Building Back the Balance Sheet in the Age of COVID-19

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Health systems mounted an impressive response to the COVID-19 crisis: rapidly deploying emergency response plans, reconfiguring staffing and operating models, and engaging, empowering and protecting frontline workers.

Now, providers face another crisis. Revenue losses associated with cancelling elective procedures and dramatic decreases in patient volumes, along with expenses in managing or preparing for the surge, have significantly impacted the financial stability of health systems. The implications are staggering, with a typical $1 billion health system losing as much as $1 million per day in the period prior to reactivating elective procedures.1

As hospitals and health systems face the aftermath of the initial surge, they must adapt to a fundamentally changed care delivery landscape and a reality where COVID-19 patients will need to be safely co-managed for the foreseeable future. While larger hospitals and health systems may be better positioned to weather the ongoing storm, each healthcare provider organization is faced with the question,

Health system leaders who act quickly have an opportunity to be proactive in this next phase of the crisis and build back the balance sheet. Resizing the enterprise to new volumes, restructuring costs, realigning operations and establishing the right infrastructure to support and monitor change will be required to return margin.

Those that take control now and greet this challenge with the fortitude and commitment they have demonstrated over the past few months will position themselves to emerge stronger, leaner and better positioned to serve their communities in the future.

1: Based on Chartis client experience and financial impact modeling.

Financial Recovery: The Next Challenge for Health Systems

“How will I repair the damages to my balance sheet from the past months while adapting my future operations to this ‘new normal’ in a cost-effective manner?”

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As a result of these dynamics, health system leaders should assume the financial picture for their organization will not improve automatically with volume; and a multi-pronged strategy will be required to achieve significant and rapid margin recovery.

Slow to return volumeAs healthcare systems reopen elective volume, they may find returning to pre-COVID volumes will take longer than expected and is unlikely to fill the financial gap for the year.

They will also re-enter a care delivery market where competition is intensified for key patient populations.

Payment uncertaintiesFinancial concessions and stimulus programs are likely to be insufficient to cover recent losses and come with incremental interest costs or uncertain sustainability.

Record-high unemployment will also negatively impact payor mix and associated net revenue and increase bad debt.

New Covid-19 costsAs organizations re-stock and prepare for continued or future surges, they are finding that supply costs for PPE have risen dramatically.

Providers are also contending with costs to safely care for both COVID-19 and non-COVID-19 patients, including increased COVID-19 testing, and new processes and facility layouts to ensure social distancing.

The Post-Surge Financial LandscapeWhile COVID-19’s impact has varied by region, health systems across the country face significant financial pressures in continuing to manage COVID-19 volumes and beginning to reopen for time-sensitive procedures. Several trends are playing out to various degrees by market.

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It is not a stretch to contemplate that a $1 billion revenue health system emerges from the post-COVID-19 surge as an $850 million one.

While organizations are partially closing the margin gap by resizing operations to volume — through salary reductions, furloughs and reductions in force — these measures will not be sufficient to cover the gap caused by revenue losses of ~40 percent.

For a typical $1 billion health system, as much as 20 percent of the margin gap must be closed through fundamental restructuring of the expense base.

The Financial Recovery Outlook

Illustrative $1B Organization (Financial Recovery Over Time)

AnnualNPSR($M

)

Mon

thly

Ope

ratin

gM

argi

n($

M)

Baseline Margin Resize to Volume Restructure Expense Base Recapture Volume Margin Gap NPSR

Change inDays Cash:

44 Days

Mar(4)

Apr(8)

May(7)

Jun(6)

Jul(5)

Aug(4)

Sep(3)

Oct(3)

Nov(2)

Dec(1)

Jan(1)

Feb0

Mar0

Apr0

May1

Jan1

Feb1

$1,000

$878

$2.5

($9)

($19) ($16)($14)

($12)($10)

($8) ($7) ($6)

$2.4

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Imperatives for Rapid Margin RecoveryIn addition to maintaining the health and safety of patients, providers and staff, providers must operate with three key principles in mind:

These changes will need to be hardwired into the fabric of the organization for sustainability. Taking bold action now presents an opportunity to reduce the cost while improving the quality of care.

Objectively evaluate all opportunities to improve financial performance — including those that have previously been rejected as unpopular or politically sensitive, such as right-sizing management structures, addressing underperforming assets and restructuring the physician enterprise.

Aggressively leverage economies of scale in shared administrative, support and ancillary services across the health system and the physician enterprise; leverage the power of the system in negotiating contracts with suppliers and vendors.

Unleash innovation and exploit unprecedented opportunities to transform care delivery and the supporting clinical and operating models, including the shift to virtual care and team-based care models.

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Right-size to volume

Actively manage and calibrate operating costs, including direct variable staffing costs, in line with efforts to recapture volume and grow revenue.

Restructure fixed costs

Quickly identify the most impactful opportunities to reduce fixed costs and restructure the asset base, including the provider enterprise.

Realign operations

Align operations to new volumes and optimize core processes and functions across the enterprise, positioning yourself to thrive in the future.

Execute with rigor

Establish the communications, change management, and performance measurement and monitoring infrastructure necessary to execute and sustain improvements.

A Multi-Pronged Strategy to Return to Liquidity

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Right-Size to VolumeActively manage and calibrate operating costs, including direct variable staffing costs, in line with efforts to recapture volume and grow revenue.

Create a reactivation team to approve increases in staff

Set a goal to bring staff back at 10 percent less overall costs

Require shift-specific staffing to demand models to support any increases in staffing

z Review roles and opportunities to reduce unit costs

Build daily reports to monitor productivity; align accountabilities to ensure execution

Determine capacity for COVID-19 and non-COVID-19 care (physical and staff)

Define safety protocols and guidelines

Extend and define virtual health platform

Engage with consumers and providers and communicate safe approaches to reengage in care

Develop service line activation plans

z Restore operations

z Operationalize COVID-19 innovations

z Work down backlog

z Optimize capacity

Resize Enterprise

Recapture Demand

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Restructure Fixed Costs Quickly identify the most impactful opportunities to reduce fixed costs and restructure the asset base, including the provider enterprise.

Fixed Cost Reduction LeversRestructure provider

enterprise

Deploy cost-effective, leveraged care delivery models; and reconfigure provider workforce and

compensation in line with financial requirements.

15% – 20%Net PE Margin

Streamline management structure

Size management positions and layers to leading practice; apportion

managerial responsibility; and restructure

senior administrative compensation.

10% – 20% Management Positions

Rationalize clinical programs

Reorganize underperforming clinical programs through site

of service or operational changes, and/or new

ownership/partnership models.

2% – 4%Program’s Direct

Expenses

Reduce fixed asset base

Consolidate underutilized administrative space

and practice locations; and monetize or reduce

underutilized assets.

8% – 12% Consolidated Clinics

Expense

Optimize corporate services

Consolidate select administrative and support

functions; deploy robust shared services system;

and consolidate contracts and reduce local expenses.

5% – 7%System Admin Costs

Expense

Example results from implemented tactics within each lever

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Realign Operations Align operations to new volumes and optimize core processes and functions across the enterprise, positioning yourself to thrive in the future.

Optimization Levers

Revenue cycle

Optimize the revenue cycle to improve AR,

bad debt, DNFB, denials and charge capture, and optimize vendor

portfolio.

1% – 3%Operating Margin

Access & throughput

Improve efficiency and access to care by streamlining patient flow processes and

optimizing care management.

2% – 6%Net Inpatient Revenue

Periop/procedural

Redesign policies and block schedule

while optimizing key processes and

workflows to increase efficiency.

6% – 11%Procedures & Revenue

Growth

Supply chain

Optimize vendor contracts and pricing, and address physician preference items and

drug costs.

3% – 5% Supply Chain Expense

Care models

Deploy care models that promote top-of-license practice for

physicians, APPs and RNs, and integrate

technology.

4% – 8%M/S Nursing Costs

Informatics & technology

Implement IT governance model; reduce IT software

and subscription costs; consolidate application

portfolio; and resize IT admin and support

models.

10% – 20% IT Staff Expense

Workforce management

Deploy productivity monitoring, operating review, robust position

approval, central OT management and robust float pool.

2% – 4%Operating Expenses

Example results from implemented tactics within each lever

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Execute with Rigor Establish the communications, change management and performance measurement and monitoring infrastructure necessary to execute and sustain improvements.

z Clarity in the goals and requirements for the effort;

z Focus on capabilities — the people, processes and technologies — required to operate in a new environment;

z Alignment with culture — understanding how the values and behavior of an organization are reflected in the process;

z A robust communication program that promotes bi-directional conversations and reaches all key constituencies;

z A course that is flexible to navigate the challenges and learnings along the journey yet still leads toward the identified end state;

z Calibration throughout the process, including reports and forums for review to ensure active monitoring of progress; and

z Courage to raise difficult and unpopular issues that impact achievement of outcomes.

A financial improvement effort of this scale will be uncharted territory for most healthcare provider organizations. Strong organizational alignment, robust cultural change management and enabling infrastructure will be essential to success.

Effective execution must be driven by:

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Time is of the essence. For a typical $1 billion health system, every day that goes by represents a loss of almost $1 million.1 Those organizations that rapidly mobilize the appropriate resources and bandwidth to develop and execute a comprehensive margin improvement plan can achieve 30 percent greater financial impact in 40 percent less time.1 As you launch your recovery efforts, the following considerations should be addressed to maximize results and speed to action:

1. Empower leadership to bring objectivity, balance and “realism” to a highly charged, emotional environment.

2. Thoughtfully integrate clinical and operational improvements in support of your growth strategy.

3. Deploy a robust approach to change management and engaging with your providers.

4. Take a data-driven approach to tackling tough decisions.

5. Harness the power of IT and leverage it as a tool to achieve and sustain financial improvement.

6. Employ a steadfast focus on quality and compliance to ensure safety of any changes.

7. Leverage a structured approach to communicate with all stakeholders — your staff, your providers and your community.

8. Commit the resources and attention to bring rigorous structure, process and facilitation to drive progress toward goals during this critical time.

1: Based on Chartis client experience and financial impact modeling.

Mobilizing the Recovery Effort

Achieve 30% greater financial

impact in

40%less time.1

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Authors

Pam DamskyDirector, Performance pdamsky@chartis.com

Rob GambleDirector, Performance rgamble@chartis.com

Stephanie HinesSenior Performance Practice Manager shines@chartis.com

© 2020 The Chartis Group, LLC. All rights reserved. This content draws on the research and experience of Chartis consultants and other sources. It is for general information purposes only and should not be used as a substitute for consultation with professional advisors.

About The Chartis Group

The Chartis Group® (Chartis) provides comprehensive advisory services and analytics to the healthcare industry. With an unparalleled depth of expertise in strategic planning, performance excellence, informatics and technology, and health analytics, Chartis helps leading academic medical centers, integrated delivery networks, children’s hospitals and healthcare service organizations achieve transformative results. Chartis has offices in Atlanta, Boston, Chicago, New York, Minneapolis and San Francisco. For more information, visit www.chartis.com.