible futures and test strategic choices for each scenario. This process can minimize financial disruptions and smooth the course toward a new way of doing business.
“Financial planning, through multiple scenarios, is helpful in terms of feeling some level of control in a challenging environment,” Mauldin says.
Mauldin suggests planning for at least three scenarios, beginning with the most likely scenario and then adjusting for a more conservative outcome.
The first variable to consider is a change in patient volume. According to data compiled by Strata Decision Technology, hospitals saw a 55 percent decline in traffic at the start of the pandemic, and future waves could create numbers like that again if the country reverts to shelter-in-place orders. Some of those volume declines could be mitigated by increased telemedicine adoption at newer, higher reimbursement rates, but just how much remains to be seen, making it prudent for health care providers to develop a plan for this particular scenario.
In addition to reduced patient volume, scenario planning can also be used to help project the impact of lower collection rates and longer billing cycles. That’s because a continued economic recession could lead to both an increase in patients on Medicaid as well as an increase in those who are unable to pay their bills, Mauldin explains.
Scenarios should also account for higher expenses for supplies as organizations work to maintain an adequate stock of personal protective equipment while continuing to implement costly operational changes in order to maintain safety. Consider other new expenses as well, such as any potential costs associated with bolstering your practice’s telemedicine capabilities.
Evaluating Your Options — and Potential Implications
Once you’ve assessed the impact of various scenarios, you can also start considering potential solutions.
“Thinking about these things in advance, before you’re in the midst of a challenge, helps take some of the emotion out of it, and can get people aligned in terms of thinking about the best next steps in a difficult environment,” Mauldin says.
The largest expense for many practices is labor, so practice leaders might consider whether they would need to furlough or lay off workers or implement across-the-board pay cuts should they need to drastically cut spending. You may want to check in with your lawyer to make sure you’re aware of proper procedure if you need to go this route. In the meantime, instituting a hiring freeze can help reduce this expense.
Real estate and overhead are typically large expenses for many practices. Those that have successfully shifted to a work-from-home model for some employees might consider making that change permanent in order to reduce office expenses. Another solution might be to reduce the square footage by relocating into a smaller space.
Now may also be an opportune time for smaller practices to consider strategic moves such as combining or partnering with another organization, an acceleration of a trend already underway.
“If a practice can align with a larger hospital or health system, or merge with another practice, there could be a synergistic effect of reducing costs on a combined basis,” says Maudlin.
Finally, some practices might consider establishing a line of credit with their bank, if they don’t already have one.
“It’s best to do that in advance of the need,” Mauldin says. “Sometimes leaders put that off, but as capital providers we will react and respond much better to having those conversations in advance, rather than trying to work through them in the moment if there’s a real liquidity crisis.”
While it’s impossible to know what the future will bring, especially in these unprecedented times, using financial scenario planning can ensure that your practice is as prepared as possible for whatever lies ahead.
For more on this topic, explore the Winter 2021 issue of Commercial Insights Magazine.
