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COVID-19 is forcing rural hospitals to rethink their business models

From consolidation to divestiture of assets, standalone hospitals will need a strategic plan to emerge from the pandemic intact.

Jeff Lagasse, Associate Editor

The COVID-19 pandemic continues to strain hospital staff and resources as the coronavirus' first wave experiences a surge across the country. No healthcare organization is immune to the disruption this is causing, but rural hospitals in particular have been feeling the pain.

There are many reasons why these smaller, mostly independent hospitals have been struggling to stay above water. Perhaps the most obvious is their lack of resources. While large health systems can often leverage economies of scale and build deep financial reservoirs, rural hospitals are dependent on the revenue they collect from procedures and care delivered within their four walls. With elective surgeries only now beginning to resume, and patient confidence at an all-time low, that creates undue financial pressure.

There are also other factors at play. Ryan Cochran, who leads Nashville-based Waller Law's finance and restructuring practice, said most rural hospitals were built when the emphasis was on inpatient care; industry-wide, that focus has shifted to the outpatient side. Competition also plays a role, with smaller facilities competing for business with larger, urban hospitals.

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"Standalone hospitals had difficulty competing with hospitals that were part of a system," said Cochran. "If you think about the payment mechanism for hospitals, whether it's private pay or government pay, it's really based on the average cost of delivering the care plus a small margin. And standalone hospitals, which really are most of your rural hospitals, have difficulty delivering care at an average cost."

The reason for that is because payers look at all hospitals and health systems when determining average costs. Rural hospitals simply can't match the larger systems, which can stretch their overhead across multiple hospitals, and also enjoy more purchasing and negotiating power.

Add to that the macroeconomic forces that rural hospitals need to combat. The temporary cancellation of elective surgeries has eliminated lucrative service lines for healthcare organizations large and small, but they've been the bread and butter for standalone hospitals in particular, and now the breadbox is bare.

The good news – at least for now – is that there has not yet been a significant acceleration of rural hospital closures during the pandemic. Cochran noted, however, that this is likely due to government assistance in the form of PPE loans and CARES Act relief funds.

"What I'm worried about is how hospitals respond when the government assistance either stops, or a portion of it has to be paid back," said Cochran. "I think they may find themselves more financially distressed than they were before COVID-19 hit."

FINDING SUCCESS

Due to these challenging fiscal realities, the boards at these rural, standalone hospitals have an imperative to examine their organization's finances and come up with a strategic plan – although what that plan could look like may vary wildly from hospital to hospital. Forming a plan is likely a tough order during a time when most care teams are focused on delivering care and responding to the virus surge, but with government relief still coming in, there's an opportunity to do so while their businesses are still afloat.

"The hospitals that come up with a strategic plan and are proactive will stay open, and staying open means saving jobs and opportunities in the community," said Cochran.

Consolidation is one strategy small hospitals may need to pursue to remain financially viable. Some would also do well to identify their most profitable business lines and make the decision to focus on those areas, perhaps even cutting certain business lines that have historically proven unprofitable.

"They could also focus on disease management and prevention issues to help their community," said Cochran. "They can start to manage the business using a 13-week cash flow analysis. But at the end of the day it's going to take a strong stance inside the institution that they need to identify what the community needs, identify the lines of business they're good at and can make money performing, and then create what I'll call the political will to change the business of the hospital to meet those objectives."

Consolidation could entail finding a larger system that boasts more doctors with more specialties, and working out an arrangement for those doctors to treat patients in the rural setting, either by coming to the hospital one or more days a week or simply consulting with the physicians who are already there. Either way, the expertise of a larger system's staff can be of great benefit. Meanwhile, smaller hospitals that own, say, a nursing home should consider selling that facility, or turning over management to another entity.

No matter how long COVID-19 persists, these strategies will likely be necessities for rural hospitals as they look toward the future.

"I don't think the virus alone will be the decisive factor," said Cochran. "The rural standalone hospitals that really focus on getting a strategic plan and focus on identifying how to operate in a fiscally sound manner are going to survive. Trying to do things the way they've done them in the past will only make them more financially distressed."
 

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com