Tightening cash flows coupled with the likelihood of increased capital spending are a cause for concern among healthcare system executives. In a recent report by the Healthcare Financial Management Association entitled “Financing the Future", some startling conclusions were reached regarding current capital spending:
As for the predictions of future capital expenditures, the study compiled some interesting statistics:
Staying as up to date as possible with new equipment technologies and replacing aging plants are a key priority among health providers. These organizations also must spend money on cleaning up old liabilities and build outpatient facilities in order for their operations to be viable in the future. However, expenditures for updated equipment such as over $1 million for an updated PET scanner aren’t being matched by income. Reduced Medicare reimbursements haven’t covered costs. As a result, healthcare systems have had to make up the difference.
From the patient perspective, they don’t want to visit a facility that merely “keeps up". Patients are paying more out of pocket expenses than ever before. As a result, they expect to be able to benefit from the technological advances they read about in the newspapers.
The gap between what patients need and what cash-starved healthcare providers can provide is ever widening. This gap is likely to remain in effect if factors such as the Medicare situation, escalating malpractice insurance premiums, and technology that is costly, continue to squeeze cash flows.
What should the provider do?
1. Work with financial service companies that really know healthcare. By that, I mean a company that can truly understand the provider’s goals and strategies as well as the particular needs of the patients. They need to work with companies that put forth financial solutions that don’t sacrifice or compromise other segments of the business.
2. Shed assets that are a financial drain on the healthcare provider. They need to determine which real estate assets are productive for the future success of the business and which are not. For example, medical office buildings are difficult to maintain and manage. Selling the asset to a third party owner can relieve the provider not only the headaches of property management, but can free up cash and improve the balance sheet dramatically.
3. Control expenses and improve operational functions. Although many of the expenses of a hospital or practice are fixed in nature, there are still strategies that can be employed to improve the bottom line. One method is to periodically perform employee reviews to determine which staff members are productive and which aren’t. An untrained or simply incompetent nurse or other staff member can cost the facility a lot of money over time. The analyst should also review the purchasing policy of supplies and surgical instruments. Is the facility taking advantage of quantity discounts? Are competitive quotes received from other medical supply distributors?
4. Collections can likely be improved. When collection staff members follow up on both third party and self pay receivables, rather than just wait until they become considerably past due, days outstanding usually decrease. This can make a tremendous difference in the amount of available cash flow.
It is clear that capital struggles are likely to continue for the foreseeable future and it is critical that healthcare system executives must “think outside the box" to remain competitive and in some cases, survive.
Kent Harlan has been a CPA since 1984 and has provided consulting, accounting and financial services to several industries. He is the owner of Ozarks Capital Funding, LLC, a Springfield, MO based company offering financing in the areas of accounts receivable factoring, equipment leasing, asset based lending, and healthcare providers. He is an active member of the Missouri Society for Certified Public Accountants and has written several articles for various publications.