Many not-for-profit hospitals have faced economic struggles in recent years, but nothing quite like the combined impact of the COVID-19 epidemic and the looming economic downturn left in its wake. We look at the prognosis for this sector of the healthcare industry.

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Here is a transcript of the conversation:

Welcome to PointByPoint, conversations, interviews and legal commentary for today's business professionals, brought to you by Waller. Many not-for-profit hospitals have faced economic struggles in recent years, but nothing quite like the combined impact of the COVID-19 epidemic and looming economic downturn left in its wake. We look at the prognosis for this sector of the healthcare industry.

Morgan

Today, I'm joined by Denise Burke and John Tishler. Denise and John both advise hospitals and health systems across the country on how to best position their organizations for success. Denise is a partner in the firm's Healthcare Compliance and Operations group and counsels clients on healthcare, regulatory and reimbursement matters. Prior to becoming a lawyer, Denise was actually in quality management at a not-for-profit hospital. She offers a unique perspective for her clients.

John offers hospitals, health systems and healthcare companies, along with their financial advisors and lenders, experience and perspective in strategic transactions and financially complex situations that require creative solutions.

John, I'm going to start with you today and welcome you to the show. Really excited to have this conversation. It feels like there is so much going on. The hospitals are at the front line of this pandemic right now. We, as a firm, spend a lot of time working with hospitals across the nation of all shapes and sizes, but I'm really curious to get your perspective on specifically not-for-profit hospitals and even more so rural hospitals. So set the stage for us. What was the situation prior to this pandemic somewhat suddenly hitting the U. S.?

John

Thanks, Morgan appreciate it. Where rural and not-for-profit hospitals are not in a system, most of those were struggling financially prior to the pandemic. Many of these hospitals serve mostly Medicare or Medicaid populations. Reimbursement rates for those government programs, compared to the actual cost of providing healthcare, have been declining, especially in states that did not expand Medicaid. Thus, prior to the pandemic, many of these standalone rural hospitals were losing money and had been losing money for several years.

Morgan

So, Denise, anything that you would add to that, as you've been working with hospitals across the country prior to the pandemic?

Denise

Not really. I mean, 120 hospitals have closed in the last decade, and most in rural areas, and 2019 was the worst year yet. So those just statistics alone confirm John's assessment.

Morgan

Wow, so it's a challenging situation even before you add on a pandemic that most hospitals weren't fully prepared for what was to come. So then the pandemic hits. What is the situation now and what do you foresee it'll look like over the next couple months? Denise, I'll start with you.

Denise

Well, so many facilities were struggling prior to the pandemic and many were only remaining viable because of the elective procedures that they were doing. Then, of course, elective procedures had to be canceled because we're trying to preserve the protective equipment for our front line providers on the COVID front. So the situation was really bleak initially. Fortunately, the government has reacted quickly and many providers have already received advanced payment loans and grant payments from the $30 million grant payment under the CARES Act. So for the moment, I think that most facilities are stable. However, to remain stable, those facilities are probably going to need to take advantage of additional aid from the government until the elective procedures can ramp back up. And then hope that those procedures ramp back up before the aid runs out. They're just so many unknown variables right now, and your brave leaders in these institutions have to spend substantial amount of effort planning for both the worst and best case scenarios at the same time. It's gonna take a fair amount of modelling, and none of that's gonna be perfect. But we're gonna have to chart courses assuming that more aid will come and also assuming more aid may not come.

Morgan

John, anything you'd add to that?

John

Yes. First, it's a bit uncertain as to the amount of loans that providers can receive. In many instances, we've heard that the Small Business Administration is limiting the total loan amount to $15,000 which is really just a drop in the bucket for a lot of these providers. And second, with the exception of the payroll protection program, most of these are loan programs which will have to be repaid under the PPP. Under certain circumstances, the loans will be forgiven, but most of the other loan programs have to be repaid and there is an interest rate being applied. So this can create a real challenge for some of these hospitals, which were having trouble prior to the pandemic making ends meet. Now if they take some of these loans and that keeps them afloat for a few months, but then the government starts recouping the loan payments out of their reimbursement payments that they could find themselves in even worse shape than before when they took the money. We'll need to see what type of payment terms and forbearances the government provides for a lot of these hospitals, but to me it's pretty clear that these hospitals will not be able to repay the loans on a very short timeline. And some are being discussed being repaid over very short periods, such as 3 to 6 months.

Morgan

Wow. I mean, one could hope that elective procedures ramp back up sometime between now and then, but if not, it's hard to see where they would find the funds to be able to quickly repay those loans.

Denise

And, Morgan, that's one of the challenges. We all hope that those elective procedures ramp back up quickly, but think of all the factors that go into that. I mean, first, when are the governments going to allow providers to start doing elective procedures again? And when they do, are elderly patients gonna be comfortable going out into the world to get those procedures before we have a vaccine? Then you've got so many people that have been laid off due to the pandemic that may not have the money to pay their copayments and deductibles or may not even have health insurance that they previously had. So that's gonna be one of the difficult things to forecast. When can those elective procedures realistically start to ramp back up? And how fast will that occur?

Morgan

Right and then, I think, kind of along those lines, in addition to serving an influx of patients who have been or have possibly been exposed to COVID-19, hospitals are unable to offer these elective procedures and services, which for a large portion of their revenue stream can telehealth serve as a solution for some elective physician visits, even?

Denise

Telehealth is absolutely essential in this crisis. When we have at-risk populations that don't need to be out and be exposed, telehealth has been a godsend to be able to get care to those patients in the safest possible environment. CMS, the private payers and the states have all worked together to relax restrictions and licensure standards to allow that to happen and to allow physicians to get paid for telehealth at the same right as they would an office visit. But the revenue from telehealth and in-office visit can't begin to replace the elective procedure revenue. So while it's absolutely essential to get through this and to get basic care provided, it does very little to help the revenue issue of the cancelled elective procedures

Morgan

John, anything you want to add to that?

John

I think I agree with Denise. Telehealth is gonna be more important than ever before. I think this pandemic has shown what an essential service it can be. It was interesting to me to see how many telehealth providers were providing direct assistance to people, especially in the early days of the pandemic. So I do think it's gonna be the future of a lot of basic healthcare advice.

Morgan

Yeah, I do think, I mean, so much of this feels a little doomsday-ish, but I will say to me that the telehealth aspects of this are really a silver lining. We've been talking about it for a long time. Seems like it's a great way for people to access healthcare that they might not otherwise have access to, particularly in these rural areas. So it really has, I think, sped up that process a little bit, and people are finally starting to kind of test what they can do with that technology.

Switching gears here a little bit. Modern Healthcare actually had a headline earlier this week, “Liquidity crunch hitting health systems.” In the article, one commentator stated, “They're getting slammed with almost emergency care, ICU-type care requirements on the coronavirus front that they may or may not make any money on at all and at least temporarily, they're shutting down their more profitable lines of business.” This is very much in line with what we've just been discussing. But, John, given your area focus, I'd be curious to get your take on that article and what you make of all of this.

John

I have no doubt that hospitals, a lot of these rural and standalone hospitals, will come out of this pandemic weaker financially than they went into it, notwithstanding the loan programs, the grant programs and all the efforts that the government has made. As Modern Healthcare correctly notes, the lucrative elective type surgeries have stopped almost completely, and personal protective equipment and other costs have risen significantly. Long stays in the hospital are not financially good for hospitals because the private payers and government payers are not covering all the costs of those types of stays. And the longer a patient stays in the hospital, the more uncompensated care is being provided. While the government is increasing Medicare reimbursements temporarily, I doubt that's gonna be enough to offset the significant losses hospitals are gonna experience as a result of the pandemic.

Most hospitals operate on a very thin, if any, positive operating margins. I think it's 2 to 3% in most cases. So I suspect almost all hospitals will suffer financial deterioration during this pandemic.

Morgan

I guess kind of along those lines, anything on the labor and employment front in terms of what the hospitals are now paying their frontline workers and what that will ultimately due to their bottom line?

John

So the number on the labor employment front, one of the challenges you're also going to start seeing is that a lot of the front line workers are requesting, and as they should rightfully, they are being paid sort of hazard pay, which is, you know, an increase in their base salaries. And this is also only going to increase the expenses that hospitals are gonna have to deal with, at least temporarily, and it should have a negative effect on their bottom line.

Morgan

So we've talked a lot about what was happening prior to the pandemic, what's happening now, and the variety of funds that hospitals may be able to access. Currently, what action steps can they take right now? And can we talk more specifically about some of these funds such as, you know, the FEMA loans or PPP? You hear a lot of these acronyms being thrown out there right now, but if I'm a hospital, what can I do at this very moment?

Denise

There are so many options that hospitals need to be looking at right now. And of course, it comes at a time when they need so much of their attention on the clinical issues to deal with the virus. But in addition to what we've talked about, the advanced payment loans, the payroll protection loans, which are forgivable, and grant money, which has already been distributed, hospitals should be applying for FEMA loans through their state organizations and small hospital improvement programs, what we call SHIP grants, through their state office of rural health. Of course, there's also another $70 billion in grants that the federal government is going to give that they have not defined the terms, although we have been told through presidential press conferences that some of that money will be allocated to rural health providers, providers with high Medicaid and uninsured populations, most rural hospitals fit into those categories. So they're absolutely additional programs out there that they can apply for now. And there should be additional grant programs in the future.

And beyond just looking for the government, I mean, there are other things that hospitals can do. Hospitals that are paid on cost basis should be filing interim cost reports to reflect the new reality at the cost structure. Cost permission is higher now because of the lower volume. When they canceled the elective procedures, the cost for those hospitals didn't get down; 80 to 90% of the costs are the same. So hospitals have the right to file interim cost reports and start getting higher reimbursement.

Morgan

That's really interesting. I mean, I wonder if a lot of hospitals are aware of that, right? I mean, how do they start that process?

Denise

Well, they should probably just talk with their advisors that help them submit their cost reports now. There's additional revenue from Medicare that they can get by filing those. They can take the information on the higher cost per patient and update their Medicare Advantage rates to get higher rates for Medicare Advantage. And they should even approach their private payers and ask for advance payments, interim payments or some sort of altered payment structure to help get through the crisis. Private payers may not agree, but some have, and it doesn't hurt to ask.

Morgan

I’ve heard a lot over this past week about the Main Street Lending Program, and it’s worth noting that today is April 15^th, and you know tomorrow, April 16^th, there may be new news that comes out about additional guidelines or additional funding that the government has issued, but for right now, this week it seems like there's been a lot of conversation around the Main Street Lending Program that will be available to hospitals and health systems with up to 10,000 employees and $2.5 billion in annual revenue. Anything worth noting about that program in particular?

John

Well, one thing about it is that it is yet another loan program, and it does bear interest anywhere, according to the guidelines, anywhere between 2.5 to 4% per annum. What it does allow is repayment over a four year period, and you can get a deferral for the first year of payments. But again, it's a loan, and so these loans, in my view, are really better geared towards some of the healthier healthcare systems than some of the ones that may not have as much ability to manage additional debt load. One thing that I've wondered about about some of these lending programs, and I saw it in a press release about this Main Street Lending Program, is a lot of loan covenants that these hospitals have prohibit additional debt being put on the hospital. The Main Street Lending Program actually requires the lender that's providing the loan to represent that it will consent to this additional debt being placed on the bottom. So I think they are getting into some of the weeds here about how these programs are gonna be able to help people by adding on additional debt.

Morgan

Denise, can you share some details about the accelerated or advanced payments that we were discussing earlier?

Denise

Sure, I think most of our clients have already applied for the advanced payment loans. But for anyone who has not, we would absolutely recommend that they do that immediately. The advanced payment loans are exactly what they sound like. For hospitals, the government will provide up to six months of payments upfront; 125% of those six month payments, if you're a critical access hospital, at the end of 120 days, they do start recouping the amount that was loaned against future receivables. And hospitals have up to a year to completely refund that money out of those before they start paying any interest. So for a year, it is a completely tax free loan that we recommend that people take advantage of. You know, we've seen some people that are hesitant to take the money if they have to pay it back, but in these times when volumes are low and we don't really know what's gonna happen in the future, it's certainly our recommendation that people take advantage of that interest free money.

Morgan, one other thing I should have said on those advance payment loans. They are extremely easy to apply for. Any hospital could just go on their Medicare administrator contractor’s Web page, and most states it's either it one or two page form. CMS has already notified the Medicare Administrator of Contractors the maximum amount that a facility is eligible to receive. So it's almost mind boggling how easy it is to get money.

Morgan

Are there any additional funds hospitals should be aware of?

Denise

Certainly lots of funds that they should be aware of. The FEMA grants that we've already covered, the SHIP grants, there are some additional smaller grants that are gonna be coming out to handle telehealth network development and rural health outreach services. Providers can go onto grants.gov and see a comprehensive list of all the grands that are available.

Morgan

All right, so now I'm gonna ask you to both get your crystal ball out. And will there be winners and losers and all of this? And who is most vulnerable? Given this situation that we're watching unfold in front of us. John, I'll start with you.

John

Well, economics are Darwinian, and said the stronger you are, the most likely you are to prosper. I think in this environment that that's gonna really bear out here. The well-capitalized institutions are gonna be in the best position not only to survive, but I predict to go on an acquisition spree once there is more stability in the marketplace. I think, unfortunately, the less well-capitalized systems will be weakened by the situation as we talked about. They're gonna have worse balance sheet than they probably went into the pandemic with. That should lead to more opportunities for competitors in the market to make strategic acquisitions and consolidate their reach over larger geographic areas. Naturally, some of the nationwide systems are gonna be in strong positions. But I would also look to a larger regional systems to be overall winners here. We saw this about 20 years ago in the banking industry. I think you'll start seeing a handful of national hospitals usually, systems that have 200 plus hospitals, but you'll also see about 15 to 20 regional systems that become very competitive or even dominant in some geographic regions.

Morgan

Denise, do you have anything to add to that? What's your perspective on how hospitals are positioned and what's to come in the near future?

Denise

Well just stating the obvious, providers who were vulnerable when this started will continue to be when it's over and will be more so. And that's why I keep circling back to the leaders just have such an enormous burden to be modeling out the best and worst case scenarios and to making sure that their boards are aware of both of those scenarios. And it's incredibly difficult to do when all the assumptions on which your modeling are changing and you are not in control of. But we all hope the government will kick in and continue to provide funding as this story unfolds, but we have to manage as if that's not going to happen and have to be ready if that doesn't happen. So I think it's, you know, hope for the best, but don't be prepared for a bailout.

Morgan

So obviously, these hospitals, particularly in rural communities, are under a lot of financial strains right now. There's a lot of challenges. We're hopeful that some of these funds coming from the government will help push them through these uncertain times over the next few months. But, like you said, I mean they were challenged way before this pandemic, and I imagine this is only going to worsen the situation.

So if I'm a leader of a hospital or I'm a board member at a rural community hospital, what advice would you give? And let's say that the hospital does need to shut. They're not able to sell the hospital or join a larger health system. What options are there available? What should they be thinking about?

Denise

I think it's extremely difficult for leaders these days to think about these worst case scenarios. A hospital is the heart and soul of its community. It's usually the largest employer, and so much of the identity comes through having the hospital in that community. But there actually are some things worse than losing a hospital, and that is the cases where you lose all of the healthcare services that go with the hospital. And so we've seen hospitals that sort of imploded quickly, where the community loses all of their healthcare services. The doctors take a job in the nearest town that offers of a job. They lose their ancillary services, their local mammograms, their local ASC. So I think it's just so important these days that people be modeling, and if there's even a possibility that the hospital is not going to survive, need to start transitioning and see what services can be preserved for the community. And almost always they can if there is the time and the money to plan those transitions, to make sure you have arrangements to have doctors in the communities, to keep those diagnostic centers in the communities, to keep as many of the elective procedures in the community, even if you don't have a full service hospital.

And you know, the studies have shown that industry will stay in communities if the community can get good healthcare; it doesn't necessarily have to have a full-service hospital, but if they lose all of the services, people tend to follow and leave the community as well. So you know, while the government is handing out money and loans and there's an opportunity to get at this money, I think we have to sort of be thinking both ways. If this is an opportunity to save the hospital and come out stronger, that's great. But if it's not, have those tough conversations with the board and be looking to what partnerships you could make or what actions you can take now to make sure that some services, as many services as possible, remain in the community.

Morgan

Well, I think that's great advice. John, anything you'd add to that?

John

I agree 100% with what Denise said, and one of the things that she and I have actually spoken about, I haven't seen it happen very often, but I think it would be a real win-win is to have some of these communities come together and pool their resources. A single community may not be able to support a freestanding hospital, a full acute care hospital. But, you know, a couple of communities or three communities could come together and support a hospital or support significant healthcare services for all three communities. It will require a very visionary type of leadership because obviously they're always competitions between places and everybody wants their own. But I think if people realize that by pooling their resources together they can have even more, then I think there will be some real winners come out of this process.

Morgan

Right now, hospital administrators and those on the front line, physicians, nurses, are really focused on what's in front of them right now and this, you know, very emergent situation with the COVID pandemic. But as a board member of a community hospital, they’re really tasked with seeing the long term vision for that facility, and what can they be doing right now in the midst of this pandemic to best position their hospital for the future?

John

Well, it's really hard to predict when the economy is gonna be reopened and when people are gonna get back to some semblance of normalcy and what normalcy will look like. But that does not excuse unfortunately, boards from trying to engage in that behavior, and I think some of the some of the best practices in that regard would be to see if they can't look out past even this year into the next few years and how best position the hospital to take advantage of what's coming down the pike with all the limitations of the hospital maybe working under. So ultimately, I always think it's a good idea sometimes for boards, and I think, this is a good time for this, and that would be to bring in a third party who can facilitate a long term strategic plan for the hospital because it may be in the hospital's best interest to begin looking at different deliveries of healthcare or different ways to deliver the healthcare, or do they need to team up with other deliverers of healthcare so that they can have optimal healthcare delivery in their community?

Denise

Yeah, I know that we talked about this and all the bad things that could happen in the worst case scenarios, but, you know, we might envision a world where it's not all bad. We have incredible leaders in these communities and incredible boards that are interested in doing the best for their community. They work really hard. They're really smart people. And in many ways the system has just been stacked against them because the system has been stacked to promote systems, hospital systems. Maybe in this time, some good will come out of this. You know, telehealth is being rolled out all across the country. This should improve care in rural health areas, but that should be sustainable. Maybe payers will understand that some of these services can be performed, and that will be sustainable. Maybe politicians will come together and see if so many rural hospitals are struggling and in danger of failing at the same time, they'll change some of the reimbursement systems that put those hospitals at disadvantages. You know, maybe we’ll come up with some new treatments. We have pharmaceutical companies developing new treatments as quickly as possible. There are a lot of things that could come out of this in the end that are good if we can just all stick together and get our politicians and our leaders all pulling in the same way to hopefully make that happen.

Morgan

Great. Well thank you, both, so much for joining us today on PointByPoint. We really enjoyed the conversation. It seems that, you know, hospitals are obviously faced with a lot of challenges right now, but also remain optimistic between the initial funding coming from the government and also what can come after the pandemic. So, really appreciate the conversation and so glad to talk with you guys today.

Denise

Yeah, Morgan, thanks for getting us all together to do this. We always love to talk about ways to save healthcare for rural communities.

John

Yeah, I appreciate it, Morgan. I appreciate working with Denise a lot. She's great, and it's a lot of fun doing it.

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