COVID-19: A Resource Guide

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Economic downturn and COVID-19 leaves some hospitals fiscally vulnerable

May 22, 2020

As the nation’s healthcare industry grapples with the impact of the first wave of COVID-19, many hospitals are facing fiscal pressure. This is particularly true for providers who fall into the following categories:

  • Providers who are or were partially overwhelmed with COVID-19 patients, experienced shortages of PPE and significant staff stress, all of which tested systems and leadership like never before.
  • Facilities that were forced to shut down revenue-producing operations while they stocked up on supplies and urgently prepared for patients that never came. One hospital CEO said of this experience, “I have never worked so hard to take care of such few patients.”

Despite the individual circumstances, the outcome of this crisis is all too consistent for hospitals: even the largest, best-capitalized hospitals are now facing financial issues that will require focused, intentional efforts to resolve. The situation is particularly challenging for organizations that were operating with razor-thin margins before the crisis.

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For an organization on a short cash runway, here are some recommended action steps to consider.

Assess your Cash Flow

Given how rapidly the economy is shifting and the resulting impact on the healthcare industry, hospitals looking to best position their organizations for the future should fully assess their finances and outline a plan to cover near-term cash obligations. Start with a detailed, day-to-day cash flow forecast which outlines specific sources and use of cash to highlight potential vulnerabilities. An understanding of the hospital’s cash runway is the key factor in determining the organization’s flexibility and is necessary for the creation of a focused recovery plan.

Determine Your Sources of Cash Flow

Sources of cash are less predictable, and the ability to project cash flow is more difficult because historical A/R valuations are now less relevant. It will also be difficult to develop accurate estimates of the hospital’s potential exposure to unreimbursed and potentially non-reimbursable COVID-19. While a large number of funds were made available through the CARES Act and other stimulus and recovery legislation, it’s unclear when those funds will be available. Likewise, emergency loans, grants, reimbursement for extraordinary expenses, and other sources of cash are important but are subject to both local and national political winds, making timing difficult to predict. Investments have dropped in value and may require liquidation while they are underwater.

Identify Uses of Cash Flow

Uses of cash require close review:

  • Hospitals in distress need to draw down all available lines of credit immediately to create a cash buffer before lenders reconsider their 
  • Normal operating expenses may have increased for the limited caseloads hospitals have experienced, while furloughs and other actions taken as a result of the crisis may have reduced normal operating expenses.
  • Losses to investment portfolios have, and will likely continue to have, an added non-cash impact as hospitals face “mark to market” and/or increased balance sheet reserves for Defined Benefit Plans. This may also create a need to fund benefit plan shortfalls.
  • Hospitals should consider the impact of delaying all non-essential vendor payments to conserve cash.
  • It is also important for hospitals to determine the timing of payments and notices for all debt, lease, and rent payments that have recourse.

Make the Tough Calls

Hospitals finding themselves in financial distress may need to file a preemptive reorganization proceeding, stop/delay all non-essential cash payments, request forbearance of interest payments, restructure debt, sell assets, close services, and aggressively pursue a financial turnaround. In this situation, it is particularly important to hire experts who have deep experience in bankruptcy law and debtor-in-possession operations to evaluate options quickly. Though it is difficult to consider the added expense of hiring outside professionals while staff have been furloughed, the expertise will speed up decision making and provide for a best case scenario down the line. What is certain is that for any entity facing the prospect of running out of cash, time is of the essence.

Experienced financial and legal advisors can:

  • Work with lenders or indenture trustees in advance of a potential default, determine if a waiver is needed, and
  • if required, seek waivers, deferments or forbearances.
  • If bonds are involved, interpret bond documents, advise on how to communicate with bondholders, solicit bondholder approval of remediation plans, gain flexibility of action with an ad hoc committee of bondholders, and justify no-action after a default.

Consider Strategic Alternatives

Depending on a hospital’s ability to address its cash runway through other means, the organization may need to consider strategic alternatives to ensure its ability to serve the healthcare needs of the community.

  • Government-owned organizations may consider special tax support to help manage through the recovery period. This help may not be available given the impact of COVID-19 on government finances and its tax base; however, there may be political will to fund the shortfalls in order to secure the broader economic benefits of having the hospital available to the community.
  • Hospitals may consider a strategic affiliation or sale of some or all assets to secure funding to manage the recovery. While it is difficult to consider loss of local control, it may be better than having the organization close entirely. Limiting healthcare services could be better option than the loss of all healthcare services for the community.
  • As a last resort, filing a preemptive reorganization proceeding and operating as a debtor-in-possession may provide the runway necessary to come to a satisfactory strategic conclusion— whether that is an eventual sale or a successful financial turnaround. The CARES Act increased the debt limit to $7 million for eligibility to the new small business bankruptcy procedures. As a result, more organizations or their affiliate organizations may be able to take advantage of the new small business bankruptcy rules implemented in 2020 which are designed to decrease the expense of a reorganization proceeding and eliminate certain hurdles to court-approval of a plan of reorganization.

Engage Board Members Early and Often

Engaging the board is critical to navigating these options.

  • A hospital board should be involved immediately and be kept informed throughout the analysis and planning process. The board might have to make hard, politically sensitive decisions with a profound impact on its community on a compressed timeline.
  • The board will have specific duties throughout this process, and appropriately documenting the satisfaction of these duties will be important to facilitate strategic options and limit board liabilities.
    • The board needs to be informed so that it can hold management accountable for its plans to confront financial challenges.
    • The board should be provided the tools to assess the hospital’s 13-week cash flow, days of cash on hand, days in accounts receivable, compliance under its debt instruments, and business plans.
    • Board members should be fully aware of their fiduciary duty, exposure and the actions necessary to limit that exposure, such as the actions necessary to gain the protection of the business judgment rule.
    • Even in states with statutory protections for members of nonprofit boards, the community, the employees, and the hospital’s creditors will hold the board to the same level of scrutiny as that of a commercial enterprise. Keeping accurate minutes that record the facts and due consideration given to issues is a best practice and can be a board’s best defense should claims be asserted against it. Lax record-keeping can be a board’s undoing in litigation.
  • Public relations and crisis communications are also necessary for those hospitals experiencing distress. Clear communications throughout the process should include effective messaging to staff and the community, especially if a restructuring plan includes layoffs, bankruptcy, changes in services available, etc.

Hospitals facing uncertainty in this new operating environment that are looking to proactively address their future should take the time to fully assess finances and determine how much runway is available to solve the financial issues that lie ahead.

Hospitals that run out of cash before achieving the benefits of a sustainable financial turnaround may have no choice but to pursue an urgent, cash-conservation approach. Hospitals in financial jeopardy should engage their board and retain solid restructuring professionals to chart the best available path forward.

This article was written in collaboration with Mitch Galloway of Galloway Consulting.

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