Trends That Will Add to Financial Distress at Many Hospitals in 2022

COVID-19 cases are skyrocketing, sapping the staff and resources at nearly all hospitals. But this care brings in little revenue, and it comes at the expense of elective procedures that do.

As the COVID-19 pandemic continues to surge, this time from both the Delta and the Omicron variants, hospitals and health systems are once again being stressed to the brink. And as bad as things have been in the healthcare sector over the past two years, 2022 could be even worse.

Three financial trends will impact hospitals significantly in 2022. The first two are directly related to the pandemic, and the third is an indirect consequence. Taken together, they spell extreme financial distress for the industry. Some hospitals may find themselves on life support.

"The number one issue that will have a financial impact is the pandemic itself," says Kristina Wesch, an attorney with Wiggin and Dana who spends the bulk of her time working in the healthcare space, including work on bankruptcies as well as mergers and acquisitions. "We're going on almost two years now. Everybody knows that there was a tremendous loss of revenue for hospitals and health systems due to the postponement of elective surgeries. Even now, many people who would be able to have elective surgeries are not feeling comfortable going into a hospital environment and are choosing not to move forward."

Elective surgeries are way down, accounting for significant lost revenue

The impact of this loss in elective surgeries can't be understated. Elective surgeries are often the bread-and-butter for a hospital in terms of revenue generation.

"Elective surgeries such as joint replacements and things of that nature are really big revenue generators that health systems and even standalone hospitals are missing out on right now," Wesch stresses.

In contrast, COVID care is dominating the resources at many care providers, especially with the allotment of ICU beds. The need for COVID care is skyrocketing, but revenues generated by that care are not.

"We hear a lot about how hospitals are overwhelmed and overflowing with patients. It's a little counter-intuitive, but I guess if you don't work in this space you'd be wondering, well, if hospitals are so busy, how could they be financially distressed? But the type of care that COVID patients require generally does not generate high reimbursements," Wesch explains.

The bottom line is that the growing number of COVID patients filling hospitals and care centers are certainly receiving care. But they're not tapping into anything that drives a lot of revenue for hospitals.

Reimbursements are primarily for the hospital space itself. In terms of revenue generated by medical procedures, most hospitals and healthcare centers aren't receiving anything significant, Wesch says. "It's really just keeping airways open, maybe putting a patient on a ventilator, providing medication, making sure they're comfortable, monitoring them, things of that nature. It's primarily nursing care."

While top quality nursing care is obviously important for a patient, it isn't quite so good for the health of a hospital's bottom line.

Consumerization of medicine was already diluting revenue streams

The loss of revenue-generating procedures during the pandemic would be bad enough, if it weren't for another trend that was already underway – the consumerization of medicine and the growing shift to outpatient settings.

"For hospitals and health systems that weren't prepared for that, it's a big loss of revenue-generating opportunities if they don't have ambulatory surgery centers, urgent care, or walking care centers," Wesch says. After all, many patients don't have a particular loyalty to a specific hospital. They just want instant healthcare gratification.

"So providers that were focused more on a traditional model might have lost out on those higher profitability factors by not having diversified in time," Wesch explains. "Maybe before there were hospitals that were reluctant to acquire more ambulatory surgery centers or affiliates, or even open their own urgent care centers. But the pandemic has really driven home the point that you need to shift to these outpatient settings in order to generate revenue."

Hospitals need to diversify operations and locations

In addition to the need to diversify where care is provided, hospitals and healthcare centers also need to diversify operations if they are to increase revenue generation, Wesch believes.

"We're seeing a lot of that, where hospitals and health systems get into spaces that may be related, but not considered traditional in the past," Wesch explains. Examples include getting into the payer space, tackling insurance-type transactions with tech startups, and partnering with pharmacy management companies.

In terms of mergers and acquisitions, there is a great deal of interest in these activities now, Wesch says, but the pandemic has slowed down the ability to make many of the deals happen.

"Where I am in New York, from a regulatory perspective, things have really slowed down because of the pandemic. The Department of Health is overwhelmed, but there's still a lot of interest," Wesch says.

"We are seeing providers that want to affiliate, but we're also seeing a lot of different types of transactions that going back three or five years ago we really didn't see very much," Wesch continues. "I think they tie back to the shift to outpatient settings and the need to diversify. So we're seeing hospitals and health systems take advantage of non-traditional parties that may not be care providers, such as private equity firms.”

Making progress starts with candid soul-searching

Whichever strategy that a hospital or health system favors, there is a commonly used expression that sums up the first step in overcoming financial distress: "physician, heal thyself."

For hospitals that are already in financial distress, Wesch recommends that they focus on the following:

• Look at your lenders, not as the enemy, but as a partner that might help get you to the place that you need to be.
   
• Consider potential opportunities for expansion, either with new business lines or by providing more outpatient care.
   
• Conduct a critical analysis of what is broken in your organization, and what is within your control to fix.

"Obviously, we have to treat COVID patients, and we can't fix the fact that they're not going to generate a tremendous amount of revenue," Wesch says. "But really getting a handle on what is threatening your business plan. Seeing with fresh eyes what works and doesn't work is often a much better strategy than just jumping into something new."

In the midst of all this change and challenges, the burden is squarely on the healthcare CFO to review their organization's business plan on a regular basis. The CFO needs to ensure the business plan is aligned with the current reality and to make sure that the goals are either being met or that they are restructured in such a way that they're achievable, to help the system become profitable or remain profitable, Wesch says.

The need to bring in outside help to right the ship

The unfortunate reality for some hospitals and health systems is that, no matter how they look at it, the best financial option for the organization is to bring in outside help and to restructure.

It's really hard to convince officers and directors to spend more money, but hiring outside expertise that specializes in hospital turnarounds can be a great resource, Wesch stresses.

"Sometimes, what I see in giving restructuring advice to providers is that maybe they jumped into some new things and they weren't successful. They're generating revenue, but they're not getting the maximum bang for their buck, because they still have business lines or operational inefficiencies that are causing them to run at a deficit overall," Wesch explains.

"It's a great strategy to expand if you're aware of the legal and compliance consequences, and all the other things that could be hidden costs when you do diversify. There are tons of great outside advisors who can come in and give hospitals a deep dive into what's going on and what can be fixed, or if something should be eliminated," Wesch continues.

"Obviously, I'm a big proponent of the outside consultants that come in and look at your overall record," Wesch acknowledges. "A good place to start is to conduct a compliance review before you start bringing professionals into your business. Make sure that all of your issues are being addressed from a compliance perspective, and that you don't have any issues that may sidetrack you being able to successfully reorganize or restructure, whether in or out of bankruptcy."

Finally, "don't be afraid to pay a little bit of money for your financial advisors or accountants or whoever you rely on. Let them come in and give you some business advice on restructuring options, because that's usually well worth the money," Wesch says.