To Survive the COVID-19 Crisis, Healthcare Providers Need Contingency Planning and Fast Action
Haywood Miller and Peter Chadwick
Advice for dealing with employees, vendors, lenders and landlords
On the front lines of the COVID-19 pandemic, healthcare providers are struggling to not only protect and treat patients, but comply with constant and often conflicting edicts across every level of government. As we emerge from the crisis, the signals promise to get more conflicted, based on industry and geography, among other things. Providers can expect to continue waking up each morning not knowing what new mandates will be imposed on their organizations before nightfall or when the nightmare will end.
The content and timing of the government guidelines will have direct and immediate impact on cash flows and forecasts for months to come—sometimes on catastrophic levels. How does an outpatient surgery center remain in business when elective surgeries are prohibited? Who pays a rural hospital to convert its psych ward to an ICU? How does an out-of-network residential treatment facility pay its employees if patients aren’t allowed to travel from out of state? How do facilities react when an employee or patient tests positive for COVID-19?
While the coming weeks and months may see greater coordination among local, state and federal officials, or a declining number of published guidelines, there is no reason to believe the healthcare sector will reach a point of stability in the foreseeable future.
This new reality puts the leaders of hospitals, outpatient treatment centers and residential treatment facilities in an unprecedented predicament. Managing through it will require new levels of agility and resolution. But it can be done.
While every provider will face unique challenges, every leader can take critical steps to help ensure they steer a course through this crisis—and maintain healthy relationships with key stakeholders.
Employees—Depending on regulatory requirements, union status, WARN Act limitations and other regulatory considerations, reduce staff to the minimum as soon as practicable (more on this below).
Vendors—Identify critical vendors and work to maintain those relationships; stretch payments to noncritical vendors; identify and stock up on critical safety and clinically essential inventory. Know that vendors will be reluctant to stop service for late payment, but understand that constant communication will give you the best consideration when payments are late
Lenders—Take down all the cash you are entitled to as soon as possible. Work with lenders to defer payments and suspend covenants. Lenders are reluctant to play hardball in this environment. We are seeing lenders back down from hard-nosed tactics, even with borrowers who had problem loans before COVID-19. Headline risk is tangible for national and local lenders alike.
Landlords—While at times devoid of sympathy for hard-luck stories, in this crisis many landlords are holding back on foreclosures of healthcare facilities. There are headline risks, regulatory limitations and the real problem of tenants who need all the liquidity they can muster to survive the crisis and emerge as viable tenants. Using the crisis to negotiate better lease terms is an opportunity; some tenants have traded earlier payments for reductions in such onerous lease terms as above-market annual escalators. Tenants in single-use properties have the most leverage—unless the land is useful for high-priced alternative development.
Others—Opportunities to negotiate settlements for litigation creditors and others will never be better than at this time of crisis. There is power in being broke. Cleaning up balance-sheet uncertainties will be time well spent.
Action Step No. 1: Overreact—And Do It Fast
In this extraordinary time, the best thing to do is assume the worst and act quickly. If you have a contingency plan, follow it. If you don’t have a contingency plan, do what you can to protect liquidity in the short term, knowing that delay will equal lost liquidity—and that liquidity lost now is lost forever. Communicate and disclose your decisions and actions to all investors and creditor constituents.
If your assumptions show a precipitous drop in revenue two months from now, consider what measures you can take today to begin conserving cash. This could even apply to the most difficult decisions healthcare business leaders will face: staff reductions. While your instincts may be to keep every member of your team on the payroll as long as possible, that is not always the smartest long-term decision. Furloughing employees a few weeks before you’re forced to can help preserve the cash you’ll need to survive the coming storm—and help ensure they’ll have a job waiting when it has passed.
Many will see such aggressive steps as an overreaction anyway. But in this crisis, underreacting could well cost a business its only chance at survival. Moving swiftly, before the business is in critical condition, could be the only way to save it.
Action Step No. 2: Plan, Forecast and Forecast Again
Some might place this as the first step, and most businesses ideally already have some understanding of cash flow and cash needs. Most well-run businesses have contingency plans. In normal times, companies should create business plans and contingency plans about once a year.
But we live in atypical times, to say the least. Elected officials and regulators are making decisions and issuing new orders every day. Knowing that any one of those could upend their businesses, providers should be reviewing and adjusting contingency plans every day.
They can start by studying what decisions and order have been made in other states, using this knowledge to build assumptions and rough models. If, for instance, you lead an outpatient treatment facility and notice other states banning elective surgery, you should be creating a contingency plan for the same prohibition in your state.
Every contingency plan will be as unique as the business itself. But here are a few considerations:
13-Week Cash Flow—Prepare and maintain a weekly cash forecast to anticipate operational and nonoperational disbursements. Create more metrics than usual, and review them at least weekly to determine trends and identify weaknesses in the company forecast.
Receipts—Create and track trendlines to anticipate changes in admits, gross charges, cash factors, length of stay, impacts to out-of-state and out-of-network admits.
Disbursements—Anticipate unusual course changes to your cash forecast. Identify critical vendors and those who may not be needed during the crisis. Treat vendors appropriately based on company need, not prior relationships.
Budget and Business Plan—Update your business plan and forecast cash weekly, in a fashion that ties to your updated plan. This can be a tedious process, but it will be well worth it as you estimate your cash need over the coming months. COVID-19 may make existing cash flows and business plans obsolete—especially in the near term. A three-statement model will help anticipate working capital swings and avoid surprises. Monitor performance by performing a cash variance weekly to identify trends that can impact liquidity. Once the finance team gets in the habit of doing this, it will become less onerous.
“Most well-run businesses have contingency plans. In normal times, companies should create business plans and contingency plans about once a year. ”
A Lifeline?
The sweeping Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted in late March, includes $100 billion to help healthcare organizations and hospitals ride out the COVID-19 crisis and still meet payroll and other cash needs. The money is earmarked for “eligible health care providers,” which include Medicare- or Medicaid-enrolled providers, and both for-profit and not-for-profit entities. Some Medicare-related support money has already been sent, to the surprise of many recipients. Those surprises are likely to be few and far between in the coming weeks and months.
In general, the CARES Act provides up to $10 million but no more than 2.5 times monthly payroll to qualified small businesses that are not private-equity owned. Businesses that take the money and avoid layoffs don’t have to pay it back. Companies that were overstaffed going into the crisis may want to use the money as a form of financing rather than for employee retention.
That might not be enough to prevent job losses among residential and outpatient treatment centers that see business dwindle to zero—decisions around layoffs will always be based on what level of employment the company can afford.
Other expenses covered under the bill include building or construction of temporary structures, leasing of properties, medical supplies and equipment (including personal protective equipment and testing supplies), hiring and training, emergency operation centers, retrofitting facilities and surge capacity. Providers seeking assistance apply to the US Secretary of Health and Human Services (HHS).
Some questions remain, most importantly around the HHS’s selection criteria. But the assistance could provide a lifeline to providers, and no entity should let those questions prevent it from taking action. Every dollar lost to shuttered facilities or reduced capacity will be gone forever.