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Impact of financial downturn on healthcare industry

Case study on Egyptian private hospital

Prepared By,

Puruhutjit Surjit surjitpj@gmail.com


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Contents

Executive Summary...............................................................................2 Introduction..........................................................................................3 Methodology..........................................................................................4 Effect of financial Downturn.................................................................11 Recommendations...............................................................................13 Conclusion...........................................................................................16 References...........................................................................................16

Executive Summary

The objective of the project is to explain the impact of global financial down turn in Al Salam hospital, Egypt.

Al-Salam hospitals have been affected significantly by the Nations economic crisis due to the financial down turns in the global market. The hospital is experiencing declining in a)margin)-non operating income-day cash on hand, d)-patient revenue. Investment income has declined dramatically, increased cost of borrowing, Decreased access to capital financing.

The economic crisis is affecting patients in need of care. Admissions and elective procedures have declined, Increases in emergency visits and patients with behavioral health care needs. Increases in patients without health care coverage and needing financial help.

Access to physician care is further threatened. More physicians are seeking financial support from hospitals. More physicians are seeking employment.

Hospitals are taking steps to address the financial impact by reducing administrative expenses. Reducing staff. Postponing or reducing capital investment in building renovation and information technology. Enhancing productivity and efficiency increasing efforts to protect and expand volume changing debt structure

Introduction to the topic


Recession-Recession is a period of business cycle where the real GDP of the country is
decreasing successively for the two quarters.

Recession impact in Hospital Industry-Egypt has a pluralistic, segmented health


system, with many different public and private providers and financing agents. There are three main financing agents: The government sectorThe Insurance sector The private sectors Due to the current account deficit on the back of decline in the outlook for export of goods and services and a slowdown in remittance growth, the overall trade deficit will widen from US$ 23.4bn to US$ 29.9bn, it will have major impact on government spending towards healthcare and it will affect the patient flow to the private hospital who are providing the services on behalf of government funds. Health Insurance Company accounted 8% of the healthcare expenditure in Egypt. In Egypt 70% of the patient paid their healthcare expenditure from out of pocket. Due to the global financial meltdown the per capital income has declined and the unemployment has increase and the people loss there heal insurance coverage, it has a major impact on selected surgeries like cosmetic surgery and bariatric surgery etc. Due to the global financial meltdown and decrease in real GDP the healthcare expenditure is expected to decrease from 6.3% of total GDP to 4% during the financial year 2009.

Table 1. Egyptian Health Expenditure: Use of funds. Source:


Users of Funds Pharmacies Ministry of Health services Private providers University and teaching hospitals Health Insurance Organization services Percent of Total Health Expenditure 36% 19% 27% 10% 8%

Table 2. Egyptian Health Revenues: Sources of finance. Source:

Source of Finance Households Ministry of Finance Social insurance contributions Firms Foreign donors

Percent of Total Health Revenues 51 35 6 5 3

Recession impact in other industries-Since the second half of last year, Egypt's
economy growth rate has witnessed setbacks due to negative impacts of the prolonged global financial crisis on the economy of the populous country in the Middle East and North Africa. Originating from the turmoil of the U.S. financial sector, the financial crisis has been spreading to most areas in the world, including Egypt. In the second half of 2008, the negative consequences of the financial crisis began to bite the Egyptian economy in many fields, particularly the prime sectors which contributed to the country's revenues. Such as Tourism sector Energy exports Suez Canal tolls Remittance from expatriate workers

Tourism industry has always been one of the major industries of Egypt. In 2008, it was reported that some 12.8 million people all over the world travelled to Egypt and brought some 11 billion U.S. dollars to the country's revenue, or some 8.5 percent of the Egyptian Gross Domestic Product (GDP). But statistics indicate that the growth rate of foreign tourists has dropped since last October. The booking rate of the hotels in the Red Sea resorts was only some 40 percent. According to the Egyptian Travel Agencies' Association, increase of foreign tourists in the next four years is only predicted at 6 percent, compared to some 16.6 percent in the past four years. In the fiscal year of 2007-2008 (as of June, 2008), remittances from expatriate workers reached 8.56 billion dollars. But most Egyptian emigrant workers live in Gulf countries, 5

which are also struggling to get rid of the negative impacts of the financial crisis. Some Egyptian workers in Gulf countries have been laid off due to shrinking investments. It is reported that some 30,000 Egyptian workers in Gulf countries are expected to return home and join the unemployed. The revenue of the Suez Canal, which hit a record 5.2 billion dollars last year, has been one of the most stable sources of the Egyptian income. The revenue has also dropped recently due to decreased numbers of ships via the international waterway caused by the global crisis and the fears over the pirates off the Somali coasts near the Red Sea waters. According to the state MENA news agency, Suez Canal revenues stood at 301.8 million dollars in February, or some 25 percent drop compared to the 408-million-dollar income the same period of last year. Egyptian economy registered a 7.2 percent growth in the fiscal year of 2007-2008 and a 7.1 percent increase in the fiscal year of 2006-2007. It is estimated that the current global financial turmoil will slow down Egypt's economic growth rate from more than 7 percent to less than 4 percent.

Methodology
We have taken five major department of the hospital and made comparative study between 1st quarter of 2009 and 2008.some of the analysis are showing below with the graphical presentations.

A. Outpatient Department
There is 14% decline in outpatient traffic in the first quarter of 2009 as compare with the same period in 2008.The decline was due to the major decline in insurance (1275) and cash (812) due to the retrenchment and it leads to loss of insurance policy. Cash patient has decline due to the reduction in per capital income. (Refer to graph outpatient traffic)

25000 20000 15000 10000 5000 0 Corporate 3802 3476

Out patient traffic Y to Y (Qtr-1)


22799 19716

12671 11396 2008 2009 4197 3385 2129 1459 Syndicate Grand Total

Insurance

SelfPaying Patient

B. Laboratory Department
There is overall 11% decrease in laboratory referrals due to the direct cash patient flow. There is increase in patient flow from insurance category due to the offer of more discounts to the insurance companies. The referrals from the corporate patient has been decline due to the reduction in the healthcare budget in the corporate sector due to the stagnant of the production (Refer chat laboratory order)

Laboratory order Y to Y ( Qtr-1)


20000 18000 16315 16000 14000 12000 10000 8000 6000 4000 2000 0 Corporate Insurance SelfPaying Patient Syndicate Grand Total 1729 1166 7410 5796 4597 5117 4711 2008 2009 4236 18447

C. Radiology department
There is also reduction in radiology procedures noticed. The above reduction is due to the less referral from orthopedics consultant to the radiology department. The consultants are referring only to the highly necessary procedure in case of out patients for inpatient there is no choice but due to the decrease in trauma cases the overall referrals from emergency has come down. (Refer to the chat Radiology)

Radiology Y to Y(Qrt-1)
9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Corporate Insurance SelfPaying Patient Syndicate Grand Total 2306 1568 489 374 2438 2619 3110 2201 2008 2009 8343 6762

D. Cosmetic surgery department


There is a huge decrease in cosmetic, plastic and bariatric surgery. Naturally the price of the cosmetic surgery is quietly high as compare with other surgery in the same category. Due to the declining in the PPP of the consumer the consumers are postponing the surgery. In Salam international hospitals the majority of the cosmetic surgery from the healthcare tourism and most of the patient flow from western Europe, united states and gulf region. Experts view the global meltdown as a considerable threat to the booming medical tourism industry in Egypt. As a consequence of recession many people in the West will no longer be able to afford insurance, and thus medical tourism will also take a beating as people will try and priorities their healthcare needs and wait for economic conditions.(Pls refer chat cosmetic surgery) 9

Cusmetic surgery Y to Y (Qrt-1)


Total 46 131 2009 Face lift 17 41 31 43 0 50 100 150 200 250 2008 94 215

Abdominoplasty

Rhinoplasty

E. Increase in volume in life saving procedure and surgery


There is marginal increase in the life saving procedure/surgery during the 1 st quarter of 2009 as compare with 2008. Unlike luxuries like certain consumer goods or services. Ill health always prompts people to seek medical care, irrespective of the state of the economy. When someone needs cardiac care, they would not worry about recession or market conditions. In fact, due to rise in stress levels, the need for immediate healthcare would escalate further. Healthcare is a recessionproof industry and hence the impact is limited in this segment.

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Increase volume in life saving procedure


300 250 200 150 100 50 0 Cardiathorasic Cardiology 71 2009 2008 Neuro surgery GLS 131 106 87 2008 2009 214 268 262 233

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The effect of global financial down turn

A. Decrease in net revenue per case


Due to the change of case mix between the corporate and self-paying patient the per case yield has been declining year to year despite of the inflation effect. Corporate clients are asking more discounted service due to the financial down turn and keep their healthcare budget low.

Decrease in net revenue per case Y to Y (Q-1)


100% 50% 0% 7653 10580 357 2008 6395 9725 325 2009 16.4% 8.1% 9.0% Decrease Non Surgical Surgical OPD

B. Decrease in occupancy level


The average occupancy level almost 20% down as compare with the first quarter of 2008.During march 2009 the 33% of the day the hospital occupancy level has been fall down below average.

Decline in daily census (Mar-09)


180 160 140 120 100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
132 132 136 130 124 125 126 127 130 121 118 122 130 117 121 114 110 102 98 107 107 109 130 127 111 109

123 120 103

123 111

Daily Average Max Min

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C. Days cash in hand declining


Due to the increase in receivables and increase in debtor collection period there is continuous decline in cash on hand since October 2008.

Days cash(mn) in hand declining contineously

0.300 0.200 0.100 0.000 Oct

0.215

0.182

0.168

0.167 0.142 0.163 Series 1

Nov

Dec

Jan

Feb

Series 1 Mar

E. Decreasing in Operating Margin


Hospital is facing decrease in operating margin in the first quarter of 2009 Decline in PBIDT Particulars Deduction and discount Direct cost Doctors fees Indirect cost PBIDT

2008(Qrt-1) 6.19% 34.85% 12.30% 25% 21.66%

2009(Qrt-1) 14% 35% 14% 28% 9.50%

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Recommendations
To overcome the present global financial down turn hospital management should implement the following policies:-

A. B. C. D. E. F. G. H. I.

Creating budget contingency plan Reducing capital spending Changing debt structure Reducing non labor cost Containing labor cost Enhancing productivity and efficiency Engaging staff in financial performance improvement Protecting cash flows Increasing effort to protect or expand volumes

A. Creating budget contingency plan


By implementing budget contingency plan one can control/monitor Change in patient revenue/volume, Operating margin targets, Sustain declines consecutive performance below target, Failure to meet debt covenants Strategy within contingency budget are linked to financial situations Good sense strategy-Prudent in any environment Riding the storm out strategy-Difficult but possible temporary expense reductions. Hard choice strategy-Permanent expense reduction that become necessary in challenging financial situation or to adjust to lasting business downturns.

B. Reducing capital spending


Spending cuts-Reduction in capital spending Spending delays-Deferred purchases of capital equipment; only replacing equipment that becomes inoperable. Spending reviews-Capital spending while approved the budget process requires review for every expenditure before purchase must be approved by all senior management.

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C. Changing debt structure


To convert the Account receivable within the granted period

D. Reducing non labor cost


Across the board hold or reduction:-Across the board 1% reduction mandated Vendor price negation-Negotiation of all vendors for price reduction Focus on vendor pricing freeze Stringent purchase reviews Equipment purchase must be authorized by CEO Stringently review of all purchases. Limiting purchase order approvals to only immediately needed items. Only buy in bulk where there is a price break.

E. Containing labor cost


Hiring freeze or analysis-In depth analysis of all open positions To make number of cost cutting measure such as a hiring freeze and replacing a clinical position only if volumes justify it. Increase potential hours-to reduce the potential hours by eliminating abnormal working hours. Matching staffing to volumes-Hold managers accountable more than ever before for staffing correctly Eliminate incentive pays for working additional, unscheduled shifts

F. Enhancing productivity and efficiency


Invest in tool and training-Make investment to improve your own efficiency and productivity Ensure profitable service lines have the tools they need Redesign and monitoring-Reengineering services to reduce costs Reviewing and changing productivity standards-Implement a tighter productivity standards for daily monitoring

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Engaging staff in financial performance improvement-Develop a committee of senior managers that meets monthly to review the capital projects and fixed expenditure.

G. Protecting cash flow


Improving billing and collection- Increase focus on revenue cycle management and bad debt reduction. Increase effort to help cash patient to increase the cash flow. Focused on opportunistic growth Revenue department should prepare a business plan to increase volume and revenue at least by 10%.

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Conclusions

Healthcare is resilient industry The market challenges of today could lead to efficiencies and investment that enable hospitals to provide more value to their communities in the future. Few sector of the economy have faced-and weathered-as much continuous financial tension as the hospital sector, which must regularly adjust to payment and regulatory changes. Hospital financial leader must, once again, marshal all of their assets to face current realities and use their considerable expertise to provide what is best for their communities.

References

1. Partnerships for Health Reform. A new Egyptian Health Care Model for the 21st Century, Bethesda, MD and Cairo: Partnerships for Health Reform for the Ministry of Health and Population of the Arab Republic of Egypt, 1999. 2. World Bank. Egypt, Arab Republic at a glance,

3. Hospital finance management association

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