Providers that emerge the strongest from the pandemic will share a couple attributes. Perhaps the most important is high liquidity, which helps them react quickly and aggressively.
“What you are seeing is everybody recognizing cash is king,” Johnson said, “and those with more liquidity are going to be able to navigate this period of turmoil much better than those that don’t.”
Historically the big for-profit systems have operated more efficiently with less cash and more dependence on lines of credit, Johnson said. Moving forward, he said it’ll become more important to build a “war chest” to fund short-term needs like higher supply costs from more expensive personal protective equipment, ventilators and other needs and higher staffing costs as workers fall ill and need to be replaced.
The government is providing what could be the most significant form of liquidity in the form of accelerated Medicare payments under the CARES Act, said Matthew Gillmor, a senior research analyst with Baird. Even though the money will have to be repaid, it could be the biggest cash offset providers will see during the pandemic, he said.
The most important characteristics to help hospitals weather the current crisis are strong balance sheets and being a part of a health system, said Kevin Holloran, a senior director with Fitch Ratings. Systems tend to perform better than stand-alone hospitals because they can control resources better. “If one hospital starts to get overloaded with the surge and another hospital maybe was spared, it can reallocate staff, equipment and ventilators to another hospital very easily—and it all stays in-house,” he said.
Fitch placed 15 hospitals on rating watch negative in April. The biggest factors that landed them on the list were being small and light on liquidity and days cash on hand, Holloran said. Of the 15, more than half had negative outlooks already. Their median days cash on hand was below 90, he said.
“If you’re going to get dislocated for a couple months, you’re going to burn into that,” Holloran said.
In the end, Holloran predicts health systems’ operating margins will fall between 3 to 6 percentage points in 2020, likely closer to 6. In other words, a 3% margin would become a 3% loss margin.
Weir, of Olmsted Medical, said the biggest challenges ahead will be having enough PPE and ensuring a safe clinical environment for patients.
“It’s been impressive all the hard work people have done in incredibly uncertain times,” he said. “In the end we’ll be fine. It’s going to be a bumpy road, but we’ll come through the other end.”