Financial scenario planning for health care providers

Content Type: Article

Preparing for multiple outcomes can help practices thrive amid disruptions.

Conventional wisdom has long held that health care is a “recession-proof” industry. Until 2020. The unprecedented disruptions created by the pandemic instigated a host of financial and logistical challenges that health care providers struggled to address.

“The post-pandemic era has been challenging for health care providers,” says Mike Mauldin, head of the Health Care Specialized Industry Group at Regions Bank.

Despite those challenges, Mauldin believes health care providers can still navigate choppy financial waters and thrive, while delivering high-quality care to patients. The key is prudent planning that considers a range of possibilities and starts with an awareness of industry trends.

Painting the financial picture

While providers often experience different challenges depending on their geography and specialty, many have found it difficult to operate under recent financial constraints, says Mauldin. For example, just when patient volume began to rebound from pandemic lows, labor shortages made it difficult for some providers to meet the needs of patients who had put off elective procedures. Reimbursement rates, meanwhile, have not kept pace with cost increases related to inflation.

Providers have had to contend with these challenges while aid from the federal government has dried up. The Coronavirus Aid, Relief, and Economic Security (CARES) Act sent $175 billion in relief to health care providers, while Paycheck Protection Program (PPP) loans also provided a measure of relief for small-to-medium-sized practices. “Unfortunately, most of those provisions have now expired, and providers are now living with the repercussions,” says Mauldin.

Another disruption is Medicaid redetermination, the process of reviewing a recipient’s continued eligibility for the program. “During the pandemic, state Medicaid agencies were not allowed to remove beneficiaries from the Medicaid rolls,” Mauldin says. “Those provisions have expired, and that has reduced the number of patients covered under most state Medicaid programs. For certain providers, that has created a challenge.”

Planning amid uncertainty

The best way to prepare for financial uncertainty is to plan for it. Mauldin encourages health care providers to engage in financial scenario planning, in which you explore different plausible futures and test strategic choices for each one. Consider these key variables when scenario planning:

Patient volumes. After the drastic decline in the number of patients seen during the pandemic, followed by a post-pandemic spike, most providers have experienced a return to pre-pandemic levels. “Patient volumes are more predictable than they were a few years ago,” Mauldin says.
Payment rates. Providers should plan for a scenario in which rates stay the same and one where they increase modestly.
Telemedicine. While virtual visits still represent a small percentage of most providers’ total volume, telemedicine has increased in certain specialties, such as among rural patients connecting to specialists and people seeking access to mental health professionals.
Collection rates. Prudent health care providers should plan for scenarios in which collections are affected by higher unemployment rates. “We only really start to see an impact on patient collections when unemployment rates start to increase,” says Mauldin.

Evaluating your options—and potential implications

Once you’ve assessed the impact of various scenarios, you can also start considering potential solutions.

“Thinking about these things in advance, before you’re in the midst of a challenge, helps take some of the emotion out of it and can get people aligned in terms of thinking about the best next steps in a difficult environment,” Mauldin says. He offers these suggestions:

Plan for the cost of labor. For many practices, staffing costs remain a challenge. “After the pandemic, when many people on the older end of the health care workforce dropped out completely, health care providers shifted to contract labor and travel agency staffing, which is significantly more costly,” says Mauldin. “The use of agency staffing and travel nurses has begun to fall during 2024, but the wage and salary costs for clinical nurses remain high.”
With this in mind, practice leaders might consider whether they need to reduce staffing levels in order to drastically cut spending. Check with your lawyer to make sure you’re aware of proper procedures if you need to go this route. In the meantime, be aware of hiring trends. As the labor market allows, some may consider shifting from agency staffing to more full-time clinicians.
Rethink your real estate needs. Rent is also a significant line item for many practices, and for those with plans of buying a business property, the costs of new construction remain high. Practices that have successfully shifted to a work-from-home model for some employees might consider making that change permanent to reduce office expenses. Another solution might be relocating to a smaller space.
“Interest cost is yet another challenge,” says Mauldin. Despite the fact that the Federal Reserve has begun to lower interest rates, interest costs remain stubbornly high for some providers, and in many cases, they have not kept pace with revenue increases, Mauldin says. This is yet another reason to take a close look at whether reducing costs can improve your finances.
Create a cushion with credit. Some practices might consider establishing a line of credit with their bank, if they don’t already have one. “It’s best to do that in advance of the need,” Mauldin says, rather than waiting until there’s a real liquidity crisis.

While it’s impossible to know what the future will bring, using financial scenario planning can ensure your practice is as prepared as possible for whatever lies ahead. “Financial planning, through multiple scenarios, is helpful in terms of feeling some level of control in a challenging environment,” Mauldin says.