Restructuring the Balance Sheet

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If you are anything like me, you have had a few sleepless nights worrying about the future of the health-services industry. Historically, the industry has been a safe haven for investment due to the fact that it is not directly dependent on economic cycles. That, however, has changed in recent years (Figure 1).

imageFigure 1. Bankruptcies in the health care sector from 1997 through the second quarter of 2009; data compiled by River Corporate Advisors.

It shows that the health care sector is suffering from weak capital markets and reimbursement pressures. The relatively few bankruptcies from 1998 to 2000 were most probably a result of the reimbursement pressures caused by the Balanced Budget Act of 1997. The recent set, from 2007 through the second quarter of 2009, is a result of a more complex set of factors, including lower reimbursement mandated by the DRA and bloated balance sheets due to the credit bubble, followed by an arid wasteland of a financing market that limited refinancing options. In addition, providers are saying that volumes are down due to economic pressures. Higher copayments and deductibles are causing patients to think twice before seeing a physician.

Most analysts believe that the other shoe will drop in reimbursement, as the majority of the funding for universal health care (if enacted) will come from some forms of reimbursement cuts that require providers to treat/diagnose more patients at a lower revenue point per encounter. Thus, providers will need to streamline their operations and strengthen their balance sheets to prepare for an impending difficult operating environment. In the event the first two actions do not sufficiently improve their financial positions, companies also might need to restructure their debts.

Getting Lean

Most health care providers (and all diagnostic imaging facilities) operate with high levels of fixed costs, and this makes them highly susceptible to reimbursement cuts. There are, however, several areas to examine in streamlining operating costs, including staffing levels, overtime policies, bonus structures, and vendor contracts.

Staffing levels: In a portfolio of centers, there are some that operate more efficiently than others. A helpful ratio for determining their relative efficiency is the number of patient encounters divided by the number of FTEs. There will be two sets of outliers: those with ratios higher than the average, indicating greater efficiency, and those with ratios lower than the average, indicating lower efficiency. Using these data, an operator can review the structure of the more efficient centers to determine how to incorporate their staffing and workflow procedures into the whole portfolio. Conversely, one must attempt to reduce staffing levels at the less-efficient centers.

Overtime and bonus structures: In some markets, an MRI technologist could make as much as $75 per hour. At an overtime rate of 1.5, that is $112.50 per hour. If he or she stays two hours late to perform one scan, the center has lost money on that scan. While most overtime cannot be avoided, a manager must look at patient scheduling to ensure that the number of appointments during overtime hours, as well as overall scan volumes, justifies the incremental cost.

Bonus plans are important and tricky. An operator must develop a plan that is properly aligned with the company’s financial objectives and not subject to gamesmanship. I encountered a situation in which a company requiring immediate cash flow instituted a bonus plan based solely on scan volume. The business-development representatives proceeded to market services to attorneys for personal-injury scans. As we all know, these personal-injury cases do not pay on a timely basis. Accounts-receivable time can exceed 360 days in this area. Obviously, this bonus plan was not aligned with the company’s objectives. The company adjusted the plan to pay bonuses at the time of payment (not service), and the number of personal-injury scans decreased precipitously.

Vendor contracts: Many vendors are not directly on the reimbursement firing line. Don’t be shy about having them share the pain. First, review all vendor relationships to determine whether there is a real benefit from the services involved. We once encountered a contract for firewall monitoring for several thousand dollars per month, in what was clearly a hangover from the Internet bubble. We determined that this was a service that could be provided with a few