Tightening cash flows coupled with the likelihood of increased capital spending are a cause for concern among healthcare system executives. In fact, the problem could become a crisis over time unless non-traditional strategies are employed, In a recent report by the Healthcare Financial Management Association entitled “Financing the Future”, some startling conclusions were reached regarding current capital spending:
* The deteriorating financial condition of hospitals are making capital access more difficult.
* The gap between financially successful and struggling providers are widening as to capital access, creditworthiness, and the ability to finance the future.
As for the predictions of future capital expenditures , the study compiled some interesting statistics:
* 72% of CFO’s expect capital expenditures to increase in the next five years.
* 85% of hospital CFO’s surveyed said they thought it would be more difficult for their organizations to fund capital expenditures in the future
* 63% responded that they expected to be more dependent on cash from operations to fund capital needs.
Staying as up to date as possible with new equipment technologies and replacing aging plants are a key priority among health providers. These organizations also must spend money on cleaning up old liabilities and build outpatient facilities in order for their operations to be viable in the future. However, expenditures for updated equipment such as over $1 million for an updated PET scanner aren’t being matched by income. Reduced Medicare reimbursements haven’t covered costs. As a result, healthcare systems have had to make up the difference.
From the patient perspective, they don’t want to visit a facility that merely “keeps up”. Patients are paying more out of pocket expenses than ever before. As a result, they expect to be able to benefit from the technological advances they hear about.
The gap between what patients need and what healthcare providers can offer is ever widening. This gap is likely to remain in effect if factors such as the Medicare situation, escalating malpractice insurance premiums, and costly technology, continue to squeeze cash flows.
What should the provider do?
1. Work with financial service companies that really know healthcare. In other words, not just a company that can put together a deal, but one that understands the provider’s strategies as well as the particular needs of the patients. They need to work with companies that put forth financial solutions that don’t sacrifice or compromise other segments of the business.
2. Shed assets that are a financial drain on the healthcare provider. They need to determine which real estate assets are productive for the future success of the business and which are not. For example, medical office buildings are difficult to maintain and manage. Selling the asset to a third party owner can relieve the provider not only the headaches of property management, but can free up cash and improve the balance sheet dramatically.
3. Control expenses and improve operational functions. Although many of the expenses of a hospital or practice are fixed in nature, there are still strategies that can be employed to improve the bottom line. One method is to periodically perform employee reviews to determine which staff members are productive and which aren’t. An untrained or simply incompetent nurse or other staff member can cost the facility a lot of money over time. The analyst should also review the purchasing policy of supplies and surgical instruments. Is the facility taking advantage of quantity discounts? Are competitive quotes received from other medical supply distributors?
4. Collections can likely be improved. When collection staff members follow up on both third party and self pay receivables, rather than just wait until they become considerably past due, days outstanding usually decrease. This can make a tremendous difference in the amount of available cash flow.
It is clear that capital struggles are likely to continue for the foreseeable future and it is critical that healthcare system executives must “think outside the box” to remain competitive and in some cases, to survive.