Topics
More on Capital Finance

Coronavirus is impacting the financial health of nonprofit hospitals, but CFOs have some options

Revenue is tanking, while expenses are going up, as organizations prepare for big surges in coronavirus cases.

Jeff Lagasse, Associate Editor

It's no secret that the world economy is straining under the weight of the coronavirus. Virtually every sector of the economy is being affected. Hospitals are on the front lines and vulnerable to this economic disruption as they face supply chain challenges and hits to their revenue from the cancellation of elective surgeries. Nonprofit hospitals are expected to have a particularly difficult go of things as the virus continues to spread.

In a business sense, one of the hospital industry's big headaches is the effect the coronavirus is having on liquidity and investment portfolios. The effect, to put it simply, isn't very good.

Eric Jordahl, managing director at Kaufman Hall, sees the unfolding situation through the lens of the U.S. Treasury. During the first wave of the coronavirus, there was a tremendous amount of turbulence in capital markets. Global markets went haywire during the early stages of the crisis, and hospitals were hit in a number of different ways.

HIMSS20 Digital

Learn on-demand, earn credit, find products and solutions. Get Started >>

They tend to carry fairly large investment portfolios, and those took a hit, as did various other financial instruments; debt markets were basically shutting down, said Jordahl. It amounted to a total assault on balance sheets.

The Federal Reserve came in and undertook some significant efforts, basically rolling out its playbook for the 2008 financial crisis, with everybody moving out of risk assets and into U.S. treasuries, particularly shorter-duration treasuries.

"Corporate debt markets kind of went wild last week," Jordahl said. "A couple of nonprofit health financings came in last week. The tech and money markets have improved, and we expect further improvement in those in the coming weeks. That's part of the equation – it's not recovered, but it's calming down quite a bit.

"Equities continue to be pretty low," he said. "The markets themselves are calming down some and that's a good thing, but everybody has been focused on the question of liquidity. Pretty much every CFO has been focused on trying to get liquidity resources in place."

So far, the early focus has been on commercial banks, and trying to set up credit in varying amounts. But there's a pretty significant disconnect between healthcare finance and operating cash flows. The finance side of the equation is basically collapsing, so revenue is tanking while expenses are the same or going up as organizations prepare for big surges in their markets.

What that means is that hospitals, nonprofits especially, are burning through liquidity. That's likely to create some ripple effects.

"What happens to healthcare ratings, covenants, all of these different areas? A lot of that, to be honest, is to be determined by how long this goes on," Jordahl said.

THE RESPONSE

Kaufman Hall thinks the focus for hospital CFOs should be establishing solid mechanisms for forecasting revenue and expenses on a rolling basis. That's a difficult task.

"The stimulus package from the feds will help," said Jordahl. "It's trying to address some of the revenue shortfalls that are in place. How sustainable is it? I don't really know. It does vary from one organization to another. Different organizations enter into this whole equation with different levels of resources. Some have very strong balance sheets coming in, others not so much.

"This is going to be one of the real challenges for the industry – how to keep different parts of the delivery system intact when not everyone has the same level of financial resources. That's something we've never confronted before."

Many organizations went through similar hardships in 2008, but that was more a case of healthcare systems responding to problems across the banking industry. Most healthcare organizations were doing relatively well; the impact was due to fallout from their banking partners. This, of course, is a different beast entirely. The delivery system and the corporate side of healthcare is going to be stressed, and likely for some time to come.

Top of mind for healthcare CFOs should be getting their immediate potential liquidity pools in place. The second priority should be putting an infrastructure in place to do cash and liquidity forecasting. Some do this already, and have robust financial planning practices that can help them achieve it, but those strategies will have to be adopted in a broader manner across the industry, said Jordahl.

What's unknown at this point is whether the liquidity pools organizations put in place during the initial stages will be enough. Hospitals and health systems will need to know how much liquidity will be required.

"You entered in with a certain amount of liquidity," he said. "The federal stimulus is coming in and you can get a good idea of how that can help, and then you have a set of claims, which is the expense side of the equation, and rolling tracking discipline about how much rolling liquidity you need. If there's a gap between the first level of liquidity you put in place and what you'll need, you'll need plans B through Z about what other ways you might be able to raise liquidity."

The rural healthcare system will be placed under a considerable amount of stress even relative to their peers because they don't have a lot of financial resources to begin with. They also tend to have a lot of outpatient activity; electives are a big part of their revenue. If that revenue disappears, they'll likely be scrambling in order to survive.

"This is really about healthcare organizations' corporate financial resources being strained, and a very severe restriction on what keeps them going on an operating basis," said Jordahl.

Because of the sheer number of variables at play, it's near impossible to estimate how long hospitals will be dealing with all of this. That's partly because of the broader economic impacts of the coronavirus. There could be a dislocation of the healthcare economy, or huge chunks of the wider global economy – airlines, hospitality and other industries.

In that sense, it's more than just a healthcare challenge. It's a global economic challenge, and that can be dispiriting.

"We're all connected under one economy," said Jordahl. "Banks are in decent shape, but if the credit quality of the people banks have lended to starts to deteriorate, that catches up to the banks. So where does this all go? There are some pessimistic scenarios, but what the Fed has done, it's clear they're trying to move dollars into the healthcare economy, drive healthcare liquidity, and banks have been very responsive to being their liquidity resources to help organizations. I'm hopeful we can move through this."

Twitter: @JELagasse

Email the writer: jeff.lagasse@himssmedia.com