Contributed by Bill Lenhart and Richard Davis
WHEN IT COMES TO nursing home, rehabilitation facility and hospital bankruptcy cases, most debtor companies are in financial distress because of excessive leverage and declining revenues. In these instances, even a single uninsured medical malpractice injury claim will create uncertainty and may raise questions about viability.
As a result, it’s imperative that healthcare providers proactively confront financial and operational issues to improve operations and cash flows, and build all constituents’ confidence.
One of the most common indicators of financial distress is declining revenue and results from declining bed occupancy; a shift in payer mix to lower profitable revenue streams, such as more Medicaid, less Medicare or private pay; and a more subtle sign of deterioration – reduction in case mix index, a measure of case acuity, that reduces the rate of reimbursement from insurers and third-party payers.
There also may be underlying issues, such as improper diagnostic-related group codes used in billings or other billing errors, inability to submit timely billings, and billing disallowances and denials by insurers and third-party payers that will negatively affect cash flow. Although it may appear to management that billings have “met the budget,” analysis may reveal that cash collections are well below revenues generated.
On the expense side, a change in patient levels is not always matched by a timely and commensurate reduction in variable patient-care expenses. The largest operating expense is payroll, where full-time equivalent staffing levels are often supplemented by temporary help. But the two are not always managed as a whole, which often leads to inefficiency and waste. Other significant patient-care expenses also may not be adjusted as patient levels change.
An area fraught with uncertainty is medical malpractice insurance coverage. Many healthcare entities are forced to self-insure as coverage may not be affordable or available. In some situations, a single uninsured malpractice claim can jeopardize the existence of a facility, especially if a facility is small or operating with insufficient working capital. In the case of a Chapter 11 proceeding, an uninsured claim may hamper the ability to confirm a plan of reorganization.
Lack of accurate and timely reporting of operational and financial information is pervasive among distressed healthcare entities and often impairs the ability to fully assess an entity’s financial situation and react accordingly.
Excessive debt service costs are almost always a significant problem because many distressed providers have survived merely by continually modifying existing debt capital or supplementing it with new debt capital rather than obtaining new equity capital.
To buttress financial health of a distressed healthcare entity, increasing cash flow is paramount.
To increase sources of revenue, an entity may affiliate with new referring doctors and medical programs or offer new therapies and new surgical procedures. Even with new programs, current sources of revenues should be maintained at least at existing levels; failure to do so may cause payback through lower reimbursement rates in later years when occupancy may be improving. Management also should attempt to renegotiate more favorable reimbursement rates with commercial carriers.
To improve revenue cycle efficiency, management should ensure that proper billing rates are being used and correctly input into the system and ensure that billings are “dropped” in a timely manner to insurers and third-party payers. Outstanding receivables also should be aggressively managed and collected.
To control expenses, any reduction in patient levels should be matched by a commensurate reduction in variable patient-care expenses. Significant variable expense items include FTE staffing levels, including temporary help, medical supplies and medical professional fees. A caveat is that patient-care staffing levels must be maintained at acceptable minimum standards as per industry norms.
To improve asset utilization, consideration should be given to reducing the number of licensed beds in operation. This frees up space for conversion to alternative use, thereby generating increased and potentially more profitable revenue streams. However, de-licensed beds for facilities in some states may be forever lost, while other states allow de-licensed beds to be re-licensed through a certificate of need process.
To improve information flow, which indirectly impacts cash flow, a portion of working capital should be allocated to technology to streamline medical records, facilitate information sharing and improve the quality of accounting data. However, as technology-related costs are not all eligible for reimbursement, management must understand how to acquire and finance these investments.
With respect to debt levels, where additional equity capital is unavailable, it is advisable to renegotiate with present lenders for lower interest rates and longer amortization periods. In many cases, lenders will not renegotiate, and a bankruptcy restructuring may be the only course of action.
The challenges for healthcare executives in the current environment are daunting. It is critical that proactive and decisive action be taken in both financial and operational areas, however painful, to increase cash generation and maintain solvency.
Bill Lenhart is a partner and Richard Davis is a director at BDO Consulting, a division of BDO Seidman, LLP a leading professional services firm.