A Take on EY’s “Americas Board Priorities 2023: How to Build Resiliency in Uncertain Times” - Peter Waziri
Part I : Navigating Uniquely Challenging Economic Conditions
From a Healthcare Industry Perspective
The EY Center of Board Matters recently published an interesting report on building resiliency in uncertain times and highlighted 5 board priorities for 2023.
Reading this report from a healthcare industry perspective was interesting and gave me a lot to think about. I am going to be sharing my thoughts in a series of five articles.
In this first article of the series, I will explore the topic of Navigating Uniquely Challenging Economic Conditions.
According to EY, the 2023 environment will likely encounter a global recession due to the war in Ukraine, rising level of interest rates, higher inflation, economic slowdown in the Europe, China, emerging markets, and the US. Given the headwinds driving these trends, the resulting uncertainty is making management adopt relatively conservative investment decisions. Yet the report accurately pointed out that uncertainty creates opportunities and proceeded to list five critical areas for boards to focus their attention to guide companies through this challenging economic period.
Healthcare company boards should consider:
Keeping an eye on inflation
Healthcare companies should be focused on how to adapt to inflationary pressures and boards should be asking management about measures to protect cash flow and margins in real terms (e.g., cost cutting and revenue generation). Equally important are steps taken to protect the balance sheet (e.g., payment cycle management and debt). Boards should encourage management to build flexible pricing and supply strategies with greater dexterity than previous years. They should also be asking questions about new strategies adopted for budgeting, planning and capital expenditure. For example, are management assumptions rebased quarterly or semi-annually to stay on top of real vs nominal costs. Also, healthcare cost inflation keeps outpacing general inflation despite recent higher inflationary trends. This twin headwind is forcing consumers into cost-based modification decisions about healthcare some of which involves postponing non-urgent treatments. Boards should be mindful of this as they engage management on forward thinking strategies, and on the effects of behavioral changes to routine and preventative medical expenses.
Paying attention to labor
The labor market remains very tight and expensive for the healthcare sector. This shortage is affecting every aspect of patient care (admission-treatment-discharge). Several health systems are experiencing suppressed bed capacity. Driving this trend is a shortage of clinical staff which most facilities try to alleviate with expensive temporary staff with limited success. This shortage has complicated and delayed post-acute placements resulting in higher costs that are not reimbursable. Moreover, lack of bed capacity contributes to revenue decline which further heightens negative margins. This sequential chain of events (talent shortages — delayed discharges — higher expenses) has been a major factor in hospital losses and the pressure on hospitals and staff will only increase. As such, boards should be asking about management’s efforts to better manage high labor costs (including travelling labor). There should be greater attention and focus on employee retention, increased training, and measures to minimize burnouts. Boards should also ask management about strategies that directly enhance productivity and efficiency gains such as investment in new processes and technologies.
Deeper focus on cost of capital
Tighter monetary policies (i.e., higher interest rates) have made cost of capital a bigger factor than in previous years for healthcare companies. They are also besieged by unprecedented increase in labor cost, retention challenges, and operational losses while executing complex business model transformations. But the need for capital investments remains just as important as ever. For healthcare entities, continued investments in digital transformation (data and technology), resilience (cybersecurity and hospital facility optimization), talent (upskill, future workforce requirements), innovation and R&D, and growth (M&A, and new ventures) remains salient. Given this, boards should challenge hospital management to rethink business models to balance their service offerings against reduced financial resources and engage in discussions to prioritize how best to deploy limited resources. A top area for healthcare is the need to keep funding digitally focused business model changes, especially those that achieve cost efficiencies and facilitate hybrid workforce models. Equally important are investments in cybersecurity and privacy. As a people business, investment in talent and workplace solutions (e.g., automation and upskilling) are just as important as other major capital expenditures. As such, the board should be looking at CFOs and how closely they work with the rest of the C-suite to prioritize these investments.
Focusing on supply chain
Disruptions caused by the pandemic and geopolitical forces continue to be prominent in healthcare. The pandemic exposed the hidden stresses in supply chain and staffing in healthcare facilities. Boards should recognize that hospitals tend to pay more for nonclinical items than other industries. This calls for better oversight of hospital supply chain risk and redundancy. Boards could ask management how they plan to explore better use of technology and robust vendor management strategies. For example, boards could engage the health systems head of supply chain to stress-test strategies that help to elevate and switch up best practices and upskill internal talent. Boards could also ask for better line of sight into supply chain strategy within health systems on a going forward basis.
Watching energy transition
War in Ukraine and climate change raises the spotlight on energy transition projects. Hospitals, surgery/treatment centers and other facility-based entities are especially vulnerable because they face the twin headwinds of high clinical and facility costs. Boards should be part of the discussions to pressure-test transition plans and projected impact to financial performance, growth, and strategy. Boards should also be interested in management’s plans given the Inflation Reduction Act (IRA) of 2022. The IRA constitutes the single largest set of investment, subsidies and tax incentives for energy and climate purposes in America’s history. The Board could ask management to explore alternative energy sources like Solar power with respect to achieving energy sustainability that can be a competitive advantage in the future.
A financial and health care leader with a global perspective, Peter Waziri has deep experience across several industries. He currently provides financial leadership for Parkland Community Health Plan’s operational and clinical management functions. Previous positions include CFO at Umpqua Health and also at Cascade Comprehensive Care, along with management positions at GE Capital, Ernst & Young, PNC, KeyCorp, and the Institute of European Finance in Great Britain.
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