Barring some savvy planning, many hospitals and health systems are headed for a financial black hole.
The explosion in managed-care activity and proposed cuts in federal Medicare and Medicaid reimbursement mean providers will be operating on thinner profit margins.
To lock in their positions in the marketplace, hospitals and health systems must clamp down on costs, improve productivity and build relationships with other providers. It's up to chief financial officers to help secure the bottom line.
With increased pressure on profit margins, CFOs will seek new ways to reduce overhead and generate revenues. Since labor represents the largest expense of most providers, more layoffs are inevitable (Dec. 20/27, 1993, p. 49).
To fill in governmental revenue gaps, healthcare providers will seek additional managed-care contracts. Other revenue boosters, such as subacute-care units, will be added.
To keep up with the flurry of managed-care contracts, CFOs will need better billing and medical records systems. They'll use continuous quality improvement techniques to improve the accounts receivable management process.
The Healthcare Financial Management Association is pushing for administrative simplification to help reduce providers' costs and "tame
the paperwork monster," said Richard L. Clarke, president and CEO of the Westchester, Ill.-based organization.
In 1994, many CEOs, CFOs and boards of trustees will review their organizations' investment management practices. Hospitals are beginning to realize that, as operating income declines, they need to maximize investment income without assuming more risk.
CFOs continue to spend more time in strategic planning activities. Their skills will be needed as hospitals and health systems negotiate mergers and acquisitions and cobble together integrated networks of care. CFOs will have to be able to put values on providers targeted for mergers or affiliations.
To acquire new organizations and build integrated networks, some hospitals and healthcare systems will issue tax-exempt debt. Providers that can preserve their cash flows by holding down costs and directing more privately insured patients into their systems will have an easier time issuing debt.
Top credit ratings will be assigned to providers that establish themselves as market leaders. But weaker providers may have to spend more to sell their bonds, and some will become so distressed that they'll lose access to capital markets.
The nation's top credit rating agencies don't expect massive downgrades, but they think there'll be a greater disparity between weak and strong credits. One of the key factors in assigning ratings will be the experience and expertise of management.
Finance experts also are worried about the impact of healthcare reform on outstanding debt obligations. Smaller, weaker institutions could fail, leaving investors holding billions worth of bonds in default. Investor and watchdog groups will press for greater disclosure of healthcare providers' financial condition for bonds bought and sold on the secondary market.
"Healthcare reform proposals will significantly influence provider behavior over the next several years|.|.|.|.Successful providers will work cooperatively to manage costs and productivity to meet their quality of care and financial goals within the context of constrained resources."
-Christopher F. Weinheimer, senior vice president of finance, Medical Center Hospital
of Vermont, Burlington;
chairman, Healthcare Financial
"(A provider's) competitive position, including market position, market share, relationships with key marketplace constituents and the institution's cost structure, are essential in order to predict future credit quality."
director of municipal finance department,
Standard & Poor's Corp.,
"We expect the use of bond insurance to increase because of investor concerns over healthcare reform and its impact on hospital credit quality; the growing complexity of hospital financing (such as the use of derivative products); and the trend toward mergers and consolidations in the industry|.|.|.|.|"
vice president and manager of the healthcare department,
Municipal Bond Investors