Helping healthcare organizations remain flexible and agile
In an environment where change is the only constant, KeyBank and Cain Brothers are helping healthcare organizations remain flexible and agile.
"Incredibly difficult" is how most healthcare C-suite leaders describe their current environment. Organizations face a perfect storm of conditions like surging COVID-19 cases due to new variants, staffing shortages and higher labor costs, new competitors with competing delivery models like home healthcare, and pressure to shift to new payment models, particularly value-based reimbursement.
Becker's Hospital Review recently spoke with three healthcare finance experts from different parts of KeyBank about the current healthcare landscape and how organizations can best position themselves for future success:
- Agapito "Aga" Morgan, commercial healthcare leader, Key Corporate and Commercial Bank
- Dave Morlock, managing director, head of health systems practice, Cain Brothers, a division of KeyBanc Capital Markets
- Kellen Williams, senior manager of business development, Laurel Road, a brand of KeyBank
Today's healthcare landscape is characterized by turmoil and turnover
Every day, KeyBank's leaders talk with health system C-suite executives about their business situations. A common theme is that the current environment is the most difficult that organizations and leaders have ever seen from a financial, profitability and personnel standpoint. "It's tough out there," Mr. Morgan said. "We're seeing a lot of management turnover from coast to coast."
Although hospitals and operating rooms aren't closed like they were at the height of the pandemic, there are still significant restrictions and limitations. As a result, hospitals often can't handle a full load of operating room cases, which is a key driver of revenue. "Even without government shutdowns, we are seeing less activity than before the pandemic and it's creating a lot of turmoil," Mr. Morlock said.
In addition, operating expenses are on the rise due to general inflation, supply chain challenges and the rising price of fuel needed to transport supplies. As interest rates increase, the cost of debt and the cost of borrowing are also rising for hospitals. In addition, the Medicare Trust Fund is scheduled to deplete in 2026. This will create significant reimbursement strains for healthcare organizations.
Despite what some might believe, "The healthcare landscape isn't going to return to 2019 conditions," Mr. Morlock said. "The curve has shifted on the expense side and revenues are also being pushed down. Over the next few years, I think merger and acquisition activity and layoffs will pick up. Unfortunately, hospital bankruptcies will also increase."
New market entrants, value-based care, health equity and regionalization will reshape the future of healthcare
Medicare Advantage and nontraditional providers like home healthcare, care delivered at a distance (such as through telemedicine and remote patient monitoring) and digital health are growing significantly. Mr. Morlock believes that Medicare Advantage — which is shifting insurance from a government-paid fee-for-service model to a value-based private model — could be the vehicle that ultimately creates a tipping point for value-based care in America.
"Medicare Advantage could become the healthcare equivalent of 401(k) plans," he said. "It's a shift from a defined benefit perspective to a defined contribution approach. Medicare Advantage will probably be the accelerant for value-based care."
Another trend reshaping the market is that insurance companies are acquiring physician practices, leading to "payviders." According to Mr. Morlock, "UnitedHealth Group is the largest health insurance company in the country, and through Optum Care, it's the largest physician group. Humana is in the physician business, as well."
A positive trend that KeyBank is seeing is that large anchor health systems are increasingly prioritizing and focusing on health equity. "If you aren't thinking about how to deliver care to underserved communities where you operate, you are already behind," Mr. Morgan said. "You can either invest alone or you can put your capital to work alongside community development financial institutions."
In addition, the business of healthcare is becoming more regional, and the regions are getting bigger. "People have often said that healthcare is local, but that's not true," Mr. Morlock said. "Ultimately, we will end up with a relatively small number of large, regional players. The number of survivors in those regions will vary, depending on the markets. Regionalization is definitely happening and it's going to continue." The key to being able to survive, thrive and compete effectively is attaining scale within a regional market. This trend doesn't bode well for independent provider organizations that lack scale yet are trying to go it alone. They will struggle to compete against regional players with greater scale.
To thrive in this challenging environment, health systems must be creative and forward-thinking on multiple dimensions — especially in attracting and retaining employees
KeyBank has found that some independent hospitals and larger health systems are adjusting quickly to this new world order and are acting with a nimble touch. The organizations that are best positioned for future success are running very lean organizations.
First and foremost, KeyBank is advising clients to build a fortressed balance sheet. During COVID-19, liquidity mattered and looking ahead, it will continue to increase in importance. "Now is the time to think about adding liquidity to your balance sheet and to think about refinancing longer-term taxable or tax-exempt paper," Mr. Morgan said. "It may be time to lessen the focus on independence and to think about merging with the right partner."
Health systems must also diversify their revenue streams. That may be through joint ventures with ambulatory surgery centers, behavioral health or home healthcare organizations. "From a strategic positioning perspective, you need scale to be a long-term survivor. The new version of scale means the ability to compete for covered lives [within a regional market]. It goes beyond traditional economies of scale," Mr. Morlock said.
Given the current staffing situation in healthcare, leading health systems are moving aggressively to develop workforce plans. Some have created programs in conjunction with local high schools, community colleges and universities to build pipelines of nurses, physicians and other care delivery providers. In addition, they are taking new approaches to nurse contracts and longer-term incentive plans.
According to Mr. Williams, "The cost of education isn't coming down and the amount of time that people commit to healthcare education is huge. Large healthcare organizations must think creatively about how to attract and retain top talent. Since March 2020, the CARES Act has enabled organizations to pay up to $5,250 of an employee's student loans as a tax-free benefit. We think that benefit will become the norm like a 401(k) plan."
Healthcare employers also need to provide employees with resources to make good financial decisions. "I think of healthcare professionals and particularly physicians as being like professional athletes," Mr. Williams said. "Once they finish their training, they have a lot more responsibility and they come into a lot of money. But do they have the tools to manage that money properly?"
With its deep understanding of the healthcare market and its portfolio of diverse businesses, KeyBank is committed to helping health systems succeed in this challenging environment
Healthcare represented 20 percent of the country's gross domestic product in 2020, according to CMS. Given the importance of this sector from an economic and social perspective, KeyBank views healthcare as one of its strategic pillars.
From a commercial banking perspective, KeyBank offers a broad range of solutions to healthcare businesses across the care spectrum. "We provide balance sheet support on the taxable side, with liquidity-like revolvers and lines of credit," Mr. Morgan said. "We also provide balance sheet support on the tax-exempt side, as well as growth capital, equipment financing and real-estate financing and refinancing."
On the treasury and enterprise payment side, KeyBank helps digitize accounts receivable and accounts payable for hospitals, health systems and other health businesses. The goal is to digitize the entire process and streamline patient engagement.
Cain Brothers focuses exclusively on healthcare, offering comprehensive merger and acquisition advisory services to hospitals, providers, managed care service companies, healthcare IT and other healthcare organizations. "We are the leader in private equity-backed, middle-market, capital-raising transactions," Mr. Morlock said. "We also are significantly involved in healthcare capitalization and recapitalization transactions, underwriting and access to debt capital markets."
Laurel Road is KeyBank's digital-first, healthcare-specific consumer banking platform. With Laurel Road, healthcare organizations can provide tangible benefits to their employees. This is critical in an environment where healthcare talent is leaving the profession and where those who stay have increased bargaining power.
Student loan debt can be particularly burdensome for physicians and nurses. Laurel Road as well as KeyBank’s recently acquired Public Service Loan Forgiveness (PSLF) counseling services provider, GradFin, can help advise on options to alleviate some of that burden. GradFin gives healthcare consumers access to no-cost consultations with student loan experts, helping them understand their options around student loan forgiveness, refinancing or a combination of both. GradFin helps healthcare professionals navigate the complexities of the PSLF application process, so they can take full advantage of the program’s financial savings benefits while also having access to Laurel Road’s competitive refinancing rates.
“When health systems work with Laurel Road, they can give employees access to low rates for paying off student loan debt,” Mr. Williams said. “In addition, employees gain access to GradFin’s PSLF student loan advisors and a variety of financial education and wellness tools. As companies reevaluate their employee incentives, we are part of that strategy.”
In March 2021, the company launched Laurel Road for Doctors. In addition to assisting with refinancing student loans, Laurel Road also offers checking and savings accounts, mortgages, personal loans and a credit card. In 2022, Laurel Road also launched tailored solutions for nurses, including a checking account that lets nurses earn monthly cash rewards.
"Healthcare organizations must take a holistic view and not just help employees get out of debt but help them thrive with the money they have," Mr. Williams said. "That's where Laurel Road comes in."
Conclusion
As healthcare organizations navigate these unique and challenging times, KeyBank is focused on leveraging its knowledge of the market, expertise and broad range of solutions to help.
"Our collaboration with Cain Brothers, our consumer platform, Laurel Road, our commercial banking team and our treasury management team is unique," Mr. Morgan said. “We go to market together every day, and we see that as a way to differentiate ourselves in all of our conversations with customers.”