The current economic downturn is causing severe challenges for hospitals and health systems across the country. With inflationary pressures and historical rate increases, organizations continue to grapple with increasing expenses and falling overall margins. Based on a recent research survey report from healthcare analytics company Strata Decision Technology, the median operating margin for surveyed hospitals in 2022 is 4.6 percent, representing a sizable 3.3 percent drop from 2021†.
Pressure on margins is being applied in a variety of ways. Surveys of health system executives conducted in 2022 have uncovered various systemic challenges, including staffing shortages, labor costs, high supply costs, and reimbursement concerns‡.
To manage liquidity and maintain a healthy balance sheet, it is essential healthcare leadership teams understand how balance sheets can remain healthy during challenging times. This article will explore the top three challenges healthcare organizations face today regarding liquidity and provide actionable insights on maintaining liquidity during these difficult times.
Challenge 1: Balancing the unpredictability of healthcare income and expenses
The uncertain balance of income and expenses, especially in this late stage of the pandemic, is one of the main headwinds that organizations face during this downturn.
The economics of the situation continue to evolve. Since the initial phases of the COVID-19 pandemic, caseloads and demand for care have created a historic labor shortage. Many organizations continue struggling to meet this demand, opening the door for a massive expansion in the contract labor market. In the first quarter of 2022 alone, the median wage rate for contract nurses increased to over three times that of employed nurses§. This trend has also extended to locum tenens physicians, with organizations scrambling to cover the costs.
Strategies to consider:
Focus on the fundamentals of maintaining reliable debt measures, diversified revenue streams, and efficient operations.
Each of these elements is key to weathering an economic downturn's effects. By focusing on these critical tenants, healthcare organizations can help maintain their financial stability and continue providing quality patient care.
Health systems often rely on investment income through foundation or endowment funds. Organizations need to be flexible in their asset allocation strategy in today's volatile market environment to minimize risks. Consider revisiting this strategy with your investment partners to reflect today's market risks.
Establish and maintain lines of credit and good relationships with lenders. Credit availability for a rainy day or for a critical project representing substantial revenue impacts can provide flexibility to ensure your organization remains on track.
Expanding telehealth services provides cost-effective ways to deliver patient care, especially in rural areas. Learning more about the potential benefits of building on and investing in telehealth capabilities should be front and center for any organization. A 2022 JD Power survey indicates that 94% of surveyed patients and their families who received telehealth medical services in the past year say they “definitely will” or “probably will” use telehealth to receive medical services in the future¶. Telehealth is popular with patients and can lower the cost of care for providers. Telehealth helps reduce expenses by eliminating the need for travel, overnight stays, and reliance on labor costs-- improving overall margins.
Another way to potentially reduce expenses is to negotiate better prices with suppliers. This can be done by working with group purchasing organizations (GPOs) or conducting a reverse auction. In a reverse auction, suppliers compete against each other to provide the lowest price for goods or services. This auction format can be used for various items, including medical supplies and pharmaceuticals.
Challenge 2: Difficulties in leveraging technology to improve liquidity management
The mandate for using technology in healthcare continues to be a battle. Between coding challenges, inconsistent reimbursement from payers, and revenue cycle management (RCM) labor challenges, the CFO has no shortage of difficult decisions in today's environment.
The effective use of technology can help health systems and physicians' practices manage liquidity and improve cash flow during an economic downturn.
Strategies to consider:
Electronic health records (EHRs) and other supporting digital tools can help reduce the cost of care by improving efficiency and accuracy. Consider AI-backed revenue cycle management tools that interface directly with your EHR for coding and billing, as this approach can reduce labor costs and improve accuracy.
A recent research report concurred with the benefits of some level of RCM automation. A National Association of Healthcare Revenue Integrity (NAHRI) 2022 report revealed that 85% of respondents saw a positive effect from automation of certain functions, for example, charges and claims edit management≠.
Revenue cycle management teams within healthcare have seen a significant staffing shortage in recent years. The Healthcare Financial Management Association’s (HFMA) recent Pulse Survey of CFOs and senior revenue cycle leaders uncovered that entry level revenue cycle positions within their organizations take on average 84 days to fill at a cost of $2,167 per position, with mid-level positions taking 153 days and $3,581 per positionⱢ. These significant costs, along with a competitive labor landscape have presented a significant challenge to organizations.
Consider partnering with your human resources team to expand your recruitment field to be nationwide. Health systems are increasingly embracing remote working situations. Departments can enhance their capabilities and staff experienced resources to support and improve revenue cycle efficiencies.
Operational efficiencies are also an important area of opportunity. Examine every step in your revenue cycle process, from care to billing to payment.
"Take the time to understand your current processes and look for opportunities to automate and optimize using technology," says John Langenderfer, Senior Vice President and Managing Director of Healthcare Banking with Huntington. "With the current healthcare environment, it's more important than ever for organizations in this space to have tight controls in place to provide greater insight into their revenues and cash flows."
Streamlining these operations and processes can result in more revenue and a better patient experience. One example is for patients to be given the option to pay their bills online or through a mobile app, which helps reduce administrative costs while simplifying the payment process for patients.
Challenge 3: Achieving complete visibility into the revenue cycle
Often, organizations fall into the habit of continuing old processes or practices that could be influencing the balance sheet and cash flow in a big way. The complexity of billings and revenue streams for providers has never been greater. Seeing the whole picture represents a significant challenge for senior executives, which can be substantial in challenging economic times.
Strategies to consider:
Consider conducting a revenue cycle audit. An external revenue cycle audit can also help to improve cash flow by ensuring that all payments are collected promptly, while limiting the number of claim denials. By taking these measures, healthcare organizations can be better prepared to weather the effects of an economic downturn and maintain financial stability.
Revenue cycle audits will also help identify errors and inefficiencies in the billing and collections process. Audits can be conducted by internal team members or external third parties and should become a commonplace exercise for healthcare organizations in the current environment.
Items covered in a revenue cycle audit can include:
- Checks on authorizations and referrals
- Insurance verification and assignment
- Charging reports
- Claims submission
- Accounts receivable
- Payments and adjustments
"Make sure you are considering all potential technology available to you to help maximize your revenue," says Langenderfer.