Distressed Hospitals Can Succeed: Initiating Financial Stability

A year into the COVID-19 pandemic, it’s clear that for some hospitals and health systems, the effects have been both material and negative. While it was often an accelerator—not the cause—of declining metrics, the economic blow from the pandemic will prove tough to overcome.

For many leaders, the question that keeps them up at night is: “How can our organization continue to care for our communities?”

Distressed organizations are on the rise.

The American Hospital Association reports that just one-third of U.S. hospitals remain standalone or independent. Those based in rural areas fare worse than their urban or suburban neighbors, with one-in-four at a high risk of closure.

Last year, credit downgrades outpaced upgrades among not-for-profit hospitals for the first time since 2013. Fitch Ratings attributed 41% of the downgrades to those with precarious financial futures that stem from factors preceding COVID-19.

Some standalone providers are looking to partnership as a way out, and healthcare mergers and acquisitions (M&As) are quickly picking back up steam. However, the field for healthcare M&A is getting more selective as buyers are more prone to decline offers than they have been historically.

Positioning a health system for a financial turnaround is highly complex work.

Decreased cash flow, market volatility, lack of scale, and insufficient capital has led to a new definition of risk in healthcare. Distressed organizations need an effective enterprise risk management strategy to combat further economic and operational uncertainty, and strengthen stability in this rapidly evolving, highly pressurized environment.

This requires leaders to be brutally honest—with themselves, their board members, and the communities they serve—about the actions needed to orchestrate a financial turnaround. It means working quickly to eliminate or downsize noncore activities that are draining resources. It also demands that leaders prioritize efforts on the areas that are likely to have the biggest impact, knowing everything cannot be fixed at once.

Those that are most successful in positioning their system for a turnaround first ask three questions:

1. Can the same team that got us into this get us out of it? Level set on whether you can continue your mission with the same team or if it’s time to find a new partner to carry your organization through the storm.
2. Will a financial turnaround require that we divest certain assets? If so, decide which assets could be divested while still protecting access to care.
3. How can we ensure that we are making the right decisions for our organization and our community? You need an objective lens through which to base these decisions.

Amid post-pandemic disruption, leaders and boards with indicators of distress must make bold moves now—before their fate is determined by circumstance.

The window of opportunity for distressed organizations to shape their post-COVID future is limited.

The most effective leaders possess not only the ability to evaluate and execute strategic initiatives, but also to rally their teams around the synergies needed for transformational improvement. And they need to do so while protecting frontline workers from operational disruption as much as possible, ensuring the organization can continue to fulfill its mission.

As we’ve seen during the pandemic, healthcare leaders were shoved outside their comfort zone—and some struggled to respond. That’s one reason why some hospital boards evaluate senior leaders more frequently during COVID-19. If a senior leader doesn’t operate well under pressure, how effective will they be in bringing discipline to the organization’s response and recovery efforts?

Ongoing market challenges require providers to confront potential financial distress and build plans to sustain their mission.

Leaders and boards must reforecast their long-term financial and operating positions recognizing continued regulatory, competitive, and demographic uncertainties. Developing plans to ensure long-term sustainability and the ability to make bold moves that generate a strong return—quickly—require preparing for multiple future state scenarios. In some cases, outside expertise can also help providers shape a resilient and profitable future.