Financial Recovery and Stability in the Midst of COVID-19
In this episode, BRG Managing Directors John Kelliher, Paul Osborne and Haywood Miller discuss how the coronavirus (COVID-19) pandemic has affected clinical and business models for healthcare providers and what tactics they are using to stabilize finances. They outline potential strategies hospitals could focus on once the US enters the recovery stage of this crisis.
TRANSCRIPT
00:02 [music] Welcome to BRG's ThinkSet Podcast. I'm your host, Michael Whalen. I'm a managing director with BRG. BRG is a global consulting firm. We help organizations in disputes and investigations, corporate finance, and performance improvement and advisory. We are a multi-disciplined group of experts, industry leaders, academics, data scientists, and professionals. Around the world, BRG delivers the inspired insights and practical strategies our clients need to stay ahead of what's next. For more information about BRG, please visit thinkbrg.com.
In this special episode, BRG managing directors John Kelliher, Paul Osborne, and Haywood Miller discuss financial recovery and stabilization for healthcare providers dealing with the COVID-19 crisis.
JK 00:58 This is John Kelliher. I'm a managing director in BRG's healthcare transactions group. For the past fifteen years, I have advised private equity funds that are purchasing healthcare companies on regulatory and reimbursement risk. Before that, I worked as a congressional staffer for almost a decade. I'm joined by Paul Osborne and Haywood Miller, also managing directors at BRG. Paul co-leads BRG's healthcare performance and improvement practice, where he applies twenty-five years of experience assisting healthcare providers improve operating margins as they overcome complex financial challenges, such as this once in a lifetime pandemic. Haywood has over thirty years of professional experience as a lawyer, entrepreneur, and workout professional. With BRG, he has worked on dozens of engagements involving healthcare companies of many types, including providers such as hospitals, behavioral health providers, and senior-living companies. Restructuring is obviously going to be a particularly important skill in this time. Paul, how is COVID-19 impacting the existing clinical and business model for providers you're working with?
PO 02:01 Thanks, John. Well, as you can imagine, both the clinical and business models have dramatically and quickly changed as we've moved into this pandemic crisis. I think what we saw initially was really on the clinical side. The hospitals were getting ready for an influx of COVID patients. So they had to look at staffing up. They had to refurbish patient rooms to take care of infectious patients. They had to train staff, setting up screening points at entry levels, emergency room, stocking up on PPE equipment, like ventilators. They had to really re-engage their technology around telehealth and those capabilities. And, at first, it was all hands on deck on the clinical side, which took most of their time.
PO 02:55 What we've seen over the past couple of weeks is really a transition to the business side. A lot of the hospitals, some of them did have a big influx of COVID patients, and their hospitals were full. But I think as we look around, a majority of hospitals are not. So they find their hospitals half empty or less. They've canceled all the elective procedures. Their revenue has gone down dramatically, as well as, of course, their operating margins. Then, also a huge impact on their investment income. So even the financially strong hospitals that had strong balance sheets are worried. A lot of the hospitals that were doing okay and had decent amount of cash on hand – those ones that had 30 or 40 days – are now finding themselves in pretty much a crisis situation.
PO 03:50 What we're seeing happening now, where a lot of those hospitals are really having to deal with the cost. And a lot of them are for low-end employees and doing lay-offs and doing some drastic steps to stay healthy financially, with at the same point, still having to deal with the medical ramifications of this pandemic.
JK 04:10 Paul, just on the operational side, how are they stabilizing their finances?
PO 04:16 Well, that's a great question. I mean, there are quite a few sources of funds out there. As you know, the federal government has stepped in. There is the CARES Act. They have $100 billion fund out there, emergency fund, and the rest is hopefully coming soon. They put in programs to get advance payments from Medicare, which pretty much every hospital that was able to do that has already done, which they will eventually have to pay back. Many hospitals are right now in the process of applying for funds from FEMA. There are some SBA programs. So there's a lot of government programs, both at the federal and state level, that they're taking advantage of to stabilize. Operationally, they're doing everything they can to control costs, but it's kind of tough because you still have to have your clinicians there to take care of the patients, you still have to run all of the departments, and you have to have your administrative staff. So it's a difficult situation for the hospitals right now.
JK 05:19 When we, the United States, start to get past this, what should hospitals focus on in terms of the recovery stage or trying to get back to something more normal?
PO 05:29 I think the first thing that the hospitals want to do is start opening it up and scheduling those elective procedures again. And I think in some places you'll see that happen sooner than later. I mean, there's a lot of places that aren't really impacted by COVID and they still had to cancel their elective procedures. So starting to open up the schedules again and starting to get those patients in, that will be a tremendous help. And you really have to be revamping their departments to get up and ready to take care of those patients. I think part of the other problem will be, even if the hospitals are ready to take them in, will the patients be ready to come back? And the patients are a little leery of going into a hospital right now if they don't absolutely have to. So they need to be ready. They need to get those schedules filled up and get their physicians back working again to hopefully get to some semblance of normal.
JK 06:26 Yes, we can only hope that we can get back to something more normal sooner rather than later. What should businesses be assuming about cash flow, about planning? What are sort of the top things that they need to be considering here on the financial side of their business?
HM 06:42 Well, the one thing that anyone who is looking forward and trying to figure out what their cash needs are should do, is throw out their old forecast and really double down on trying to put together a new forecast dealing with the realities that they're facing. And most of the situations that we get into as a restructuring group, they're providers that have issues with management and issues with liquidity anyway, and this will just exacerbate that. So a lot of what we're doing now is we're providing cash forecasts and determining to what extent there is a hole in liquidity. How much money will be needed to get to the end of the year, for example. And then addressing that hole by dealing with, initially, self-help, because no one's going to want to work with anybody who doesn't execute self-help in the first place, and those are the standard things that you do to enhance liquidity, stretching vendors. In this case, there's a lot of not paying rent out there right now and people are getting away with it, unlike times in the past.
HM 08:01 We also work very closely with our performance improvement group—Paul’s group—on every healthcare provider engagement because there's a lot of things that they do from a self-help basis that extend the liquidity runway. For example, revenue cycle management. A lot of management teams get a little fat and happy and are not as disciplined as they should be when it comes to collecting their receivables. And also properly coding and all those types of things, dealing with denials going through the rough and tumble of dealing with payers. The other thing that impacts short-term liquidity is staffing changes, portfolio management, shutting down services if that is what is necessary. In this environment if you're not doing elective surgeries and things like that, there may be entire floors of hospitals that go dark trying to preserve liquidity. When it will end? Who knows.
JK 09:00 You raise a somewhat of a difficult question there. I mean, are there specific things to think about with regard to layoffs, furloughs? Are there any tips for that area as well?
HM 09:10 Well, there are ways to reduce staffing on an FTE basis that may or may not include wholesale layoffs or furloughs, but those are nipping around the margins. I think right now the best thing a management team can do is be very, very decisive, communicate extensively with management and union leadership, and with the doctors in a hospital and any other clinicians to try to make that as easy as possible. But, unfortunately, in this environment when you have empty beds there will be layoffs because cash on hand begins to deteriorate. And if this continues to go on, to Paul's point, people are afraid to go into the hospital, this could be a real long haul for folks.
JK 10:01 Yeah, I'll kind of bring it around to a bit of a wrap-up question for you as well similar to with Paul, which is when we get past this, how should managers unwind all this – deferrals, bringing back workforce, maybe they haven't paid vendors, maybe they are behind on debt—I mean is there a priority for reestablishing order in your mind?
HM 10:25 Yeah, ultimately your need for your ability to remain liquid will drive the decisions that you're making with regard to how to re-staff your facilities, re-staff your units, and those types of things. From my perspective—and I'll leave that type of thing to Paul—but from the financial perspective, right now provides a unique chance to have patience by landlords, vendors, and lenders because they don't have any good options. What we are seeing in the marketplace right now is folks in those categories that are usually very aggressive being extremely patient: one, no one knows what's going on, but two, they don't have any good options. There aren't a lot of transactions going on out there. There's no one that's going to save them. So they're really looking inward to try to figure out how to navigate through this situation and they're actually providing extra cash, or not enforcing collections, and those types of things. But operationally I'll defer to Paul on how to re-staff a facility.
PO 11:39 Yeah, thanks Haywood. I think for the majority of the hospitals that their hospitals are not full. They're lucky if they're fifty-percent full. As that volume starts to come back, and if they have furloughed employees, or laid employees off, they need to start to bring them back. But it also offers a great opportunity to really kind of reorganize the organization. As things start to come back, start to get their service lines up and running again, and they have furloughed a lot of employees, or laid off a lot of employees, they'll need to obviously start bringing them back. This will also offer them great opportunity to really restructure the organization and reorganize it to be more efficient and to be more effective.
PO 12:26 There are some good things I think that will come out of this in the long run. Just a couple of them to mention would be the usage of telehealth. We've been trying to get telehealth to work for years. There’s been struggles with adapting it through the payers and so forth. I think that these organizations will really hard wire telehealth and be big users of that, which I think will bring down the cost of healthcare in many parts. The other thing is uses of mid-level providers. I think that will continue to expand and has kind of forced payers in hospitals and so forth to leverage more on the clinical side. I think it'll be a bit of a heavy lift to get back to normal, but people are going to have to get there and try to move as quick as possible.
JK 13:15 I'm the public policy person here, so I think we're going to have some public policy commentary as well. And Paul is going to take over the questioning role as I come in to answer.
PO 13:26 Yeah, thanks, John. As we know, the federal government has made significant emergency funds available to healthcare providers. So maybe you could talk a little bit about what these funds are and how the organizations can access these funds and maximize their use.
JK 13:42 Sure. And there are multiple provisions in the legislation that's been passed that go to individuals and businesses of all kind, but I'll focus somewhat more on the healthcare ones, some of which have been mentioned by both Paul and Haywood in their comments. First of all, there's an advanced payment program. So this is for providers to take either in the case of non-hospital providers one quarter, 90 days of advanced Medicare payments. Hospitals can take up to six months. They have some options on how long they can delay starting the payback and then the duration of the payback could be up to almost two years for hospitals to pay it all back. The government has reported that over 60 billion of those advance payments have already been dispersed. Again those are effectively alone.
JK 14:32 There's a hundred-billion-dollar fund which is giving out money that is not a loan, it's a grant. Thirty billion has been dispersed from that fund already based on Medicare fee-for-service billing. It's our understanding another thirty billion could be coming as early as this week, more targeted to Medicaid providers, and providers that have a heavier exposure to Medicare Advantage. That would leave another forty billion in reserve. Again, it's my understanding from some staff at HHS that they're going to try to target that more to areas of greater COVID activity, but I think we'll wait and see the details on that.
JK 15:09 This has been mentioned and there's a small business loan program under 500 employees. It starts out as a loan, it can become a grant. It can become a forgiven loan if the borrower meets certain conditions such as maintaining payroll. There's a larger business program for the 500 to 10,000 employees that's being operated by the Treasury Department. Doesn't seem to be quite as applicable to healthcare. I think it's going to be more targeted industries such as transportation. But I think for major healthcare systems there could be a possibility to tap that as well.
JK 15:43 There is the state and local money that I think Paul has referenced and FEMA as well, which nonprofit hospitals are eligible for. And then the state and local grants are essentially controlled by state and local governments, but certainly could be an opportunity for a hospital system to go to those levels of government and receive some assistance as well.
PO 16:04 Kind of a follow-up question to that. Will there be another round of legislation from Congress aimed at addressing the COVID issues? I know the hospitals are very happy for it and it's been very beneficial for what they've been able to receive so far, but if there's more, what shape do you see those taking?
JK 16:22 There was a desire to add additional funds to the hundred billion that's focused specifically on healthcare providers. I know the Department of HHS expects Congress to add more money to that. If it goes beyond just adding money, I think it depends on the trajectory of the epidemic. If we see evidence that it's reducing in terms of the rate and magnitude of infection and hospitalizations, then Congress would be more likely to confine themselves to just making sure there's enough money in the existing structures. If it seems to be continuing at a high level or even accelerating, or re-accelerating then I think they could build additional programs for say, nursing facilities, or labs, or something for physician practices beyond 100 billion. But, that would only occur if we don't see some lessening of the disease's trajectory.
PO 16:53 Follow-up question on the advance payments for Medicare: Those were made as loans to be paid back. Is there any chance that they may forgive those advance payments?
JK 17:04 I do think there is a chance. It would have the effect of just adding more money to the fund, right? If you simply forgave some or all of the borrowed money perhaps with some conditions on it such as maintaining payroll or at least give providers an option around that. So I think that's definitely a possibility. Some hospital trade associations have raised that idea. I think it's quite possible that that could become part of a discussion in May.
PO 17:31 So, John, what are the long-term policy impacts of the COVID response? For instance, how will the 2021 rule making for Medicare be affected?
JK 17:40 Yeah, it's very interesting, we've been getting a ton of questions about the long-term implications. I can point to three that I suppose I could weigh on the positive side, if there are positive elements to this situation, which is that we've had an extraordinary acceleration of the use of telehealth. And it's really more than telehealth; it's portals, remote monitoring. It doesn't all have to be video, voice. Already an area of developing policy. Medicare had been adopting a lot of new permissive policies around these areas, but we've had sort of a wholesale expansion of that—waivers of requirements—and I don't think that will ever be put back in the bottle. We've had a huge nationwide test of the capabilities of these new technologies and they've proven effective and so I think we're going to continue to keep a lot of this increased use of remote or telephonic delivery of healthcare.
JK 18:37 Maybe not as likely to stay permanently, but interesting has been restrictions on the scope of practice. So allowing nurse practitioners, or physician's assistants, to do more; pharmacists to do more, order tests; doctors practicing outside of their specialty or across state lines. There has been a considerable expansion in that area as well. Not as confident that that will all stay in place. I think there's been a vested interest that will want to return to the status quo. Also, more of those rules are now at the state level and are actually set in statute. So in the absence of a temporary waiver, or some sort of a temporary policy it'll sort of fall back to the status quo.
JK 19:19 But third, an interesting development that I do think will stay somewhat more is expedited FDA action. There's long been tension around whether FDA should approve things more quickly, or be more concerned about efficacy and safety in this crisis. They've obviously approved a number of things quite quickly and so I think it is, like it's kind of a test of the concept of being quicker and so far has been a positive that they've been quicker.
JK 19:46 My last point—and this is really a bit more on the negative side—is I think the nursing facility industry, which was already under some duress—changes in clinical practices, demographic forces, changes in government payment programs—had already been lessening the demand for nursing facilities and now the disease has taken a particular toll on the frail and elderly and has had particularly concentrated effects in facilities. And so I think that will be an additional long-term negative, both in terms of reduced volume; again, simply people and payers will try to avoid utilization, but also on the possibility of increasing operating costs. If regulators require a more robust ability to respond to things like pandemics, on the operator side it could add to costs. So they could have a bit of a squeeze from both ends in the skilled nursing and in the long-term care nursing facility industry from this, somewhat sadly.
PO 20:50 Thanks John. Always love to hear from you the latest that's coming out of Capitol Hill. Thanks, Haywood.
JK 21:56 Thanks for asking those questions, Paul. Thank you for your thoughtful insights as well, and Haywood's comments were great. Also, I hope our audience found them useful. I certainly found them interesting.
HM 21:06 Yeah, thanks a lot, guys. These things are informative for the rest of us as well since everything is just on a day-to-day basis right now.
JK 21:14 Thank you, everyone, for listening and stay well and safe.
MW 21:19 [music] This ThinkSet podcast is brought to you by BRG. You can subscribe to the podcast and access other content from ThinkSet magazine by going to thinksetmag.com. Don't forget to rate and review the show on iTunes as well. I'm Michael Whalen, thanks for listening.
MW 21:41 The views and opinions expressed in this podcast are those of the participants and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, or its other employees and affiliates.