Over the past year, headlines have focused on the toll Covid-19 is taking on healthcare workers, providers and, most importantly, patients. Behind the scenes, many health officials focused on another significant impact with potentially long-term consequences: Many hospitals and providers face significant operating losses as elective procedures and outpatient visits have been postponed or delayed in the past year.
This reality is especially true for community and rural hospitals, some of which will need the advice of outside professionals to navigate insolvency and bankruptcy to survive. For example, before Covid-19, more than a quarter of rural hospitals faced a risk of closure due to persistent financial losses and low or no financial reserves – and Covid-19 likely made matters worse due to the increase in costs and decrease in patients. volume, according to a recent article in Becker’s Hospital Review.
While financial hardship is common for many businesses, community and rural hospitals face unique challenges that their outside legal and business advisers should consider.
Voluntary governance. Volunteer administrators are often invited to serve on a board because of their fundraising prowess, notoriety in the community, or other reasons unrelated to health care. In the right times, with a strong management team, it can work well. However, it can disadvantage these directors and their organizations in times of financial instability.
Inexperienced management. Senior management may be skilled at balancing financial demands under normal circumstances, but may not have the experience of doing so in times of economic distress. At the same time, management may have to cope with these challenges without a board of directors familiar with restructuring healthcare. This inexperience may force management to seek outside help to develop restructuring plans and necessary changes.
An evolving business model. Community and rural hospitals have historically built their business models trying to ‘be all for all’, which means they often try to provide a wide variety of services to provide their community with as many local options as possible. However, this model may no longer be viable and some community and rural hospitals may be vulnerable to competition from private or private outpatient sites that can provide some services at lower cost and with better access.
Recommendations for change
In light of this, professionals counseling community or rural hospitals should consider whether it is appropriate to now make some or all of the following recommendations to clients.
- Strengthen governance and consider adding a new director with expertise in financial oversight. At the same time, current board members need to ensure that they understand current financial reports to know the viability of their organization. These efforts will help guide directors in carrying out their fiduciary duties and in considering the charitable mission of the organization.
- Organizations should consider a review of service lines to identify areas of growth or contraction. Continuing to “be all for all” can jeopardize health care “for all” if existing service lines are not cost-effective or provided in an unsafe manner on a daily basis.
- Focus on staffing and supporting staff. In the current circumstances, it is essential to retain a quality staff and to ensure that they have the personal protections and tools necessary for their work. Additionally, organizations should remember that employees need downtime to recover from the impact of Covid-19. The use of creative recruitment and different staffing models (for exampleproviders, midwives, and midwives) can help provide coverage and protect patients.
- Evaluate long-term strategic relationships with other suppliers. These relationships can range from affiliations and clinical partnerships to alternative structures to provide healthcare services, operational alliances or a transaction to create a unified system. Once the board has chosen a strategic path, review all the processes available to achieve the goal, including judicial and extrajudicial restructurings to facilitate an asset sale or clean up a balance sheet.
There is no doubt that there are costs associated with these actions. However, during a time of financial distress, prioritizing spending and developing a survival strategy becomes the top priority. There is no reason to “rush” to complete a large capital project if there are questions about the viability of the organization.
In other words, just as eliminating unnecessary costs is essential, it is also essential to engage in a careful process of determining what is essential in the first place and how to protect it.
Finally, throughout any period of financial distress, management should ensure that communications with employees, commercial creditors and lenders are clear and concise with expectations set at a realistic level. Failure to meet expectations can cause parties to lose confidence in the direction of the organization or to take action to protect their financial interests. Such actions can accelerate instability and crisis.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
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Mark E. Toney is Senior Managing Director at ToneyKorf Partners LLC. He specializes in crisis and transition management, operational reorganizations, financial revitalizations, corporate turnarounds and corporate governance.
Andrew Helman is a partner in the Restructuring, Insolvency & Bankruptcy group and Distressed Healthcare group at Dentons Bingham Greenebaum. He focuses on bankruptcy and insolvency issues and works with all types of businesses, including those in the healthcare industry.