December 9, 2023

Days cash on hand at not-for-profit hospital systems is trending downward as the sector recalibrates after last year’s higher-than-normal balances. 

For some, it’s requiring tough choices to be made. 

Trinity Health is looking for ways to stabilize its portfolio, while also deferring capital expenses, even as demand increases to improve equipment and facilities, CEO Michael Slubowski said. The Livonia, Michigan-based health system had 237 days of cash on hand as of March 31, compared with 261 days at that time in 2021, according to the most recently available data. 

“The biggest prime directive about this is to try to lower our operating expenses and find any sources of revenue we can to try to get back on solid financial footing,” Slubowski said.

Last year, hospitals’ coffers were bolstered with federal COVID-19 relief funds, including the benefits of payroll tax deferrals and the Accelerated and Advance Payments Program implemented in early 2020 by the Centers for Medicare & Medicaid Services.

“That led to a bulging of balance sheet(s) that is coming down now from the peak that you had at the end of 2021, but even (with) that cycle of balance sheet shrinking back … on average the not-for-profits will still be holding a lot of cash,” said Daniel Steingart, senior credit officer at credit rating firm Moody’s.

Not-for-profit systems typically hold more cash than for-profit organizations because there are no shareholders vying for excess capital releases and the entities have tax-exempt status.

Median days cash on hand have decreased by 18% from June 2021 to July of this year, according to an analysis of approximately 700 not-for-profit hospitals from consulting firm Kaufman Hall. 

One big cause of the downturn is required repayments for the Medicare loan program. Providers must repay the amount in 29 months, a time frame that ended this summer for those that received the advance payments in early 2020. The repayment period should end for providers by the end of the year. As of May, about 75% of the outstanding amount had already been repaid, said Erik Swanson, senior vice president of data and analytics at Kaufman Hall.

Higher expenses, largely driven by increased labor costs, and the resulting squeeze on operating margins are other factors dragging down cash on hand.

“It’s going to be a very challenging year. We have not seen any tremendously bright spots of abatement of the high expense load, huge influxes or rushes of volumes coming back,” Swanson said. “If you entered the pandemic and came into this situation with a relatively shaky balance sheet, you would likely be very worried now.”

He estimated more than half of hospitals are drawing on cash reserves to cover current operating expenses.

Smaller healthcare organizations are more prone to cash issues. 

Peggy Abbott, CEO at Ouachita County Medical Center in Camden, Arkansas, said available cash is the lowest she has seen in her 35-year healthcare career–days cash on hand are at a “critical level” at the medical center. She did not provide additional details. 

“Survivability is really a question at this point,” Abbott said. “We have never had a wide margin anyway, but we … have it seems to me a nonexistent margin to date. … We are truly operating on a week-to-week cash basis in Ouachita County Medical Center, and I think many of the rural individual hospitals are in that same space.”

To stay afloat, the hospital has cut workdays in non-clinical areas and shortened shifts by two to four hours. Abbott, along with other management leaders, voluntarily reduced their salaries. She has reached out to government officials and legislators for assistance. A local bank is willing to offer short-term loans to the hospital.

Turning to lines of credit is a temporary solution, Swanson said. And analysts are watching to see if hospitals default on their debt agreements, which could negatively affect credit ratings and limit future options for issuing more debt. 

Main Line Health has seen a 100-day erosion in days cash on hand in the last year, CEO Jack Lynch said.

A few capital projects are siphoning funds at Philadelphia-based Main Line, including a $327 million modernization at the Riddle Hospital campus. There was also a $35 million expansion doubling the inpatient psychiatric unit at Bryn Mawr Hospital, plus a $45 million investment into neurointerventional programs. 

“Our board has curtailed our capital investments dramatically, cutting back on strategic investments and really only investing in capital equipment that will affect safety, quality and equity,” Lynch said.

Main Line brought in a consulting firm to assess its cost structure, including ways to eliminate excess costs and standardize its care processes and suppliers. For example, the organization is working to cut costs by avoiding unnecessary hospital admissions, especially as lengths of stay climb across the industry. 

Joseph Malas, chief financial officer at Davenport, Iowa-based Genesis Health System, said recent losses on investments have negatively affected the system’s cash balances, with recession fears driving a volatile market. For example, any gains shown in 2021 on the S&P 500 had been erased as of this June. Several health systems cited investment losses as a key reason for poor second-quarter performance.

Genesis Health had 220 days cash on hand as of August, compared with 311 days a year prior.

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