Most, if not all, healthcare systems in the U.S. have experienced some financial impact from the COVID-19 pandemic. Many health systems were already operating with thin margins1, and now face additional pressure from the global health crisis, like growing liabilities and reduced cash flow. Looking long-term, implications are more far-reaching, potentially impacting hospital credit ratings and challenging the view of the healthcare sector as “recession-proof.” So where are systems being hit hardest?
- Revenue and expense: Revenues are down, largely due to the cancellation of elective procedures and patients deferring care due to the risks of COVID-19. Couple that with an accelerated shift to Medicaid from private insurance as a result of unemployment. Medicaid reimburses providers at a lower rate than private insurers, further cutting into healthcare finances. At the same time, expenses have increased due to a number of factors, including the volume and cost of treating COVID-19 patients, supply chain disruption and unexpected labor costs.
- Liquidity and cash flow: Market volatility and a COVID-induced market downturn may be correlated with further hospital revenue declines and margin reductions. The combination of compressed operating margins and greater operating uncertainty make the long-term investment portfolio and its allocation increasingly critical. As a result, it’s important for healthcare systems to perform a detailed analysis of their current and future liquidity needs, and the sources of funding to meet those needs. Sources may include external liquidity, (lines of credit and other loan options), or existing assets (long-term investment portfolio or other asset pools). Liquidity analysis is a direct input to developing the appropriate risk tolerance for a system to achieve its financial objectives and adequately fund operations. Once a liquidity profile and risk appetite are established, the system can re-evaluate its sources of liquidity to determine the best strategy to satisfy operating needs.
The AHA estimates a total financial impact of $323.1 billion in losses for America’s hospitals and health systems, or an average of $50.7 billion per month from March through June.2
How to stay ahead of the coming challenges
One approach health systems can employ to support their fiscal health is through strategic asset allocation that incorporates enterprise risk management (ERM) principles. Establish liquidity requirements and risk tolerance to take a wider view of the total investment picture. This can determine whether or not their investment pools support the overall financial objectives of the organization. Incorporating ERM principles into this process pushes beyond an asset-only approach to closely link organizational strategy, operations, finance and treasury. With the financial pressure created by COVID-19, an asset-only approach has become even more inadequate in addressing the needs of health systems. Instead, an approach that looks at the impact of financial and operational risks across the organization is required to maintain the financial health of many systems.
The big picture
If healthcare systems don’t invest the time now to address these short-term challenges, they could potentially develop into longer-term impacts. The long-term implications are not only for individual systems, but for the healthcare sector as a whole. Historically, healthcare has been viewed as "recession-proof"3 due to the consistent demand for its services by patients. But now, patients are cancelling elective procedures and deferring care due to COVID-19. On top of that, an overreliance on private insurance reimbursement is leading to deficits in liquidity and cash flow adding to the financial pressure.
Even once the risks of COVID-19 are alleviated, patients may not be rushing back to care immediately. Many may still face unemployment, which could mean the loss of health insurance or reliance on Medicaid/public plans for coverage (and lower reimbursement for care providers). For those who do maintain employer-sponsored health insurance, many employers are shifting to high-deductible plans to control their own costs, stoking fear among patients that they may end up with surprise medical bills and thus are less likely to seek care. The path and pace to a “normalized” operating environment is unclear. These factors have converged to cast doubt on whether healthcare demand remains as inelastic as it has been in the past, and if not, raises the question of how health systems will adapt to the changing landscape to remain solvent.
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1 "The Effect of COVID-19 on Hospital Financial Health," American Hospital Association, aha.org.
2 "New AHA Report Finds Losses Deepen for Hospitals and Health Systems Due to COVID-19,” American Hospital Association, aha.org. June 2020.
3 "Are U.S. Hospitals Still “Recession-proof?,” New England Journal of Medicine. nejm.org.
Information provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company.
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