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Building resilience to the next economic slowdown

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As healthcare organisations get set to resume operations in full bloom post lockdown, at the top of the to-do list for leaders will be to relook at revenue cycles and bring back financial stability. Here are few prescriptions shared by experts:

Raelene Kambli

For hospitals, diagnostics centres, medtech players and allied industry, one virtually universal component of the COVID-19 crisis is the financial setback that has accompanied it. From smaller, regional and rural healthcare providers to the large multi-facility providers, every organisation is hit by this adversity. Whether it’s the high cost of treating COVID-19 patients, unplanned expenses for hard-to-find equipment or the collapse in elective and other non-COVID treatments and diagnostics or stumbling demand for high-end equipment, medical supplies and more – many healthcare organisations are increasingly feeling the financial distress.

Having said that, the Government of India is taking tactical actions to restore the functioning of these essential services; and so, it is time for financial leaders to get their acts together.

To begin with, there are some significant questions that need to be answered, such as, what would be the cash flow impact of losing weeks (or more) of elective surgeries? What impact might COVID-19 would have on the length of stay and case mix index (CMI)? What portion of the workforce will be directly impacted and what contract labour costs will be incurred? What would be the potential magnitude of extraordinary inventory costs to manage supply shortages? What will be the impact on the investment income and balance sheet if market losses hold or increase for the year? For medtech players, how the pandemic could influence capital purchases across several major medtech product categories and so on? And above all, will all these rethinking help in bringing back fiscal stability and when?

Early contingency planning is a must

Many financial leaders point out that building and stress-testing several scenarios for procedures and product demand will be critical to identify areas of risk and opportunity and navigating through the crisis. The planning and actions taken in the short term can have significant implications for the future.

From a broader business strategy point of view, Srinath Venkatasubramanian, Industry Analyst, and Srikanth Kompalli, Programme Manager, Transformational Health Practice, Frost & Sullivan recommend that healthcare companies need to re-evaluate their portfolio basis the shifts in R&D priorities and market needs. Moreover, by learning from the crisis, they need to prioritise digital initiatives across the value chain, specifically in areas such as customer engagement, supply chain monitoring and clinical development. This will enable them to remain successful as the current environment becomes the new norm. Companies can reorient themselves for long-term growth and can explore the possible benefits through strategies like vertical integration and bolt-on acquisitions (acquisition of smaller companies, usually in the same line of business to gain a significant comparative advantage but at a lower cost).

For hospitals, a long term contingency planning is a must, believe financial experts. “Hospitals should assess their cash position considering various outbreak scenarios over the next two-to-three quarters. We believe that hospitals need to plan for downside scenarios with multiple peaks over the next year or so, leading to multiple phases of patients having limited access to hospitals, like in a lockdown. To strengthen viability and sustenance in such scenarios, hospitals need to consider operating model changes that can strengthen their cash position. To start with, revenue from non-emergent services can no longer be dependent on traditional outreach models and doctor referrals. We believe that this crisis will spawn opportunities for more direct B2C connects between hospitals and their patients on platforms such as home healthcare, telemedicine and online consultations, enabled by insights garnered from analytics on patient databases. Marketing initiatives will become more digitally-focused rather than taking a below-the-line promotional approach. On the cost side, hospitals are likely to renegotiate terms for senior doctors with Minimum Guarantee (MG) fixed fee and convert them into more Fee For Service (FFS) models. Senior management pay cuts to the tune of 25-35 per cent are likely to be a key consideration across most healthcare groups. Non-doctor employees may see rationalisation or leave with minimal pay, especially if the crisis extends beyond June-July. Most healthcare groups should seek a moratorium on their loans and rental waivers or at least deferment for key leased facilities. Smaller, sub-scale facilities or facilities at an early stage of ramp-up could selectively see aggressive scale-back of operations or closure. In addition to the above operating model refinements, hospitals need to be aggressive in working capital optimisation by adopting an aggressive approach towards collections from government schemes and insurance payers and by deferring non-critical payables. Besides, all non-essential capital expenditure needs to be deferred until normal business operations resume. Without any interventions, most of the leading healthcare groups in India are likely to have only two-to-three months of cash to fund operational losses, assuming moratorium on financial obligations. Some of the operating model interventions could cumulatively give them an additional 30-40 days of cash for sustenance,” opines Kaustav Ganguli, Healthcare Leader and Managing Director, Alvarez and Marsal.

However, the real deal begins when operations resume. Joy Chakraborty, COO, P D Hinduja Hospital and Research Centre, indicates that contingency planning is much needed for operations to resume smoothly without greatly impacting operating costs. “First and foremost step that each hospital must undertake is a rock-solid exit strategy from lockdown to ensure a steady and healthy way to improve resource utilisation and scaling up of facility operations. At that juncture, attention needs to be paid on cash flow. Excellent management of receivables and payments management should be in minds. Renegotiations of contracts and rentals are advisable. A suitable HR plan to manage the optimal level of human resources to match the hospital’s operations will be the need of the hour,” he maintains.

For medtech companies who are currently facing disruption in supply chains (especially those dependent on single suppliers), delay in other clinical trials and challenges in connecting with physicians and clinical forums for product adoption may have to deal with greater losses. “The financial year (FY) business propositions on the unit shipments will also get hampered by 25-30 per cent in the overall medical devices industry. In the imaging sector, it can be as much as 30-40 per cent due to the high dependency on imports. Nevertheless, there is an opportunity for domestic manufacturers to fill in on certain requirements, courtesy of the healthcare stimulus package of ₹15,000 crore (Emergency Response and Health System Preparedness Package) and due to the supply chain disruptions on imports. Another concern when the recovery begins, it could be accompanied by a resurgence of demand for both elective and delayed essential procedures, straining business models and financial resilience,” imply Venkatasubramanian and Kompalli.

Therefore, the medtech industry will quickly need to recalibrate across the value chain to serve healthcare’s critical needs.

Dr GSK Velu, Chairman and Managing Director, Trivitron Healthcare, suggests, “Business, as usual, is not an option. Medical device manufacturers need to move fast enough to confront the pandemic but remain flexible enough to respond to changing situations. There will be a huge hit on the industry as the country imports consumables, disposables and capital equipment including orthopaedic implants, gloves, syringes, bandages and imaging devices from China. We have to immediately respond to this situation and look to localise the manufacturing of these products.”

More or less financial leaders perhaps have charted the strategic plan for their companies and are ready to act. However, there are a few things that experts recommend for financial managers, CEOs and operation heads to consider while implementing their plan of action.

  • Consider the potential risks
  • Create a list of your priority resources
  • Involve teams and delegate responsibility
  • Identify alternative sources of credit
  • Identify trigger variables that will affect revenue and cost
  • Back up your data
  • Review and update the process regularly

Turning risks into rewards

While analysts and financial leaders indicate that the road to recovery won’t be an easy path, they also hint that there would be an immense opportunity for organisations to excel and build resilience.  “Our sense is that this crisis will lead to consolidation opportunities for corporate healthcare groups, given that many of the smaller operators may not have the balance sheet strength to survive the crisis. For PE funds, this crisis is likely to lead to investment opportunities in some of the larger healthcare groups as most of the leading healthcare groups have less than a quarter’s cash for operational and financial sustenance, assuming low levels of utilisation for a quarter. Business models in healthcare are fundamentally sound and are expected to bounce back post the crisis unlike in many other sectors where the challenges are more long-term and systemic.  We have also seen that the pharmacy retail and e-pharmacy sectors are relatively more insulated from the crisis. While prescription generation for new patients has been low, pharmacy retail has continued to show resilience for chronic and self-purchase medicine. e-pharmacy has emerged stronger through the crisis, especially with a relatively lower number of people having access to brick and mortar shops as well as with pharma OEMs increasingly preferring them as an alternative channel. We believe e-pharmacy and retail pharmacy will see the increased transaction and investment activity post the crisis,” believes Ganguli.

“If global manufacturing giants shift some capacity from China to India, aided by favourable government policies, it could lead to some construction demand in the manufacturing sector,” Dr Velu delightfully adds.

Well, as some healthcare leaders seem unshakeably resolute to turn challenges into opportunities, it is paramount that they think of building resilience to the next economic slowdown. It is important to learn from the present crisis, build strong rescources and forge collaborations that contribute to the long-term growth objective of the company.

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