Health systems ready for a recession by knowing what to cut, what's safe

On Christmas Eve 2008, at the height of the Great Recession, Rich Miller was called into an all-hands-on-deck meeting of Northwell Health’s top executives.

Before they could head out to slice the ham at their family gatherings, leaders had to sign off on a number of reductions and other operational decisions amid the crushing economic downturn.

“They basically pulled the team together to make sure that everybody understood the challenge in front of us and to make sure we’re all rowing the same direction in terms of the actions we would take to respond to it,” said Miller, who was vice president of financial planning in 2008, but is now the not-for-profit health system’s chief business strategy officer.

Miller doesn’t foresee being in that position again. The New Hyde Park, N.Y.-based not-for-profit health system is seeing strong patient volumes and the areas it serves boast low unemployment rates. And while predictions abound, he said Northwell’s top brass doesn’t see evidence of a recession in the near future.

Nonetheless, some health system leaders and industry experts say now is precisely the time to formulate and implement plans for weathering the next inevitable economic downturn, whether it lands in 2020 or beyond. That can include modeling how much damage various economic scenarios would inflict upon specific organizations and what areas of the budget may need to be trimmed or, on the other end of the spectrum, protected at all costs.

For their part, Northwell’s leaders plan to discuss the potential for a recession at their February finance committee meeting, including what the magnitude could be and how the health system, which reported $11.5 billion in operating revenue in 2018, would respond.

They can draw on their experiences from a decade ago. Back in 2008, Northwell’s patient-care volumes were suffering amid the downturn, so the team had to cut back on capital and supply expenses, Miller said. During their February meeting, the finance team will assess which 2020 capital projects would be first on the chopping block if a recession hit. Miller declined to name specific contenders.

“Obviously ones that hadn’t begun yet would be ones that would be first looked at,” he said. “If you’re in the middle of a project, it’s a lot harder to stop than if you haven’t started it.”

Altamonte Springs, Fla.-based AdventHealth has tied its capital spending to its operating earnings: Since 2001, 75% of its earnings before interest, taxes, depreciation and amortization have been dedicated to capital spending, said Paul Rathbun, chief financial officer of the not-for-profit health system.

That means a decline in investment returns prompted by an economic downturn wouldn’t prompt the system to lower its capital spending. During the 2008 recession, however, AdventHealth did lower that ratio from 75% to 70% amid uncertainty over debt issuance and bank lending, Rathbun said.

“We weathered through that, the markets recovered, things got more back to normal and we went back to our 75% model in 2015,” he said.

An economic downturn would not necessarily mean lowering that ratio again, as AdventHealth’s balance sheet has strengthened over the past decade, Rathbun said.

Health systems are already very familiar with cost-cutting work outside of economic downturns. For its part, AdventHealth, whose revenue approached $11 billion last year, has kicked off a companywide assessment to learn how its overhead compares with its peers, and whether it is justified or not. The goal is to complete the project by mid-2020 and determine next steps after that. On the supply-chain side, the health system has saved more than $225 million over the past few years through negotiated price reductions using a systemwide approach, he said.

“We don’t just do it from the corporate offices,” he said. “We get everybody involved.”

The margins of not-for-profit hospitals suffered during the Great Recession, whereas their for-profit counterparts saw their total margins increase between 2006 and 2011, according to a 2014 Health Affairs study. Fortunately, the margins of both groups recovered by 2011, the study found.

The research team found that for-profit hospitals were more likely than not-for-profits to be part of systems, which added a financial cushion during the downturn. The study said for-profits also may be located in economic markets that weren’t hit as hard during the recession.

Another potential reason for the split: for-profit hospitals, not bound by the same reporting constraints and regulatory expectations as not-for-profits, may have lowered their charity care and financial assistance spending, said Gloria Bazzoli, a study author and Bon Secours professor in Virginia Commonwealth University’s health administration department.

“The pressure is on nonprofit hospitals to demonstrate that they are producing value given their tax exemptions,” she said. “So while they might cut back a bit, they still have that external pressure to demonstrate community benefit, so they can’t really cut that deep.”

Chip Kahn, president of the Federation of American Hospitals, which represents the for-profit hospital sector, said there is no evidence for-profit hospitals lowered their uncompensated care spending during the recession. “They’re just making an assumption based on no data,” he said.

Community benefit spending is an area Northwell did not touch during the Great Recession. The system provides financial assistance to patients with incomes up to 500% of the federal poverty line, Miller said, adding, “We think that’s part of our mission.”

Safety-net hospitals, especially those in states that did not expand Medicaid, and major teaching hospitals will be particularly vulnerable during the next downturn, Bazzoli added.

Hospitals are already bracing for potential hits on the regulatory front—from cuts to the 340B drug discount program to implementation of a site-neutral payment policy—that they say would further erode finances. Hospitals won court battles over those policies in 2019, but that didn’t stop the CMS from baking them into its 2020 Outpatient Prospective Payment System rates.

High demand for the kind of specialized services Rochester, Minn.-based Mayo Clinic provides kept its volumes relatively stable during the 2008 recession. That should continue to be the case, CFO Dennis Dahlen said.

Mayo is also buffered by its nearly $10 billion investment portfolio, which acts as a “great stabilizer” in that the money is set to deliver returns in the long run rather than in a quarter, Dahlen said. Finally, the system continues to diversify its revenue services, adding a new hospital in the United Arab Emirates, for example. “We think that also is a risk mitigator in terms of business disruption,” he said.

Overall, health systems are unlikely to make changes to their investment portfolios during an economic downturn. In the same way financial leaders have said they don’t make allocation changes based on quarter-over-quarter or even year-over-year stock market swings, they similarly didn’t express a strong willingness to change that during a downturn.

In the event of a downturn, health systems are likely to look at cutting expenses in their largest bucket: salaries and wages, said John Hanley, senior managing director and head of healthcare finance at Ziegler. That would include holding off on filling open positions, reducing employee count through attrition or, if necessary, cutting employees.

At the same time, health systems would be hesitant to make dramatic changes in any areas that are patient-facing, Hanley said. In doing so, they have to be careful to abide by contractual obligations to unionized employees, he said.

It’s unclear whether an economic downturn would prompt health systems to walk back their promised minimum wage raises. Several health systems, including Advocate Aurora Health, Cleveland Clinic and UPMC have announced increased base wages, with the expectation of boosting employee retention. Advocate Aurora is committed to increasing its minimum wage to $15 an hour by 2021 even in the event of an economic downturn, spokesman Adam Mesirow wrote in an email.

Health system leaders agree that, while staffing costs would be scrutinized, front-line caregivers are the very last area they would touch during a downturn, if they’re considered at all. They say that’s because patient safety and quality should be protected at all costs. “That would obviously be the last place anybody would go,” said AdventHealth’s Rathbun.

It’s tough to know whether a downturn will be temporary or long term, he said. Hiring back staff members can take a long time. “Patient caregivers are in short supply,” he said, “and there is an onboarding and training period to get people up to speed. If you were to make cuts in those areas, it becomes difficult when the economic situation turns around and you’re looking to staff back up.”

Turnover for a bedside registered nurse, for example, costs a hospital $52,100 on average, and ranges from $40,300 to $64,000, according to NSI Nursing Solutions’ 2019 report on nurse retention.

Chris Plance, a healthcare expert with PA Consulting, said he’s seen health systems unintentionally pile more responsibilities onto their front-line caregivers, even as they aim to protect those jobs. Case-management positions are commonly culled when times get tough, but their tasks are sometimes shifted onto nurses. Ultimately, that could affect nurses’ performance, he said.

Another area that’s relatively safe from cuts, per health system leaders, is the revenue-cycle team. That’s not surprising, because in a tough economic environment, systems want to make sure they’re collecting every last cent of cash possible.

“That would probably be cutting your throat,” Rathbun said. “That’s the time where you would absolutely want to be sure your revenue cycle was highly functioning.”

That wouldn’t apply in the growing number of cases where hospitals outsource their revenue-cycle services, rather than handle it in-house. Demand for full revenue-cycle management outsourcing grew 48% between 2015 and 2019, according to Black Book Market Research.

One week after Northwell held a groundbreaking ceremony on a four-story, $120 million children’s hospital pavilion in December 2008, investment manager Bernie Madoff was arrested for running a massive Ponzi scheme.

The two events seem unrelated, but as it happens, one of the families affected by the scandal was set to be the project’s largest donor. The family could no longer follow through.

The health system set out to find new donors. Fourteen months later, it landed a $50 million pledge from the Steven & Alexandra Cohen Foundation, prompting the hospital’s name to become Cohen Children’s Medical Center, said Northwell spokesman Terry Lynam. Steve Cohen is a hedge fund manager.

The Madoff scandal wasn’t the only event that dampened Northwell’s fundraising. Many of its active and prospective donors pulled back on giving as a result of the financial downturn, according to Lynam.

Healthcare is typically among the last sectors to see its charitable giving drop off in an economic downturn, along with religion and education, said Betsy Chapin Taylor, president of consultancy Accordant Philanthropy.

Even so, many health systems in 2008 made the mistake of delivering across-the-board salary and staff cuts, Taylor said. Consequently, gift officers were let go and those systems’ fundraising programs were diminished for years.

“If you let a gift officer go, it can take years to rebuild a program because the new gift officer you hire down the road when the finances look better hasn’t built trust and relationship equity,” Taylor said. “They don’t have the ability to just walk in and pick things up and move forward.”

At the time, health systems viewed their foundations as cost centers, rather than as revenue centers, Taylor said. Most gift officers return multiple times their salaries, she said.

Instead, when a downturn hits, health systems should tighten the focus of their fundraising messages, Taylor said. That means don’t tell potential donors you’re going to improve healthcare. Tell them exactly which capital projects or clinical programs or innovations you plan to spend the money on, what outcomes you expect and how outcomes will be measured, she said.

“As donors in a recession become even more discriminating around where they’re going to allocate their charitable gifts, we need to make sure that we are offering them the best value proposition possible,” Taylor said.