Updated: May 27, 2020
Today’s COVID-19 medical business environment requires a simulation tool akin to a flight simulator allowing for the real-time application of potential solutions with immediate results/feedback… and a “Reset” button.
An airshow performer had intermittent engine failure and made a forced landing in a nearby field. Afterward, he commented: “An intermittent or partial engine failure is much more dangerous than complete engine failure. Your mind goes back and forth too many times between scenarios.” The point being: If the critical variables in the decision-making process are constantly changing, it becomes hard to make the right choices.
That said, the right tool enables you to make the right choices.
The medical community is energized by CMS/HHS announcing they will ease Shelter In Place guidelines, including the resumption of elective surgeries, etc. However, we were advised, the process will not be like turning on a light-switch, but more like a sunrise… it will be a slow roll-out.
The Critical Question: “Will the resumption of services and payments be in time to save your medical practice?”
The shutdown had a significant negative financial impact on most medical practices. The critical question is: “Will the resumption of services and payments be in time for your medical practice?” While the traditional pro forma has always been a useful tool, its accuracy is highly dependent on these relatively constant historic metrics:
Accounts Receivable Statistics (i.e., Days in AR etc.)
Payroll and other fixed expenses
By the middle of March, most medical practices realized they could not rely on the above metrics in their decision-making process. Never seen variables such as Shelter in Place mandates and the canceling of elective surgical cases etc. disrupted existing financial metrics. Medical practices are struggling to know where they stand financially because they are in uncharted territory.
The Problem with Traditional Financial Forecasting: A traditional year-end forecast that includes restoration of services may describe a recovery by year’s end, but it could underestimate the pandemic downturn and may not predict insolvency by August, with recovery in the 4th Quarter.
Given the dynamic nature of the variables that change almost daily, medical practices of all sizes are in desperate need of an innovative tool for financial forecasting for such a unique scenario. Yesterday’s financial modeling will render a forecast that is irrelevant or even misleading. For instance, a traditional year-end forecast that includes restoration of services may describe a recovery by year’s end, but it could underestimate the pandemic downturn and may not predict insolvency by August, with recovery in the 4th Quarter. Ironically, the practice would not be there to see their “come-back!”
What Kind of Financial Forecasting is Applicable for Today’s Environment? The medical community needs something akin to an aviation flight simulator.
The medical community needs something akin to an aviation flight simulator. A flight simulator allows the pilot to experience in-flight emergencies in real-time, such as partial engine failure. They can apply in-flight emergency procedures to attempt to recover the aircraft’s loss of power, control, etc. If they fail and the plane does not recover, no one dies! The “Reset” button gets hit and they try again. Similarly, today’s COVID-19 medical business environment requires a simulation tool allowing for the real-time application of potential solutions with immediate feedback and a “Reset” button. The simulator needs to forecast financial viability based on the practice’s decisions projected on a month to month basis and not simply Net Revenue at year’s end.
Follow Up Critical Question: How many weeks will the practice lack Operational Cash and to what degree?
It comes down to this: What does the gap in Operational Cash look like? Most of the practice’s “BC” (before COVID-19) revenue should have been collected by now, or soon will be (given 30-45 Days in AR). The BC money is likely what the practice has been using for Operating Cash since the shutdown. For many, the cash has been spent. Most will have seen a 4-6 week dearth in billable services since the mid-March shut down. If there was not enough Operating Cash going into the COVID-19 crisis, and if government assistance is insufficient or delayed, the practice could be faced with insolvency a scant few weeks from now. The potential revenue lag will likely result in an Operating Cash gap the likes of which the practice has not seen.
The Quick and Dirty Math: The Practice needs somewhere between 8-12 weeks of Operating Cash needed NOW!
Assume the BC accounts are collected, and the money is largely spent. Then assume 4-6 weeks of reduced services + post-shutdown services… but another 4-6 weeks of AR ramp-up to refill the payment “pipeline” = somewhere between 8-12 weeks of Operating Cash needed NOW (if expenses did not change). However, the calculation is anything but a static estimate. What happens next, and next… (ad nauseam) changes the math on a monthly, even weekly basis.
The 3-Second Rule: The first reaction is often not the best option. Look for the best solution.
Pilots have a “3-Second Rule” when faced with a critical in-flight emergency, the initial tendency is for the pilot to “Do something!” immediately (in 1 second or less). However, the first reaction is often not the best option. Pilots are taught to take 3 seconds and THINK about the best solution. The little extra time can make the difference between a bad outcome and an acceptable, even good, outcome. In the case of the medical practice facing a foreseeable Operating Cash crisis… take the time to think through the options. Put aside the first thing that comes to mind. Look for multiple options/solutions and “simulate” them financially in a dynamic vs. static business model. It is OK to fail at a simulated solution. Hit the “Reset” button and try again. Don’t give up and keep flying the plane! (“Keep Flying the Plane” is the 1st rule in an in-flight emergency)
About the Author - Grant Scott, MA
Grant Scott is the Founder and President of Accord Healthcare & Business Consulting.
Grant leverages 25 years of experience in anesthesia, pain, and critical care medicine to help small and medium-sized practices & businesses make the best decisions based on interactive predictive business modeling using expert advice coupled with the COVID-19 Business Flight Simulator or, depending on client needs, CashFlowTool (the #1 rated cash flow app on QuickBooks Marketplace). Helping the medical/business community meet the COVID-19 Crisis head-on.