To play on a famous phrase from the advertising world, “It's Not Your Father's Economic Downturn.” With that uncertainty in mind, HRCM Senior Editor Daphne Lawrence recently sat down with Russ Rudish, vice chairman and leader of New York-based Deloitte's U.S. Healthcare Provider Practice, to obtain some advice on preparing for the future. While no one knows how bad the economic climate will get, it's certain hospitals won't be immune. In the following interview, Rudish gives advice on how the C-suite can come through the storm afloat.
DL: Describe the current financial strain on hospitals.
RR: There are two parts of a hospital from a financial standpoint. In one respect is the operating budget and one is the capital budget. They are both a lot worse off today than they were a month or two ago. If you had no margin, or if you are one of the hospitals running close to zero margin, now you definitely don't have one. And if you were running on a slight margin and that was what you were using for reinvestment, you probably lost that now.
DL: What might be some examples of executives overreacting to the situation?
RR: As a practical matter, I haven't seen any overreacting right now. What I have seen is CFOs, in particular, scurrying around to figure out how they can get a grip on what the actual net impact is and how they can mitigate it. There is a lot of variable rate debt out there that people are trying to deal with and trying to cut their losses, so to speak. And as far as overreaction, I don't have a good answer for overreaction because these are pretty tough times.
I did a presentation to several hundred financial executives recently, and after I got done they had a panel discussion with four CFOs from the tri-state area, and to a person they said — and these are 20-plus year people — that this is the most trying time they've ever had financially in their careers, which I think is true. It's hard to overreact right now. I haven't seen anybody do something totally irrational, if that is what you meant by that question.
DL: What would be some steps that CEOs could take to increase revenues, things like insurance reimbursements, patient co-pays, ED visits, attracting physicians and their patients, philanthropic activity, managing investments?
RR: You mean beyond maximizing your revenue cycle, which people have been doing for years, right? Maximizing the co-pays that you were saying, maximizing getting paid upfront, minimizing bad debts, putting in all good procedures to do that, which has been ongoing, so it's nothing new. So maybe there is an increased focus. But I think that what might be new is, on your asset side where you have investments, whether it's in a pension fund, or in a board-designated fund or an endowment fund or whatever, or a bond fund. Really focus on that, because those things for years have been in a pretty steady state and now they're not so steady. And so that is where the real extra focus needs to be. Here's my assets, theoretically, historically liquid assets. Focus on that to maximize the value of those assets.
DL: Would that include real estate, things like that?
RR: It could. Some people are thinking that this is a good time to pick up some assets, some hospitals or other types of assets because prices are low, whether they're public or private.
DL: How do hospital execs go about evaluating their investments?
RR: Almost all of them have investment managers or professional managers. The bigger the system, the more in-house talent they have. But even the biggest and the best — whether it's Harvard, you hear about some of their endowments — they still have professional money managers that work with them on the outside.
DL: So it's really about protection at this point.
RR: I think it's about minimizing the damage, mitigating the risks and capping it, and then figuring out how to best go forward. Again, if I was at a 2 percent margin, what do I need to do to get back? That wasn't enough in the first place, so I what do I need to do to get back there? But I still have to run my hospital, so I don't want to fire people most of the time because, generally speaking, I don't have excess people. I really most times don't. And by the way, if you fire people, as you know, that costs money in the short term. You've got to do severance and all sorts of things; they aren't going to help you in the short term. So layoffs really aren't the answer.
DL: So, short of headcount, what steps can be taken to reduce expense?
RR: Well, if you go back to what I said at the onset, there is the day-to-day operations and then there is the capital budget. The capital budget is basically two things. In a health system, it's more than two things, but 80 to 100 percent of capital budget is either building or investing in a new wing or a new hospital building, or IT, or machinery, the big stuff you buy from the GE and the Siemens of the world. So one thing you do is you figure out what is really, really, really necessary from a timing standpoint and you slow that down.
DL: A timing standpoint?
RR: Go into our IT department, I want to put in a new financial system, or a new clinical system or a new lab system, or a new any system. I was planning to do it today, start it today and finish it a year and a day from now. Why do I really have to do it today? Can I wait a year and not spend those millions of dollars? The answer, more often than not, is going to be (that) you really can wait if you so choose. Now there are negative implications to that. You're going to upset people. You're going to upset your medical staff perhaps, or you've made some commitments that you're going to have to back off of. But by and large, you can defer. If you're building a new hospital and you've already started, it's a little more difficult, but you can stop that too, or at least slow it down. So that's on the capital side.
When you go back to the operating side, I don't believe layoffs are the right or logical thing to do, because of the reasons I stated earlier. But I think you look at the non-payroll costs. There is money in fixed costs, as opposed to labor, where you can have more or less, so it's more variable. So I would say you would focus on your fixed costs, which are basically things you write checks for, not payroll checks, but where you pay maintenance contracts — elevator maintenance contracts, IT maintenance contracts, etc. I think that on the health benefit side, there'll be changes there. Hospitals are employers too; so just like other employers, they're going to want to put less money into the cost of healthcare for their employees. So things like that, and supplies too.
I think it's those kinds of things that you can focus on, in a shorter term, as well as getting all that revenue, which is nothing new; it's just an increased focus. There are better places to look at on the operating side then on the layoffs.
DL”: Talk a little more about projects you think can be put on hold.
RR: We think there will be a slow down. When cash becomes this tight and you spend money, it's just like a hospital on the verge of bankruptcy. What do they do? They extend their creditors, their vendors as much as they can and they pay for the blood and the supplies that they need to run the hospital, and they don't pay their lawyer so fast. They obviously pay their consultants very fast. So they stretch out what they can stretch out, and in addition to stretching out payables, I do think that capital projects will be, at a minimum, delayed and in some cases abandoned.
DL: Let's say you're in the middle of a project and you have contractual obligations and now the money has run out, what happens then?
RR: It depends on the circumstances — in some cases you'll continue it and put off experimenting with anything new; in some cases you can delay it. I would think there would be fields that are impossible to abandon, so I would say delayed or closed down. But a new project, say you're putting in a billing system right now, and you were going to do that first and then you were secondly going to put in a clinical system, you might just delay that clinical system for a while.