A rough year so far for health system finances

https://mailchi.mp/b1e0aa55afe5/the-weekly-gist-october-7-2022?e=d1e747d2d8

As everyone in our industry knows, sluggish volumes amid persistently rising costs, especially for labor, have sent health system margins into a downward spiral across 2022. Using the latest data from consultancy Kaufman Hall, the graphic above shows that by the end of this year, employed labor expenses will have increased more than all non-labor costs combined. 

While contract labor usage, namely travel nursing, is declining, the constant battle for nursing talent means travel nurses are still a significant expense at many hospitals. Through the first six months of this year, over half of hospitals reported a negative operating margin, and the median hospital operating margin has dropped over 100 percent from 2019. 

Larger health systems are not faring better: all five of the large, multi-regional, not-for-profit systems we’ve highlighted below saw their operating margins tumble this year, with drops ranging from three points (Kaiser Permanente) to nearly seven points (CommonSpirit Health and Providence). 

While these unfavorable cost trends have been building throughout COVID, health systems now have neither federal relief nor returns from a thriving stock market to help stabilize their deteriorating financial outlooks. 

Health system boards will tolerate negative margins in the short-term (especially given that many have months’ worth of days cash on hand), but if this situation persists into 2023, pressure for service cuts, layoffs, and restructuring will mount quickly. 

Moody’s downgrades Envision Healthcare, says bankruptcy possible

https://www.healthcarefinancenews.com/news/moodys-downgrades-envision-healthcare-says-bankruptcy-possible?mkt_tok=NDIwLVlOQS0yOTIAAAGHIoNXD3RHJX9565s0VyIQfY4Uc14busfvrByxC5bYAOaGJlhBG7u8IwXVfkB87U6Jjbirffa4zrcOIdYpH9jOgLhMCdv-mgKhDKgBYygB

Envision will see weak liquidity over the following 12 to 18 months, and its $1.4B cash reserve will likely run dry by the end of next year.

Physician staffing company Envision Healthcare is struggling financially, and these struggles are reflected in a Moody’s Investors Service credit rating downgrade, which took into account ongoing labor pressures and a decline in volumes linked to the COVID-19 pandemic.

According to Moody’s, Envision will see weak liquidity over the following 12 to 18 months, and its $1.4 billion cash reserve will likely run dry by the end of next year. Moody’s said bankruptcy or restructuring is likely in the cards, and its Corporate Family Rating (CFR) has been downgraded from C to Caa3.

The rating action follows a series of transactions including restructuring of Envision’s senior secured credit facilities, and issuing a new revolving credit facility in July 2022 and other debt in April 2022 at its subsidiary, AmSurg. Moody’s deemed Envision’s transactions to be a distressed exchange, as the loans were exchanged at a price below par. That’s a default under Moody’s definition.

Envision’s capital structure is unsustainable, the rating agency said. Recovery rates for much of the company’s debt will be low. Moody’s expects operating performance will continue to deteriorate due to ongoing labor pressures within the industry, as well as rising interest rates that will cause interest expense to nearly double. 

The refinancing has not materially reduced debt, and while the maturities have been extended, Envision remains at risk of being unable to service its debt.

WHAT’S THE IMPACT

There are some factors in play that mitigate some of the risks. Envision has considerable scale and market position as one of the largest physician staffing outsourcers in the country, said Moody’s. The company has strong product diversification within its physician staffing and ambulatory surgery center segments.

However, continuing business pressures and increased interest expense will cause Envision’s free cash flow to be significantly negative in 2022 and beyond. 

When assigning the new ratings, Moody’s considered the expected loss on the Envision debt, which the Rating Agency expects will be significant. Moody’s noted that to the extent that there is asset recovery on the Envision business, the share of proceeds to the term loans will be applied to the Envision senior secured first out term loan before the other debt. But it’s expected that there will be material losses.

The outlook is stable for both Envision and the AmSurg subsidiary. Moody’s expects the company to remain distressed and there is a heightened risk of default given the weak liquidity and risks surrounding the ongoing sustainability of the business.

THE LARGER TREND

Envision operates an extensive emergency department, hospital, anesthesiology, radiology and neonatology physician outsourcing segment. The company also operates more than 250 ambulatory surgery centers in 34 states, and is owned by private equity firm KKR. Revenues for the period ending June 30 were about $7 billion.

Although it’s unlikely in the near term, a substantial improvement in Envision’s liquidity position –  including refinancing of the existing debt – would be needed to support an upgrade. Envision would also need an improvement in its operating performance, Moody’s said.

Earlier this month, Envision filed a lawsuit against UnitedHealthcare over the insurer’s denied claims, sparking a countersuit from UHC, which claimed Envision fraudulently upcoded claims for services provided to UHC members.

UHC removed Envision from its network last year, claiming the firm’s costs did not reflect fair market rates. According to Envision’s lawsuit, UHC denied about 18% of submitted commercial claims – a number that swelled to 48% of all claims after Envision’s removal from UHC networks, the firm said. And for the highest-acuity claims, Envision is accusing UHC of denying 60% of those claims.

Meanwhile, in June, physicians at Corona Regional Medical Center and Temecula Valley Hospital in California threatened to leave the hospitals if for-profit owner Universal Health Services changes the staffing management firm to Envision, according to an emergency room doctor who heads the hospitals’ current staffing firm, Emergent Medical Associates (EMA).
Physicians objected to Envision citing concerns of lower pay and staffing levels leading to lower quality of care.

Hospitals experiencing some of the worst margins since beginning of pandemic: Kaufman Hall

https://www.fiercehealthcare.com/providers/julys-hospital-margins-were-among-worst-pandemic-kaufman-hall-says

Despite a a seventh straight month of industrywide negative margins, “hospitals and health systems must think strategically and make investments to strengthen performance toward long-term institutional goals despite the day-to-day financial challenges they experience,” Kaufman Hall’s Erik Swanson said.

Months of inching performance gains were upended in July as the nation’s hospitals logged “some of the worst margins since the beginning of the COVID-19 pandemic,” Kaufman Hall wrote in its latest industry report.

Decreasing outpatient revenues paired with pricier inpatient stays were chief among the culprits and outpaced minor improvements in expenses, the group wrote in its monthly sector update for July.

What’s more, seven straight months of negative margins “reversed any gains hospitals saw this year” and has the advisory group forecasting a brutal year for the industry.

“July was a disappointing month for hospitals and put 2022 on pace to be the worst financial year hospitals have experienced in a long time,” Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said in a statement. “Over the past few years, hospitals and health systems have been able to offset some financial hardship with federal support, but those funding sources have dried up, and hospitals’ bottom lines remain in the red.”

Kaufman Hall placed its median year-to-date operating margin index at -0.98% through July, compared to the -0.09% from January to June the group had reported during last month’s report. Hospitals’ median percent change in operating margin from June to July was -63.9%, according to the report, and -73.6% from July 2021.

The month’s volume trends hinted at the larger shift toward scheduling procedures for ambulatory settings, Kaufman Hall wrote. For instance, operating room minutes declined 10.3% from June to July and 7.7% year over year, according to the report.

Patients who did come into the hospital tended to be sicker, the firm continued. Average length of stay increased 2% from last month and 3.4% year over year. Patient days increased 2.8% from the previous month but were down 2.6% from the prior year, while adjusted discharges dipped 2.8% from June and 4.2% from July 2021.  

These trends came together as a brake check on 2022’s to-date revenue gains. Gross operating revenue fell 3.6% from June but remains up 5.5% year to date. Outpatient revenue was down 4.8% from June and maintains a 7.1% year-to-date increase. Inpatient revenue declined 0.7% from June but is still up 3.6% year to date.

The silver lining in Kaufman Hall’s report were total expenses that, although up 7.6% from July 2021, saw a modest 0.4% decline since June. Those savings came squarely among supply and drug expenses as total labor costs and labor expense per adjusted discharge still grew 0.8% and 3.5%, respectively, since June. Increases in full-time employees per adjusted occupied bed “possibly” suggest increased hiring, the group wrote in the report.

Kaufman Hall acknowledged the “urgency of day-to-day pressures” driving the month’s sudden performance dips but urged hospital leaders to prioritize long-term operational improvements as they work to keep the organization afloat.

“2022 has been, and will likely continue to be, a challenging year for hospitals and health systems, but it would not be prudent to focus on short-term solutions at the expense of long-term planning,” Swanson said. “Hospitals and health systems must think strategically and make investments to strengthen performance toward long-term institutional goals despite the day-to-day financial challenges they experience.”

Kaufman Hall’s monthly reports are based on a sample of more than 900 nationally representative hospitals.

The group isn’t alone in its doom-and-gloom warnings for providers. Fitch Ratings recently wrote that high expenses, jilted volume gains and other challenges are unlikely to resolve before the end of the year. As such, the agency downgraded its outlook for the nonprofit hospital industry from “neutral” to “deteriorating.”

Read the full report here

HOSPITALS SEE NEGATIVE MARGINS FOR SIXTH CONSECUTIVE MONTH

https://www.healthleadersmedia.com/finance/hospitals-see-negative-margins-sixth-consecutive-month

Expenses are still weighing heavily on hospitals, health systems, and physician’s practices as the cost of care continues to rise.

Hospitals, health systems, and physician’s practices are still struggling under the weight of significant financial pressure, that the rise in patient volume and revenue can’t seem to outweigh.

The increase in patient volume and revenue has not been able to offset the historically high operating margins these organizations are facing, according to data from Kaufman Hall’s National Hospital Flash Report and Physician Flash Report. Hospitals, health systems, and physician’s practices dealt with negative margins in June for the sixth consecutive month this year.

“To say that 2022 has challenged healthcare providers is an understatement,” Erik Swanson, a senior vice president of data and analytics with Kaufman Hall, said in an email report. “It’s unlikely that hospitals and health systems can undo the damage caused by the COVID-19 waves of earlier this year, especially with material and labor costs at record highs this summer.”

The median Kaufman Hall year-to-date operating margin index for hospitals was -0.09% through June, for the sixth month of cumulative negative actual operating margins. However, the median change in operating margin in June was up 30.8% compared to May, but down 49.3% from June 2021.

Hospital revenues for June continued to trend upward, even as volumes evened out, according to the Kauffman Hall data. Organizations saw a 2.1% drop in patient length of stay. Both patient days and emergency department visits each dropped by 2.6% in June when compared to May. Hospital’s gross operating revenue was up 1.2% in June from May.

Expenses have been dragging down hospital margins for months, however, June saw a slight month-over-month improvement as total hospital expenses dropped 1.3%, despite this, year-over-year expenses are still up 7.5% from June 2021. Physician practices saw a drop in provider compensation, according to the Kaufman Hall data, however, this wasn’t enough to offset expenses. The competitive labor market for healthcare support staff resulted in a new high for total direct expense per provider FTE in Q2 2022 of $619,682—up 7% from the second quarter of 2021 and 12% from the second quarter of 2020.

“Given the trends in the data, physician practices need to focus on efficiency in the second half of 2022,” Matthew Bates, managing director and Physician Enterprise service line lead with Kaufman Hall, said in the email report. “Amid historically high expenses, shifting some services away from physicians to advanced practice providers like nurse practitioners or physician assistants could help rein in the costs of treating an increased patient load while taking some of the weight off the shoulders of physicians.”

Nonprofit hospitals face mounting financial pressures: 4 things to know

Not-for-profit hospitals and healthcare systems continue to face significant operating challenges as they attempt to keep revenues on pace with escalating operating expenses fueled by inflation, according to a June 27 report from S&P.

Highlights from the report:

  • The first quarter of 2022 marked the toughest performance quarter on record for U.S. not-for-profit hospitals and health systems, highlighted by widespread inflationary pressures across the sector. 
  • High labor expenses are likely to cause sustained operating hurdles, and demands on cash flow combined with weaker investment market returns could reduce financial flexibility through the remainder of 2022 and into 2023.
  • S&P notes that higher interest costs are likely to make borrowing options more expensive. Furthermore, the re-introduction of sequestration and the likely end of the public health emergency later this year will also have to be absorbed into cash flow.
  • The regulatory environment is becoming tougher and eliminating mergers and acquisitions as an option for many providers. Given recent denials by the Federal Trade Commission and other regulatory agencies, this option may be increasingly difficult to deploy. If these denials affect organizations that are already struggling operationally, options could become increasingly limited for certain providers.

Read the full report here.

6 WAYS TO REDUCE FINANCIAL DISTRESS IN HEALTHCARE

Welcome to the second installment of Pulse on Healthcare. This month’s issue takes a look at the issues causing financial distress for healthcare organizations, and how CFOs can take action to relieve it.

According to the 2022 BDO Healthcare CFO Outlook Survey, 63% of healthcare organizations are thriving, but 34% are just surviving. And while healthcare CFOs have an optimistic outlook—82% expect to be thriving in one year—they’ll need to make changes this year if they’re going to reach their revenue goals. To prevent and solve for financial distress, CFOs need to review and address the underlying causes. Otherwise, they might find themselves falling short of expectations in the year ahead.

Here are six ways for CFOs to address financial distress:

1.      Staffing shortages: 40% of healthcare CFOs say retaining key talent will be a top workforce challenge in 2022.

How can you avoid a labor shortage? Think about increasing wages for your frontline staff, especially your nurses. You could also reconsider the benefits you’re offering and ask yourself what offerings would be attractive for your frontline staff. For example, whether you offer free childcare could mean the difference between your staff staying and walking out for another employment opportunity. Additionally, consider enhancing or simplifying processes through technology to relieve some strain from day-to-day tasks.

2.      Budget forecasting: Almost half (45%) of healthcare organizations will undergo a strategic cost reduction exercise in 2022 to meet their profitability goals.

 How else can you cut costs? One option is to adopt a zero-based approach to budgeting this year. This allows you to build your budget from the ground up and find new areas to adjust costs to free up resources. Consider some non-traditional cost reduction areas, like telecommunication or select janitorial expenses, which are overlooked year after year. Cost savings in these areas can be substantial and quick to implement.    

3.      Bond covenant violations: 42% of healthcare CFOs have defaulted on their bond or loan covenants in the past 12 months. Interestingly, 25% say they have not defaulted but are concerned they will default in the next year.

 How can you avoid violations? The first step to take is to meet with your financial advisors, especially if you are worried you’re going to default on your bond or loan covenants. You want to get their counsel before you default so you can prepare your organization and mitigate the damage. Ideally, they can help you avoid a default altogether.

4.      Supply chain strains: 84% of healthcare CFOs say supply chain disruption is a risk in 2022.

How can you mitigate these risks? Supply chain shortages are a ubiquitous problem across industries right now, but not all of the issues are within your control. Focus on what is, including assessing your supply chain costs and seeing where you can find the same or similar products for lower prices. Identifying alternative suppliers may end up saving you a lot of frustration, especially if your regular suppliers run into disruptions.

5.      Increased cost of resources: 39% of healthcare CFOs are concerned about rising material costs and expect it will pose a significant threat to their supply chain.

How can you alleviate these concerns? Price increases for the resources you purchase — including medical supplies, drugs, technology and more — could deplete your financial reserves and strain your liquidity, exacerbating your financial difficulties. You may be able to switch from physician-preferred products to other, most cost-effective products for the time being. Switching medical suppliers may even save you money in the long run. Involving clinical leadership in the process can keep physicians informed of the choices you are making and the motivation behind them.

6.      Patient volume: 39% of healthcare CFOs are making investments to improve the patient experience.

How can you satisfy your patient stakeholders? As hospitals and physician practices get closer to the new normal of care, patients are returning to procedures and check-ins they put off at the height of the pandemic. Patients want a comfortable experience that will keep them coming back, including a safe and clean atmosphere at in-person offices.

They also want access to frictionless telehealth and patient portals for those who don’t want to or can’t travel to receive care. Revisit your “Digital Front Door Strategy” and consider ways to improve and streamline it. These investments can also go toward improving health equity strategies to ensure everyone across communities is receiving the same level of care.

Is healthcare still recession-proof?

https://mailchi.mp/3390763e65bb/the-weekly-gist-june-24-2022?e=d1e747d2d8

A recent conversation with a health system CFO made us realize that a long-standing nugget of received healthcare wisdom might no longer be true. For as long as we can remember, economic observers have said that healthcare is “recession-proof”—one of those sectors of the economy that suffers least during a downturn. The idea was that people still get sick, and still need care, no matter how bad the economy gets. But this CFO shared that her system was beginning to see a slowdown in demand for non-emergent surgeries, and more sluggish outpatient volume generally.

Her hypothesis: rising inflation is putting increased pressure on household budgets, and is beginning to force consumers into tougher tradeoffs between paying for daily necessities and seeking care for health concerns. This is having a more pronounced effect than during past recessions, because we’ve shifted so much financial risk onto individuals via high deductibles and cost-sharing over the past decade.

There’s a double whammy for providers: because the current inflation problems are happening in the first half of year, most consumers are nowhere near hitting their deductibles, leading this CFO to forecast softer volumes for at least the next several months, until the usual “post-deductible spending spree” kicks in.

Combined with the tight labor market, which has increased operating costs between 15 and 20 percent, this inflation-driven drop in demand may have hospitals and health systems experiencing their own dose of recession—contrary to the old chestnut.