A financial and operational checkup for physicians

August 12, 2020

It’s critical that healthcare providers understand how to better prepare, operationally and financially, for the next outbreak.

The COVID-19 pandemic has been a pivotal moment for the healthcare industry. As much-deserved attention was being given to the heroism of doctors, nurses and countless other professionals on the front lines, the business of healthcare was quietly – and permanently – changing. Elective surgeries were cancelled and non-emergency medical appointments moved to telehealth. The coronavirus outbreak forced the industry to shift its long-standing business models.

As the initial surges of COVID-19 begin to wane, many healthcare providers have begun to reopen. However, with office hours looking much different, challenges remain. And, with many experts predicting a second wave of the virus in the fall, it’s critical that healthcare providers understand how to better prepare, operationally and financially, for the next outbreak.

Supply Chain

When the pandemic first hit, two things happened in quick succession. First, frontline workers began running low on facemasks, gloves and all manner of personal protective equipment (PPE) as existing inventory was diverted to hospitals to meet unprecedented demand. Second, with inventory low, prices for PPE began to skyrocket, with masks that normally sold for less $1 being priced at $6 or more.

While this series of events contributed directly to financial hardship in the healthcare sector, it also informs the industry as to how to prepare for the next outbreak. Healthcare providers should, within reason, build a stockpile of critical resources, including PPE, test kits, medication and other materials necessary for day-to-day operation.

Beyond having ample supplies, providers should also take a close look at existing agreements with supply chain partners, delivery schedules, contingencies for future disruption and pricing. When the next outbreak does hit, contracts should not allow for the price adjustments seen during the initial outbreak. Suppliers also shouldn’t be able to claim force majeure in order to void existing contracts since, for such a clause to go into effect, circumstances preventing fulfillment have to be severe and sustained over several years – a condition not likely to exist based on what has been seen to date.

Preparing Personnel

Hospital systems across the nation were wholly unprepared for the surge in patients seen during the initial outbreak. Faced with a tremendous surge in critical casework, facilities were forced to extend overtime for existing staff, call in retired workers and hire staff from out-of-state to address essential needs. The costs associated with personnel, combined with the extra costs for equipment and the loss of income from elective procedures, has left several hospital systems in financial straits.

Before the next outbreak hits, hospitals (and other healthcare providers in demand during a pandemic) need to lay the groundwork for a more efficient and flexible staffing model. Leadership needs to negotiate with unions and employee advocacy groups on conditions for the next surge. Iron clad agreements should be made with contingent workforce providers to have nurses, technicians and other critical staff available at reasonable cost.

Office Procedure

To help prepare themselves, healthcare providers must take every necessary precaution to ensure patients’ safety, which may mean elective visits and procedures remain at a reduced volume. Prior to COVID-19, crowded waiting rooms, with patients completing necessary paperwork and ready to begin their appointments at a moment’s notice, were the norm. Going forward, it will be a different story. Practices will need to adapt social distancing guidelines and will minimize patients’ extraneous time in the office. Patients will need to complete all paperwork online before they arrive on site and have to wait for their appointment offsite – entering only after checking-in via app, call or text message. Further adaptations will be necessary as this convention becomes the “new normal” for office visits.

Minimizing office time won’t be the only long-term effort made to help with social distancing. It has become widespread practice for patients to don gloves and face masks during visits to newly reopened doctors’ offices and it’s likely to becomes standard practice. Providers, however, should not trust the cleanliness or reliability of patient-owned PPE. When arriving at the office for their appointment, patients should be issued masks and gloves by the practice itself – items that are known to be clean, unused and sterile. In terms of an operational model, physicians may be able to look to dental offices as a baseline. At their core, dental practices are built around personal protection based on the nature of their work, and have the necessary equipment, policies and procedures to keep both staff and patients safe.

Misuse of Funds

For many practitioners, the biggest risk to the health of their business may come from the sources that they relied on to help them make it through the pandemic: federal aid. While most of the funds were distributed quickly to provide maximum benefit these past months, none of it was issued without restrictions. For example, provider relief funds allocated through the CARES Act were accompanied by arcane and sometimes changing terms and conditions on how recipients could spend the money, ranging from restrictions on paying salaries to precise instructions on how to safeguard IT systems. Running afoul of any one of these conditions may trigger an audit or other enforcement – which has the ability to ruin a practice financially more effectively than a lockdown. Prompt repayment is also essential. For recipients of CMS loans, repayment must be made 120 days after the provider got the advance payment. While these funds amount to no-cost working capital, an approximately 10.25% interest rate begins to accrue on any amounts that remain unpaid if the deadline is missed.

Emergency Waivers

Many practices were quick to adapt the “new normal”, partly due to emergency waivers that were meant as temporary means to facilitate operations under lockdown. Telehealth expanded significantly since the beginning of March, largely due to waivers that allow for video calls to replace in-person office visits. However, these waivers will, without some specific additional regulatory action, sunset when the HHS emergency declaration (allowing waivers to be made) expires.When that happens it will require providers using telehealth pursuant to a waiver to return to seeing patients in traditional office settings. Not only does this cause disruption to what has become accepted practice in recent months, but it may also lead to financial hardship. Patients are still reluctant to visit physician offices unless absolutely necessary, which means doctors will need to understand how to replicate income from telehealth if this is no longer an option under waivers. Certain procedures that have been optional due to waivers will also return to mandatory status. This change will place practices in a difficult situation as they will no longer have the income to support the staff to conduct such procedures.

Reimbursement

With elective visits and procedures likely to remain at a reduced level for quite some time, practices can no longer rely on patient volume for sustained revenue. Now is the time for practice groups to collectively engage with insurance companies to discuss increased reimbursement levels. While this issue has been a long time coming, raising reimbursement levels has never been more critical as practices are facing economic failure at an unprecedented rate. Such negotiations will take time – but are essential to insurers as well since taking no action will mean a permanent reduction in their customer base.

Patient Communications

Perhaps the most drastic change healthcare providers will need to manage is getting patients back in the door. Many people are understandably reluctant to conduct an in-person examination or consultation unless absolutely necessary. With that in mind, physicians need to adapt to this new reality and serve patients in ways that provide a greater level of comfort.

Practices need to engage patients with clear, direct explanations of measures they are taking to ensure safety, including sanitation, usage of PPE, new procedures, and policies for continuous improvement. They should also send out guidance on what to expect from a visit as well as appointment reminders, educational materials for patients – CDC guidelines, seasonal updates, etc. While these materials may not be an immediate call-to-action, they are an important touch base with patients. Videoconferencing is also having its moment during the pandemic as practitioners of all types are embracing such tools to conduct remote examinations and consultations. This is just another example of practices that are not likely to go away soon. Physicians should take the initiative now to increase the availability of telemedicine – but do so within recognized legal boundaries.

A Financial Checkup

Before considering how to prepare for any future outbreaks, healthcare providers need to assess damage done during the past few months and how it was inflicted. There are key learnings from the initial outbreak of COVID-19 that can help healthcare providers prepare for a potential second wave. This includes supplier relationships, personnel and how they communicate with patients.

Mark Claster is a Partner at Carl Marks Advisors, an investment banking and advisory firm in New York City. He can be reached at mclaster@carlmarks.com.

Ari J. Markenson is a Partner at Winston & Strawn's New York City office, as well as Co-Chair of their Health Care and Life Sciences Industry Group. He can be reached at amarkenson@winston.com