Michael Sandnes
Healthcare Restructuring and Analysis Expert

Few industries affect our daily lives with greater frequency and magnitude than healthcare. Hospitals continue facing an uphill battle to overcome the negative impact of COVID-19.

There is an abundance of information demonstrating how COVID was detrimental not only to the population at large but to the very healthcare facilities that we depend on for medical needs. Optimistically, there will be an overall recovery of the industry as more and more citizens are vaccinated and elective procedures return. However, for some in the industry, the effects of COVID-19 may have been too great when coupled with underlining issues and those entities may unfortunately face Chapter 11 bankruptcy or closure.

With the plateauing of infections and reductions in ICU admissions, now is the time for hospitals and clinics to begin robust organizational assessments and the addressing of underlying issues, which may result in Chapter 11 filings, which were already increasing in early Q2/21. Some organizations may have been lulled into a false since of security and stability after the infusion of federal stimulus funds, but the threat of insolvency may still be there if appropriate action is not taken now.

From my experience, CEOs need a good game plan to avoid drifting into “insolvency waters” and must demonstrate the flexibility to address changing circumstances to stay on course. That plan must include an effective communication strategy that will keep various constituencies, including employees, medical staff, elected officials and the community, abreast of a facility’s status while proposing operational recommendations to the board of directors on an ongoing basis.

Furthermore, appropriate notification to the Department of Health, Department of Human Services and other state agencies is critical, as each organization provides a source of valuable information and guidance. Failure by leadership to achieve a turnaround could require the hiring of a chief restructuring officer/financial advisory consultant to oversee operations, thereby removing authority from the CEO. Many healthcare organizations, including community and rural acute care hospitals, long-term acute care facilities (LTAC) and large physician groups, may lack the management resources, time, or sophistication to determine when they have entered the insolvency zone.

To complicate matters further, vendors with outstanding balances may organize into an official committee of unsecured creditors, which will attempt to influence the direction of the bankruptcy.

In a report from November of last year, the American Hospital Association stated that 47 hospitals closed or entered bankruptcy in 2020 due to the COVID-19 pandemic and there were more expected. The AHA further stated that during the second half of 2021, projections estimated $120.5 billion in losses for hospitals in Q3/21 and Q4/21. In addition, several major healthcare organizations throughout the U.S. may file for Chapter 11 bankruptcy protection because, simply put, they will be running out of cash. Decreased reimbursement, rising costs, an overabundance of indigent care, aging facilities and increased technological costs are responsible for this deteriorating trend, which could lead to further filings loom in 2021.

This is a time when a strong financial advisory team with clear expertise in bankruptcy, restructuring and asset disposition services is essential to help an organization move forward. That expertise and skill is especially beneficial when applied to the following key areas.

Assessment and Implementation; C-Suite and Team Staffing/Structure

An organization will need help to conduct objective comprehensive performance and collection information date assessments to review and evaluate the senior management team and action plans to validate the causes of continuing losses and develop strategies to close the cost gap. This includes assessing an organization’s missions, profit, loss review and short- and long-term viability, business model, facilities and equipment, clinical service lines, supply management, purchasing and group purchasing organization (GPO), physician compensation, employee key performance indicators (KPIs), staffing ratios, and marketing and branding as well as the compatibility of management and the future market.

The next tough step, implementation, must occur immediately to stem the losses and reposition the healthcare entity for its future, including closing unprofitable entities and liquidating assets. Finally, an operational assessment must be conducted to form the basis for an action plan, which should identify who is accountable for the steps and results.

Reorganization Alternatives

An effective advisory team must assess strategies that maximize return to creditors and evaluate various reorganization plans. This includes:

  • Formally appointing a chief restructuring officer who will report to the board of directors, not the CEO. Their role is to provide leadership and direction through the process to make sure work gets done and the best future direction for the facility is pursued.
  • Reorganization vs. asset sales vs. affiliations vs. liquidation: Assist with the development/negotiation of a reorganization plan. What is the best course of action for the organization?
  • Identify potential affiliation partners and/or buyers with appropriate resources and cash infusion.
  • Liquidate and sell off all unproductive assets and evaluate third-party bids.

Cost of Operation(s); Agency Nursing Cost

The highest expense item on the operating budget, an estimated 70%, consists of labor cost. One of the primary concerns of many organizations now is the shortage of nursing staff to provide the highest quality of care to patients. This deficit has caused many facilities to contract, with agencies that can fill that need creating a higher cost, with an hourly rate including a 54% markup of an employed nurse’s per hour salary.1 This information provides greater incentive to leadership to ensure there is effective recruiting and retention of team members.

Facility Acquisition and Rapid Expansion

Lenders may become uneasy with the announcement that healthcare organizations are filing Chapter 11. Even though Chapter 11 is meant to fix an organization, lenders may see it as an organization’s inability to operate with good fiscal responsibility, leaving creditors questioning if a loan can be repaid. Just because something can be done, an organization still must ask if it should be done as well as how and when.

Healthcare organizations must also know when expansion will have a positive effect; expanding too rapidly can have heavy financial repercussions down the line if it happens too rapidly. The goal is steady growth toward long-term sustainability and a healthy return on investment (ROI).

Lack of Corporate Mindfulness

The “should, how and when” referenced earlier is a part of being corporately mindful or otherwise keeping a finger on the pulse of the organization, its surroundings, its finances and its presence in the community its serves.

Another part of corporate mindfulness is taking the necessary steps to keep the ship on course, which in some cases may include a turnaround financial plan. If necessary, the turnaround financial plan may necessitate the recapitalization or restructuring of a company’s balance sheet. This may involve change in the relationship between financial stakeholders through a combination of debt and equity conversions, exchange offers and stock rights offerings as well as the addition of new financial stakeholders. Leaders must do just that: lead, not manage. Leadership must show compassion toward team members to engender trust and support. The heart of an organization is the people who lend their time, talent, skill and expertise to make an organization successful. Therefore, leaders must listen to their teams and lead by example; anyone can manage money, time and resources, but teams are lead.

Proactive vs. Reactive

Filing Chapter 11 is a reaction to situations an organization may find itself because things did not go as planned or because of ineffective planning. This is where being proactive instead of reactive is essential.

When things do not go as planned, a healthcare organization may have to deal with the unpleasant circumstance of having its current structure deemed untenable. Such a determination will require radical restructuring asset sales and team member layoffs. These tough and often painful decisions may be the only way for the organization to survive. The CEO or board must select the right people for the executive team and establish performance metrics to make sure plans proceed in the right direction and on the proper schedule.

The implementation of a business turnaround plan must be monitored intensively. The first goal is to stabilize cash flow and prevent it from diminishing. Sales and profit centers need to be analyzed, with decisions made on which areas make money and which need to be scaled down or eliminated. When it is all said and done, it often comes down to the CEO’s ability to show leadership and keep the ship from sinking even under the most adverse conditions.

There now exist opportunities to ensure better and stronger healthcare organizations that will be able to withstand what the future may hold. There are opportunities to strengthen the ties between communities and providers. All the issues outlined in this article provide a start, but they are by no means an end. People and companies have been pushed into trouble, but together we will get through it with everyone playing a part in a unified pursuit of success.

Key Takeaways

  1. Crisis is something to be avoided but also expected; be mindful that it often comes without warning. There must always be a cognizant realization that lack of preparation may result in a downward spiral. There is always a need for advance preparation and a robust action plan otherwise known as a solid turnaround game plan.
  2. An open-door policy will not work without communication transparency. Take proactive steps to establish and maintain a line of communication with all members of the team, from the C-suite to the front line and include community engagement. When team members feel included as part of the organizational family, they will rally to tackle the issues the organization may face. For this to occur, organizations must overcome the adage “be as loyal to the company as it is to you.” Loyalty is earned, not paid for by salary.
  3. Stay away from “silos” and build a cohesive team by fostering an inclusive environment. If things go awry, as they sometimes do in this industry, leaders will find there are more voluntary hands-on deck to “right the ship.” Team-based treatment works, resulting in positive corrective team action with outcomes for findings.
  4. One way to create a high sense of urgency is to ensure a healthy revenue cycle. This can be accomplished by keeping your teams integrated, cross trained and equipped both materially and technologically. By adhering to best practices and allowing for innovation and team input, an organization can expect intensive revenue cycle management, cash management, expense reduction and increased marketing branding efforts.
  5. Once the groundwork has been laid, it’s time to move the process forward. Accountability must be maintained for all stakeholders. There must be management action plans for each department with realistic timelines and steady feedback and support if an organization wishes to attain successful outcomes. Organizational leaders need to keep in mind that they are responsible for projecting a positive strong image to and for the organization and that they must have the support of the board of directors.

Michael Sandnes can be reached at 443-333-6654.