Consolidation is coming to the Regional Health Systems – quickly. I understand this is not a fun topic and may sound like hyperbole, so I’ll explain. Operating costs at health systems are growing faster than revenue. This has been an emerging trend for over 10 years, but it was accelerated by the pandemic. Three years after the start of Covid, hospital revenues have been overtaken by skyrocketing expenses, especially for labor, supplies, and technology. This leaves health systems in a challenging position. The cost of care is greater than the reimbursement rate, and cash reserves are disappearing at an alarming rate.
As a VC investor, I often discuss this “runway” concept, but it isn’t not widely understood. Runway is an analogy to help executives visualize their situation. It is defined as the number of months a business has before it can no longer fund operations. It can be calculated by dividing the cash on hand by the monthly cash burn rate. Executives must find a way to change the state of the organization or “achieve liftoff” before they reach the end of the runway (and crash).
According to Moody’s Investors Service, health systems’ balance sheets at the end of 2022 had a median of 247 days (8.1 months) of runway. Leadership teams will have to find new sources of cash or cut expenses quickly. However, health systems (unlike startups) have a moral, legal, and ethical responsibility to continue to provide care to the people in their geography. Boards of Directors take this responsibility seriously and will not be willing to cut it too close to failure. Thus, leaders will be forced to hire outside advisors to sell or merge the system while there is time to conduct an investment banking process. In my experience, this process takes between 9-12 months.
Thus, leadership teams have only a couple of months to present a viable plan before the system is put up for sale. Most teams have no plan ready. It’s difficult to blame them as they’ve struggled over the last few years to meet the pandemic emergency. This new cash crisis is unfair but real.
How can leaders take action – Fast?
CEOs and leadership teams must band together to find new sources of cash and remove significant costs. To help, we are assembling the Jumpstart Regional Leader Network to create “safety in numbers” for our health system partners. This network allows executive teams to maintain independence while learning from peers to mitigate risk in testing and developing new ideas and approaches. Every system faces financial challenges, and no one has enough time, capital, or experience. The runway is short. Collaboration will be critical to our collective ability to build strong regional health systems across the US.
It will not be a panacea, but we believe the Jumpstart Regional Leader Network can be a significant component of a health system’s full strategy. Of course, each leadership team must assess its strengths and challenges, but the Jumpstart team knows how to move fast and complement our health system partners.
Whether you join the Jumpstart Network or establish your own, take a hard look at your own specific burn rate and cash runway – every day counts. Health System leaders need to quickly find new sources of cash flow, collaborative peer systems, or a friendly merger partner. The challenges are great, and there will be safety in numbers.