Over the past three years, businesses across industries have had to contend with unprecedented challenges. Not-for-profit health systems and provider networks were no exception and often face obstacles from being on the front lines of the pandemic. These hardships include:
- Labor – Clinical staffing scarcity, burnout, staff poaching, and wage pressures standing in the way of healthcare providers keeping facilities staffed and employees engaged.
- Waning demand for services – Organizations finding their way in the face of changing dynamics within preventative, elective, and acute care and sorting out new care delivery models, volatile patient volumes, and supply cost increases.
- Combatting healthcare deserts – Often with higher levels of uninsured and underinsured patients with significant care needs, it can be difficult to provide services without exacerbating already thin margins or depleting valuable liquidity.
- Funding capital projects – The cost of capital is up, and economic conditions remain an issue. The Federal Reserve’s interest rate increases are having a far-reaching impact, and a return to a stable economy isn’t yet in sight.
These are just a handful of the financial pressures hospitals are facing, and there’s no clear path to predictable or “normal” operations.
However, there are several tangible steps that healthcare systems should consider to combat these many financial challenges.
Consider New Markets Tax Credits (NMTC) to locate facilities in economically distressed areas. The NMTC program incentivizes community development and economic growth via tax credits to attract private investment in economically distressed communities. For projects in eligible areas, the NMTC program can help healthcare providers expand their mission and serve underserved communities by reducing the amount of direct financial commitment needed to get a project off the ground.
Tax credits help defray the costs of setting up or expanding in low-income areas and can make otherwise marginal projects become more feasible. As an example, Truist worked with a major regional health system to utilize new markets tax credits to renovate an HIV clinic in a disadvantaged area where infection rates are six to eight times higher than the national average. The renovation expanded access to dental treatment, imaging, infusion, lab services, pharmacy, and social support services. It was the third time the health system used Truist’s NMTC program to expand or improve services in underserved communities.
Examine your financing options: public markets or bank debt? Many health systems have had to delay or defer major capital projects due to the challenging economic environment with increased costs and supply chain issues. Additionally, capital and project budgets approved just months ago may already be out of date.
The rise in interest rates has left many organizations with more expensive variable-rate debt and made previously attractive refunding options unfeasible. It’s more important to revisit the details of your current capital structure and to investigate alternative capital sources. Keep the big picture in mind: Interest rates should normalize at some point and organizations will want to be ready to take advantage when they do. Management teams can position themselves for success by establishing or increasing lines of credit to help with cash flow challenges and to ensure that necessary projects remain on track.
Rethink your approach to cash management. Have you put certain bank accounts on set-it-and-forget-it mode? Are idle balances sitting in obsolete transaction accounts earning little to no interest? If so, taking the time now to relook at these accounts may lead to opportunities to improve the yield earned.
Update your investment policy. When was it last updated? Dust it off and look at the details. How does it align with your current needs? Or is it too restrictive? If so, consider updating it to provide additional latitude while staying within your risk parameters.
Explore alternative real estate funding options. Have you considered using a structured real estate platform. It allows health systems to develop new facilities with the flexibility of leasing rather than using cash for the initial investment. Projects are typically structured with an option for the hospital to acquire the property in the future.
At Truist, we have our own structured real estate platform and using this strategy has helped free up liquidity, reduce the risks inherent in commercial real estate ownership, and allow for the retention of operating control for the health system.
You don’t have to go it alone. Many healthcare providers are opting to form joint ventures with physicians or other clinical operators for a variety of community needs including primary care, urgent care, ambulatory surgical centers, etc. A well-structured joint venture can be the key to deliver on an organization’s mission without 100% of the start-up costs.
Look at your employee benefits and their costs, including your pension plan. Hospitals need to find ways to deliver competitive benefits at the best possible value. Are there opportunities to make changes to existing benefit packages without impacting employee satisfaction? Are the offerings that your organization provides relevant to today’s workforce? Lastly, many hospitals & health systems have struggled for years with underfunded pensions. Now that these liabilities have decreased due to the increase in interest rates, take another look at a pension restructuring.