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FTI Journal | Critical Thinking at the Critical Time

Get Well Soon, Healthcare Providers

Get Well Soon, Healthcare Providers

It’s no secret that the uncertainty surrounding the future of the Affordable Care Act (ACA), otherwise known as Obamacare, is causing great anxiety in the healthcare market. From patients to providers to suppliers, the turmoil that comes with the continuous threat of rollback or outright repeal of the ACA by Congress is wreaking havoc across the industry.

For small to midmarket and stand-alone providers, including such entities as large medical groups, free-standing emergency rooms, urgent care facilities, physician-owned hospitals, post-acute providers and small and rural hospitals, the stress on financial wellbeing is especially critical. These entities typically operate with slim margins and depend heavily on self-pay, Medicare and Medicaid reimbursements to maintain positive cash flow. Given the possible effect reform would have on these systems, exactly how to succeed in this environment is yet to be defined. Furthermore, questions about the possible changes to the three reimbursement sources in context of whatever new program emerges are rife.

This confusion presents a major headache for a provider when it comes to planning and forecasting. As a result many are choosing to put performance improvements initiatives on hold — a serious detriment at a time when the healthcare market is emphasizing cost management tied to the efficiency of value-based care.

Trouble Up Ahead

In the years leading up to the Great Recession, bankruptcies among small, midmarket and stand-alone providers were fairly rare, averaging just eight cases annually prior to 2008. In the immediate aftermath, the number rose to almost 14 on average.1 Following the onset of the ACA in 2010, however, these entities slowly began to thrive on reimbursements derived from the approximately 20 million newly-insured and benefited as well from relatively low wage inflation and the availability of low-cost financing. By late 2015 and into 2016, with ACA enrollment peaking, the number of bankruptcies filed began to decline and return to pre-2008 levels with filings of eight and eleven respectively.

Now, squeezed by slim margins, cash flow issues and the potential loss of millions of patient reimbursements, the vulnerable may not survive. Indeed, a red flag looms on the horizon that suggests as much. Over the next two years, maturity of non-investment grade or non-rated loans within the healthcare sector2 will rise annually until reaching a veritable wall of debt during 2020; in that year, more than US$40B in debt will come due.3 Attempting to refinance or extend these maturities in an increasing interest rate environment and a potentially declining credit environment, could further stress limited liquidity.

Take These Steps Right Away

Rather than wait for resolution on the ACA and risk extinction, providers can take action now to improve viability and focus on the basics, with more emphasis on top line, concentration on cost efficient operations and purposeful strategic visioning. There are many levers that can be engaged but here are a few key ways to potentially increase cash flow and tighten operations.

Focus immediately on the revenue cycle and start with getting paid for the work you do:

  • Maximize revenue sources and achieve and sustain net revenue improvements through redesigned organizational structures, improved workflow, optimized controls and measurement systems within Patient Access, Coding and Documentation, and Patient Financial Services. This will allow you to address recurring opportunities in denial management, documentation, and bad debt management. This will stimulate increased net revenue realization, increased cash flow, decreased cost to collect, increased patient and provider satisfaction and streamlined workflow and information flow through the entire revenue cycle.
  • Healthcare is a complex business, one of the only sectors in which service is provided before you are aware of how much you will receive for your service. Therefore, of particular concern is awareness that receivables can frequently be overstated among distressed facilities.
  • Maximize collection rates through increased emphasis on large accounts, minimize work effort on small accounts by possibly outsourcing, and investigate common problems with collection with increased scrutiny on those post billing revenue cycle elements mentioned above.

Review service line and subsidiary contribution as inflow is better than outflow; in short contribution is critical:

  • Financially healthy organizations want to provide service lines that make a positive contribution margin to the organization or, at a minimum, exist so that other services can deliver such a contribution.
  • Non-contributing service lines (and payor groups) must be evaluated relative to their short-term strategic purpose, and long-term potential. Eventually, making the often difficult decision to eliminate or sell off non-core businesses is likely needed.
  • Look for operations that may have had good strategic value when first implemented but now in fact may be losing a substantial amount of money. It can be tempting to fall back on short-term thinking and stay the course far too long — even when it is financially disadvantageous.
  • Review your entire operation, from staffing and productivity levels, supply chain costs, to physician enterprise operations and overhead. Make the hard decisions with decisiveness.

Constant focus on process improvement allows providers to stay ahead of changing reimbursement environments by being lean and ready to adapt to change. Look to the intermediate and longer term; revisit who you are and that the end justifies the means:

  • Ask yourself, are existing payor contracts negotiated to your advantage and achieving the best pricing, thereby bringing value to my organization?
  • Examine demographic needs: Are you providing the appropriate care relevant to the regional population served?

Reshaping the services you provide may require engaging with main payors and allow you to get and remain ahead of the curve when it comes to necessary cost reductions. While this is always advisable, the benefits, more often than not, generally accrue more slowly.

Action Now, Payoff Later

Even those providers who feel they’ve combed through every nook-and-cranny to turn up cost savings or believe they have maximized all efficiencies, can often find other levers to pull. At other times they simply need the outside perspective of an objective source to take a bold step like shutting down a once-profitable operation, or to better understand the timing and full implications of that step.

Begin restructuring planning now as advanced planning is a gating factor between a successful turnaround, or forbid a bankruptcy and unsuccessful one. (i.e., credit renegotiation, reorganization and emergence as opposed to liquidation). In concert, look for opportunity to open discussions with potential partners, possibly larger companies and health systems that have greater financial resources and liquidity.

Finally, it’s a challenge to find the right strategy that balances immediate need for capital with long-term vision under any circumstances, let alone the uncertainty of the future of a primary funding source such as the ACA. But standing still or maintaining status quo is a risky choice in today’s competitive healthcare market. Moving aggressively now can payoff when the dust settles later.

1: Bankruptcy filings that have reported more than $50 million in total liabilities.
2: Includes health plans, healthcare providers, life-science/biotech, medical equipment and suppliers, pharmaceuticals.
3: In conducting our research for this article we investigated loans that exceeded $99 million in the healthcare related industry, and were considered non-investment grade or non-rated loans where the debt service spread is > 150 bps.

Published April 2017

© Copyright 2017. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

About The Authors

Bob Medlin
Senior Managing Director
Southwest Region Leader
Corporate Finance & Restructuring
FTI Consulting

Timothy J. Dragelin
Senior Managing Director
Corporate Finance & Restructuring
FTI Consulting

Jeff Benton
Senior Managing Director
Health Solutions
FTI Consulting

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The views expressed in this article(s) are those of the author and not necessarily those of FTI Consulting, Inc., or its professionals.
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