COVID-19 Pandemic Exposes Vulnerabilities in Healthcare Organizations (Part 1)

In the coming weeks, we will be releasing a series – of which this is the first installment – covering a topic that might seem over-done at first glance, but rest assured this is an alternative perspective on the impact of the COVID-19 pandemic on healthcare organizations. Since the quickly rising numbers of cases jumped in March 2020 and the varying degrees of “shutdowns” or “slowdowns” that have subsequently occurred, the challenges uncovered during these recent months of 2020 have been wide-ranging. As organizations attempt to navigate these challenges, one thing we can start to look at, think about, and ultimately address is the many areas of weaknesses and vulnerabilities this event has exposed.

Issues that perhaps were lurking under the surface or even gaps that were known to leaders within organizations became evident when the pandemic abruptly forced these organizations into a very unique and challenging situation. Some gaps, even if known, may have been deemed lower priority before the crisis; the acuity and severe impact of these challenges escalated dramatically in a condensed timeframe. Indeed, many weaknesses that were previously considered relatively minor grew to have major, systemic adverse effects when the pandemic thrust an unforeseen and challenging dynamic upon organizations.

We will identify and discuss some of the vulnerabilities the pandemic exposed in this series. Our team has been reviewing with our veteran consultants and clients about weak points that have emerged over the last six months. We will break these down into categories, use these lessons to learn from the past, and plan to avoid such negative consequences in the future.

Episode 1: Gaps in Financial Planning and Performance

The first category we identified from clients and feedback our consultants have received from healthcare organizations is perhaps the most obvious and, in many ways, remains very severe, and that is the financial impact and weaknesses in financial management. And while this is perhaps the most prominent and, in many ways, the most acute of challenges for healthcare entities, it is also a vast and wide-ranging category of challenges.

We should take a moment before moving on to note that clearly, the most significant challenge that hospitals and medical groups have experienced throughout these times is the clinical impact on patients whose care and health the pandemic has negatively effected. Patients with a wide range of medical needs – not just those struggling with the virus itself – have experienced significant adverse effects on their health and lives. We do not want to minimize that in any way. The purpose of this series is to focus on the various organizational weaknesses that healthcare provider entities have identified through the events related to the pandemic. While we acknowledge that such matters are not mutually exclusive from the clinical challenges that have emerged, our expertise ties to the former, and we would respectfully defer to clinical experts that can speak to the latter category.

Low Margins and Minimal Retained Earnings

With that noted, let’s look at the financial-related weaknesses exposed during the COVID-19 public health emergency (PHE). Many healthcare provider organizations operate at relatively low margins with minimal capital reserved in retained earnings derived from profits. However, this is not always the case; some health systems retain significant excess earnings each year that are reserved purposefully. But, healthcare entities that traditionally have not retained excess capital could be impacted significantly by an unforeseen event, resulting in declines to volume and revenue.

The reasons for this are an entirely separate discussion for another day, but since low margins and minimal retained earnings are normal for so many healthcare organizations, a significant negative impact on volume is going to have a substantial impact on those organizations’ financial stability during that period and beyond.

When one considers the fact that many physicians, practices, and hospitals experienced significant declines in volume (in some cases over 90-100%) for an extended period, it is not too difficult to imagine the dramatic financial impact that will have. Besides, it is not just the volume and revenue declines that impact such organizations; the expense side of their profit and loss statements did not change. So, they had to deal with dramatic declines in revenue while still obligated to pay expenses as if the revenue remained the same.

Fortunately, in most cases, the incredibly high levels of decline did not remain. However, the vast majority of provider organizations are still nowhere near their normal levels of production and volume, meaning their revenue still has not normalized. Moreover, for entities in some areas of the country, they remain at near-total stoppage levels that began six months prior in March. Although nearly all businesses (even beyond the healthcare industry) have taken dramatic steps to alleviate the burden of expenses during this time, it is not sustainable long-term. And this brings up an important point.

As of September 2020, we still are uncertain how long it will take businesses to return to some semblance of historical volume and production. That is the most critical stimulus behind the financial vulnerability for healthcare organizations. Even diligent financial management and healthy retained earnings have their limits during a crisis with an unknown endpoint.

Specialties or Service Lines with Low Margins

Another financial-related vulnerability, particularly for hospitals and health systems that operate employed physician networks, is the impact on specialties or services that traditionally have low margins. In the past, it was not uncommon for hospitals to accept these lower-margin specialties because specialties that delivered higher margins compensated for them, ultimately combining all services into an overall package of value.

However, introducing a crisis exposed how quickly those lower-margin specialties can have a significant negative ripple effect throughout a health system. In essence, the high-value services could no longer right-size the dramatic “dragging down” effect that lower-margin specialties were ultimately having system-wide. A seemingly working formula rapidly turned into a vulnerability. The systemic impact of low-margin specialties is the product of many lessons.

First of all, we saw how significantly market volatility and uncertainty negatively impact low-margin services in a health system. Uniquely, this principle is often not seen in the healthcare industry – at least not at the same levels as other industries – when dealing with recessions and economic downturns, such as the financial crisis that emerged in 2008 and continued for several years. During that downturn, many healthcare organizations continued operating as normal, as if they were “recession-proof,” which is a common term applied to healthcare services businesses. However, the market volatility resulting from the global pandemic of 2020 has, needless to say, impacted healthcare entities just as much as businesses in any other industry. In many cases, healthcare provider organizations have been affected more severely than in other industries.

‍Lack of planning is another contributor to the acuity of financial vulnerability for many organizations. No one could have predicted a global pandemic, so perfect planning is not a realistic expectation. But, this experience should help healthcare organizations begin to think more diligently and intentionally about the potential negative impact that low-margin services could have on their financial performance if unforeseen challenges do emerge. These challenges do not necessarily have to come from a “Black Swan” event or a significant market downturn. Many things could challenge the financial stability of a healthcare entity. Without a dynamic plan of adjustment to pursue when challenging times emerge, lower-margin services can cause detrimental effects that compromise the overall mission and viability of those organizations.

These are just a few of the seemingly countless weaknesses that have been exposed in healthcare organizations as we continue to navigate these very unique and unexpected times. We will continue to discuss more of these in the future. Hopefully, these examples will allow for lessons to be learned and absorbed into plans to prevent, or at least lessen, the adverse effects that we continue to see in 2020.

Coker Group, a national healthcare advisory firm, works with hospitals and physician groups to develop customized solutions in five main service areas: Strategy, Operations, Finance, Technology, and Compliance. Our mission is to customize an approach for each client that ensures strategic differentiation in the marketplace and the achievement of every goal across all performance areas. Through principled professional consulting, Coker Group assists healthcare providers in their pursuit of a sound business model and an enhanced patient experience. Coker Group's advisors have the experience and creativity to find the right solution for any market and healthcare entity.

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