Labor shortages, the rising cost of capital, inflation, and preparing for a possible recession are consuming the attention of health system executives. Deleveraging and reducing costs through automation and operational efficiencies should be priorities of public hospitals, and efforts should focus on sustainable solutions that generate long-term value.
But reducing debt and providing services more efficiently doesn’t mean retrenchment. Public hospital leadership should be preparing for an economic downturn by shoring up their balance sheet, diligently pursuing operational efficiency opportunities, and positioning for growth.
Liquidity
One would think hospital executives would be eager for the end of 2022; more than half of all hospitals are expected to lose money this year. The cost of labor, purchased services, supplies, and drugs have all increased approximately 25% from 2019. And yet, expenses are expected to continue to rise into 2023. But now is not the time for additional debt. Hospitals with high debt and low days cash on hand are particularly vulnerable when patient service revenue declines. The situation is exacerbated for public hospitals that:
- Have less access to capital than large health systems and no opportunity to issue equity.
- Bear a greater share of charity care, which increases during recession.
- May rely on local tax revenue, which often deteriorates during an economic downturn.
Having high levels of debt—and therefore high interest and principal payments—reduces the cash a hospital has to cover operating expenses. Combine reduced revenue, high debt payments, and increasing operating expenses and a hospital begins to face the need to layoff portions of the workforce, reduce services, and take other, more aggressive cost-cutting actions that impair its ability to serve the community.
Originally published by The Governance Institute, November 2022
Published March 8, 2023
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