Category Archives: Restructure

The Balance Sheet Bridge

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https://www.kaufmanhall.com/insights/blog/balance-sheet-bridge

Current Funding Environment

The healthcare financings that came in the past couple of weeks generally did well. Maturities seemed to do better than put bonds, and it remains important to pay attention to couponing and how best to navigate a challenging yield curve. But these are episodic indicators rather than trends, given that the scale of issuance remains muted. Other capital markets—like real estate—are becoming more active and offer competitive funding and different credit considerations relative to debt market options. Credit management continues to be the main driver of low external capital formation, but those looking for outside funding should spend time up front considering the full array of channels and structures.

This Part of the Crisis

And now it’s official. After JPMorgan acquired First Republic Bank—with a whole lot of help from the Federal Deposit Insurance Corporation—CEO Jamie Dimon declared, “this part of the crisis is over.” Not sure regional bank shareholders would agree, but from Mr. Dimon’s perspective the biggest bank got bigger, which made it a good day.

Last week the Federal Reserve raised rates another 25 basis points and the expectation (hope) seems to be that the Fed has reached the peak of its tightening cycle or will at least pause to see if constrictive forces like higher rates and regional bank balance sheet deflation slow activity enough to bring inflation back to the 2.0% Fed target. Assuming this is a pause point, it makes sense to check in on a few economic and market indicators.

Inflation is improving, although it remains well above the Fed’s 2.0% target range, and there are other indicators (like labor participation and unemployment) that have recovered some of the ground lost in 2020. But the weird part remains that this all seems quite civilized. To some, the Treasury curve spread continues to suggest a recession is looming, but in my neighborhood workers are still in short supply, restaurants are busy, and contractors are booked well into the future. Today’s ~3.36% 10-year Treasury rate is less than 100 basis points higher than the average since the start of the Fed interventionist era in 2008 and a whopping 257 basis points lower than the average since 1965. Think about how much capital has been raised in market environments much worse than now (including most of the modern-day healthcare inpatient infrastructure). Again, the main culprit in retarded capital formation is institutional credit management concerns rather than the funding environment.

The major fallout from the Fed’s recent anti-inflation efforts seems concentrated with financial intermediaries rather than consumers (or workers), and the financial intermediary stress the Fed is relying on to help curb economic activity is grounded in their own balance sheet management decisions rather than deteriorating loan portfolios. We’ve looked at this before, but it bears repeating that in the “great inflation” of the 1970s, the Chicago Fed’s Financial Conditions Index reached its highest recorded points (higher means tighter than average conditions) and in this most recent inflationary cycle, that same index has remained consistently accommodative. Can you wring inflation out of a system while retaining relatively accommodative financial conditions? Which begs the question of whether any Fed pause is more about shifting priorities: downgrading the inflation fight in favor of moderating the financial intermediary threat? We might be living a remake of the 1970s version of stubborn inflation, which means that all the attendant issues—rolling volatility across operations, financing, and investing—might be sticking around as well.

Meanwhile, somewhere out in the Atlantic the debt ceiling storm is forming. Who knows whether it will make landfall as a storm or a hurricane, but it does remind us that the operative portion of the Jamie Dimon quote noted above is this part of the crisis is over. The next part of the long saga that is about us climbing out of a deep fiscal and monetary hole will roll in and new variations of the same central challenge will emerge for healthcare leaders.

A Healthcare Makeover

Ken Kaufman has been advancing the idea that healthcare needs a “makeover” to align with post-COVID realities. Look for a piece from him on this soon, but the thesis is that reverting to a 2019 world isn’t going to happen, which means that restructuring is the only option. The most recent National Hospital Flash Report suggests improving margins, but they remain well below historical norms and the labor part of the expense equation is structurally higher. Where we are is not sustainable and waiting for a reversion is a rapidly decaying option.

My contribution to Ken’s argument is to reemphasize that balance sheet is the essential (only) bridge between here and a restructured sector and the journey is going to require very careful planning about how to size, position, and deploy liquidity, leverage, and investments. Of course, the central focus will be on how to reposition operations. But if organic cash generation remains anemic, the gap will be filled by either weakening the balance sheet (drawing down reserves, adding leverage, or adopting more aggressive asset allocation) or by partnering with organizations that have the necessary resources.

Organizations reach the point of greatest enterprise risk when the scale of operating challenges outstrips the scale of balance sheet resources. Missteps are manageable when the imbalance is the product of rapid growth but not when it is the result of deflating resources. If the core imperative is to remake operations, the co-equal imperative is continuously repositioning the balance sheet to carry you from here to whatever defines success.

Trinity Health to combine ministries, restructure leadership on West Coast

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https://www.beckershospitalreview.com/strategy/trinity-health-to-combine-ministries-restructure-leadership-on-west-coast.html?origin=CFOE&utm_source=CFOE&utm_medium=email&utm_content=newsletter&oly_enc_id=2893H2397267F7G

Livonia, Mich.-based Trinity Health is restructuring leadership on the West Coast as it combines Saint Agnes Medical Center in California and Saint Alphonsus Health System in Idaho and Oregon into one regional ministry, according to a statement shared with Becker’s May 4. 

Trinity Health said the combination will allow these ministries “to streamline management and decision-making, reduce administrative costs and improve overall operating performance.” 

The ministries will keep their names, and the boards of directors for each ministry will remain separate, the health system said. There will also be leadership changes.

Nancy Hollingsworth, MSN, RN, will retire as president and CEO of Fresno, Calif.-based Saint Agnes, effective May 26. Odette Bolano, BSN, president and CEO of Boise, Idaho-based Saint Alphonsus, will become president and CEO of the new regional entity. Additionally, David Spivey will join Saint Agnes as interim president and market leader.

This is a natural progression, as several services have already been consolidated between Saint Agnes and Saint Alphonsus, Trinity Health said.

The health system has also merged ministries in other regions, including Michigan, Indiana, Illinois, Iowa and New York.

Trinity Health has 123,000 employees in 26 states, according to its website. 

Razor-thin hospital margins become the new normal

Posted on by • Posted in Financial Distress, Financial Goals, Financial Instability, Financial Performance, Financial Stewardship, Financial Viability, Financially Distressed, Health System, Hospital, Hospital Industry, Leadership, Operating Expense Reduction, Operating Expenses, Operating Income, Operating Margin, Operating Metrics, Operating Performance, Operating Revenue, Restructure • Leave a comment
https://www.beckershospitalreview.com/finance/razor-thin-hospital-margins-become-the-new-normal.html?origin=CFOE&utm_source=CFOE&utm_medium=email&utm_content=newsletter&oly_enc_id=2893H2397267F7G

Hospital finances are starting to stabilize as razor-thin margins become the new normal, according to Kaufman Hall’s latest “National Flash Hospital Report,” which is based on data from more than 900 hospitals.

External economic factors including labor shortages, higher material expenses and patients increasingly seeking care outside of inpatient settings are affecting hospital finances, with the high level of fluctuation that margins experienced since 2020 beginning to subside.

Hospitals’ median year-to-date operating margin was -1.1 percent in February, down from -0.8 percent in January, according to the report. Despite the slight dip, February marked the eight month in which the variation in month-to-month margins decreased relative to the last three years. 

“After years of erratic fluctuations, over the last several months we are beginning to see trends emerge in the factors that affect hospital finances like labor costs, goods and services expenses and patient care preferences,” Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said. “In this new normal of razor thin margins, hospitals now have more reliable information to help make the necessary strategic decisions to chart a path toward financial security.”

High expenses continued to eat into hospitals’ bottom lines, with February signaling a shift from labor to goods and services as the main cost driver behind hospital expenses. Inflationary pressures increased non-labor expenses by 6 percent year over year, but labor expenses appear to be holding steady, suggesting less dependence on contract labor, according to Kaufman Hall. 

“Hospital leaders face an existential crisis as the new reality of financial performance begins to set in,” Mr. Swanson said. “2023 may turn out to be the year hospitals redefine their goals, mission, and idea of success in response to expense and revenue challenges that appear to be here for the long haul.”

Adventist Health reorganizes; executive job cuts coming

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https://www.beckershospitalreview.com/strategy/adventist-health-reorganizes-executive-job-cuts-coming.html?utm_medium=email&utm_content=newsletter

Roseville, Calif.-based Adventist Health plans to go from seven networks of care to five systemwide to reduce costs and strengthen operations, according to a Feb. 15 news release shared with Becker’s.

Under the reorganization, Adventist Health will have separate networks for Northern California, Central California, Southern California, Oregon and Hawaii.

“Reducing the number of care networks strengthens our operational structure and broadens the meaning and purpose of our network model as well as the geographical span of one Adventist Health,” Todd Hofheins, COO of Adventist Health, said in the release. “This also reduces overhead and administrative costs.”

The reorganization will result in job cuts, including reducing administration by more than $100 million.

“Our commitment to rural and urban healthcare remains steadfast, and we are expanding to other locations to invest and transform the integrated delivery of care,” Kerry Heinrich, president and CEO of Adventist Health, said in the release.

Specifically, the health system has a recently approved affiliation agreement for Mid-Columbia Medical Center in The Dalles, Ore., to join Adventist Health, the health system said. The agreement is pending final regulatory and state approvals.

Meanwhile, Adventist Health filed a Worker Adjustment and Retraining Notification Act notice with California officials Feb. 15. 

Adventist Health will eliminate job functions and positions for employees at its corporate office campus along with some remote roles, the notice states.    

Layoffs from Adventist Health began Feb. 1 and will continue into April, according to the notice. 

Adventist Health said it has provided all affected employees 60 days’ written notice of the layoff. The health system expects about 59 employees to be separated from employment with Adventist Health. 

Employees affected by the layoffs include administrative directors, directors, managers and project managers, among others.

“We recognize that these changes impact people’s lives and want to respect each affected individual,” Joyce Newmyer, chief people officer for Adventist Health, said in the health system’s release. “We will make every effort to identify other opportunities for team members impacted.”

5-hospital system exits bankruptcy with 5 new C-suite leaders

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https://www.beckershospitalreview.com/finance/five-hospital-system-exits-bankruptcy-with-5-new-c-suite-leaders.html?origin=CFOE&utm_source=CFOE&utm_medium=email&utm_content=newsletter&oly_enc_id=2893H2397267F7G

Segundo, Calif.-based Pipeline Health, now a five-hospital system, exited bankruptcy Feb. 7

Former CFO Robert Allen has replaced Andrei Soran as CEO. Mr. Allen previously served as group CEO for CHA Hollywood Presbyterian Medical Center in Los Angeles. He also held CFO positions at San Francisco-based Dignity Health and Keck Medical Center of USC, Valley Presbyterian Hospital and Sherman Oaks Hospital and Health Center, all in Los Angeles.

Four other leaders have also been appointed to executive positions:

  • Steve Blake has been promoted to CFO
  • Vince Green, MD, has returned to Pipeline as chief medical officer
  • Patrick Rafferty assumed a new role as COO for Pipeline’s Los Angeles market while also serving as CEO for Coast Plaza Hospital in Norwalk, Calif. 
  • Elaine Stephenson has been promoted to vice president for human resources

Pipeline filed for Chapter 11 bankruptcy Oct. 2, and its plan to emerge was confirmed Jan. 13. Over the last few months, the system has worked through a restructuring process that included selling two Chicago hospitals, evaluating vendor contracts, creating a business plan with realistic financial goals and securing financial agreements with key stakeholders. It now owns four hospitals in the Los Anegeles area and one in Dallas.

In a memo sent Feb. 7 to employees and affiliated physicians, Mr. Allen wrote, “Hospitals across the country face similar financial challenges. You should take great pride in knowing that our company stands on solid footing now with a clear path forward. And I am proud — and grateful — that our employees and physicians have stayed with us, keeping their focus on delivering quality patient care throughout this period of uncertainty.”

Pipeline’s path forward includes a renewed commitment to quality care and an improved workforce strategy, according to Mr. Allen. 

“That means providing the right care in the right place at the right time to every patient who comes to us and ensuring timely patient discharges,” he said in a Feb. 7 news release. “We also will focus on enhanced workforce management to care for the patients we serve and to enhance our critical relationships with our employees.”

Where CEOs need to focus in 2023—and beyond

Posted on by • Posted in Affordability, Aging Population, Behavioral Health Infrastructure, Business Model, Business Transformations, CEO, Challenge, Change Management, Change Mindset, Chaos, Competition, Costly Specialty Therapeutics, Existential Opportunity, First Mover Advantage, Focus, Growing Senior Population, High Cost Therapies, Leadership Vision, Opportunity, Outcomes, Outcomes Appropriate, Restructure, Strategic Attention, Strategic Change, Strategic Leadership, Strategy, Unmanaged Behavioral Needs • Leave a comment
https://www.advisory.com/daily-briefing/2023/02/02/radio-advisory-146?utm_source=member_db&utm_medium=email&utm_campaign=2023feb02&utm_content=member_headline_finalb_infogram_x_x_x&elq_cid=4838956&

Radio Advisory’s Rachel Woods sat down with Advisory Board‘s Aaron Mauck and Natalie Trebes to talk about where leaders need to focus their attention on longer-term industry challenges—like growing competition, behavioral health infrastructure, and finding success in value-based care.

Read a lightly edited excerpt from the interview below and download the episode for the full conversation.https://player.fireside.fm/v2/HO0EUJAe+VhuSvHlL?theme=dark

Rachel Woods: So I’ve been thinking about the last conversation that we had about what executives need to know to be prepared to be successful in 2023, and I feel like my big takeaway is that the present feels aggressively urgent. The business climate today is extraordinarily tough, there are all these disruptive forces that are changing the competitive landscape, right? That’s where we focused most of our last conversation.

But we also agreed that those were still kind of near-term problems. My question is why, if things feel like they are in such a crisis, do we need to also focus our attention on longer term challenges?

Aaron Mauck: It’s pretty clear that the business environment really isn’t sustainable as it currently stands, and there’s a tendency, of course, for all businesses to focus on the urgent and important items at the expense of the non-urgent and important items. And we have a lot of non-urgent important things that are coming on the horizon that we have to address.

Obviously, you think about the aging population. We have the baby boom reaching an age where they’re going to have multiple care needs that have to be addressed that constitute pretty significant challenges. That aging population is a central concern for all of us.

Costly specialty therapeutics that are coming down the pipeline that are going to yield great results for certain patient segments, but are going to be very expensive. Unmanaged behavioral needs, disagreements around appropriate spending. So we have lots of challenges, myriad of challenges we’re going to have to address simultaneously.

Natalie Trebes: Yeah, that’s right. And I would add that all of those things are at threshold moments where they are pivoting into becoming our real big problems that are very soon going to be the near term problems. And the environment that we talked about last time, it’s competitive chaos that’s happening right now, is actually the perfect time to be making some changes because all the challenges we’re going to talk about require really significant restructuring of how we do business. That’s hard to do when things are stable.

Woods: Yes. But I still think you’re going to get some people who disagree. And let me tell you why. I think there’s two reasons why people are going to disagree. The first reason is, again, they are dealing with not just one massive fire in front of them, but what feels like countless massive fires in front of them that’s just demanding all of their strategic attention. That was the first thing you said every executive needs to know going into this year, and maybe not know, but accept, if I’m thinking about the stages of grief.

But the second reason why I think people are going to push back is the laundry list of things that Aaron just spoke of are areas where, I’m not saying the healthcare industry shouldn’t be focused on them, but we haven’t actually made meaningful progress so far.

Is 2023 actually the year where we should start chipping away at some of those huge industry challenges? That’s where I think you’re going to get disagreement. What do you say to that?

Trebes: I think that’s fair. I think it’s partly that we have to start transforming today and organizations are going to diverge from here in terms of how they are affected. So far, we’ve been really kind of sharing the pain of a lot of these challenges, it’s bits and pieces here. We’re all having to eat a little slice of this.

I think different organizations right now, if they are careful about understanding their vulnerabilities and thinking about where they’re exposed, are going to be setting themselves up to pass along some of that to other organizations. And so this is the moment to really understand how do we collectively want to address these challenges rather than continue to try to touch as little of it as we possibly can and scrape by?

Woods: That’s interesting because it’s also probably not just preparing for where you have vulnerabilities that are going to be exposed sooner rather than later, but also where might you have a first mover advantage? That gets back to what you were talking about when it comes to the kind of competitive landscape, and there’s probably people who can use these as an opportunity for the future.

Mauck: Crises are always opportunities and even for those players across the healthcare system who have really felt like they’re boxers in the later rounds covering up under a lot of blows, there’s opportunities for them to come back and devise strategies for the long term that really yield growth.

We shouldn’t treat this as a time just of contraction. There are major opportunities even for some of the traditional incumbents if they’re approaching these challenges in the right fashion. When we think about that in terms of things like labor or care delivery models, there’s huge opportunities and when I talk with C-suites from across the sector, they recognize those opportunities. They’re thinking in the long term, they need to think in the long term if they’re going to sustain themselves. It is a time of existential crisis, but also a time for existential opportunity.

Trebes: Yeah, let’s be real, there is a big risk of being a first mover, but there is a really big opportunity in being on the forefront of designing the infrastructure and setting the table of where we want to go and designing this to work for you. Because changes have to happen, you really want to be involved in that kind of decision making.

Woods: And in the vein of acceptance, we should all accept that this isn’t going to be easy. The challenges that I think we want to focus on for the rest of this conversation are challenges that up to this point have seemed unsolvable. What are the specific areas that you think should really demand executive attention in 2023?

Trebes: Well, I think they break into a few different categories. We are having real debates about how do we decide what are appropriate outcomes in healthcare? And so the concept of measuring value and paying for value. We have to make some decisions about what trade-offs we want to make there, and how do we build in health equity into our business model and do we want to make that a reality for everyone?

Another category is all of the expensive care that we have to figure out how to deliver and finance over the coming years. So we’re talking about the already inadequate behavioral health infrastructure that’s seen a huge influx in demand.

We’re talking about what Aaron mentioned, the growing senior population, especially with boomers getting older and requiring a lot more care, and the pipeline of high-cost therapies. All of this is not what we are ready as the healthcare system as it exists today to manage appropriately in a financially sustainable way. And that’s going to be really hard for purchasers who are financing all of this.

New Jersey hospital shifts to freestanding ER after Trinity, Capital Health transaction closes

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https://www.beckershospitalreview.com/hospital-transactions-and-valuation/new-jersey-hospital-shifts-to-freestanding-er-after-trinity-capital-health-transaction-closes.html?utm_campaign=bhr&utm_source=website&utm_content=latestarticles

St. Francis Medical Center in Trenton, N.J., on Dec. 21 transitioned to a freestanding emergency room that offers various outpatient services after Capital Health acquired the hospital from Trinity Health, according to PBS affiliate WHYY.

The campus, renamed Capital Health – East Trenton, must feature a primary family health clinic and a women’s OB/GYN clinic, according to terms of the transaction. 

Other services, such as cardiac surgery, are moving to Capital Health Regional Medical Center in Trenton, where “extensive capital projects” are being planned, the health system said in a Dec. 8 news release. 

A St. Francis spokesperson told the news outlet that the hospital had been financially struggling for years. 

“St. Francis has done many great things for the Trenton community, but the current healthcare landscape has made it unsustainable,” Capital Health President and CEO Al Maghazehe said. “Without these key approvals, Trenton would have lost desperately needed healthcare services, including emergency services, behavioral health and cardiac surgery.” 

Capital Health said it has taken “a significant risk” to try and prevent a healthcare crisis for Trenton’s 90,000 residents, according to the report.

CFOs experienced in cutting costs, restructuring in high demand

Posted on by • Posted in Budget, CFO, Cost Management, Cost Reduction, Health System, Hospital, Hospital Industry, Labor Spend Management, Operating Expense Reduction, Operating Expenses, Operating Income, Operating Margin, Operating Metrics, Operating Performance, Operating Revenue, Restructure, Talent Acquisition Strategy, Talent Competition, Talent Management • Leave a comment
https://www.beckershospitalreview.com/finance/cfos-experienced-in-cutting-costs-restructuring-in-high-demand.html?utm_medium=email&utm_content=newsletter

Fall is typically a period of increased CFO turnover as hospitals and health systems begin searches for new executives for the beginning of the following year, but the pressures associated with high inflation, a projected recession and the continued effects of the pandemic have led to more churn than usual for top financial positions, The Wall Street Journal reported Oct. 23

Many economists and financial experts are expecting a recession to hit the U.S. in early- to mid-2023. This is pushing some executives to switch roles now before the labor market changes. Many healthcare organizations are also preparing for a potential economic downturn by searching for CFOs who are experienced in cutting costs or restructuring operations, according to the report.

Recession planning in healthcare is challenging because it can have both negative (payer mix, patient volume) and positive effects (decrease in labor and supply inflation) on financial performance, according to Daniel Morash, senior vice president of finance and CFO for Boston-based Brigham and Women’s Hospital.

“The best advice I would give is that hospitals need to consider recession scenarios when making long-term commitments on wage increases, capital expenditures and planning for capacity for patient access,” Mr. Morash told Becker’s Hospital Review. “Most of our focus needs to be on the acute challenges we are facing. Still, it’s important to be careful not to overreact or overcommit financially when a recession could change a number of trends we’re seeing now.”