Adapting to a Changing Landscape: Colorado’s Safety Net Health Centers

April 27, 2016

There’s no question that the healthcare landscape is changing. Unprecedented policy changes aimed at expanding and improving healthcare access, coverage, and quality are having a major impact on how health centers function. With the passage of the Affordable Care Act (ACA), Colorado becoming a Medicaid expansion state, and the growing momentum towards outcomes-based payment models, Colorado health centers are in the thick of adapting to a rapidly changing environment. These health centers have been providing an essential safety net for the state’s most vulnerable and underserved communities for over fifty years, offering essential services such as primary care, dental, behavioral health, case management, public health prevention/education, and transportation.

Driven by the desire to better support Colorado health centers in the midst of rapid adaptation, The Colorado Health Foundation (TCHF) partnered with Nonprofit Finance Fund (NFF) to take a critical look at how these organizations are faring as their business models evolve in the face of systemic shifts. TCHF Program Officer Sara Overby reflected, “As the healthcare landscape rapidly evolves, the philanthropic sector is seeking optimal ways to partner with and support our state’s health centers as we collectively navigate the future.”

NFF conducted an intensive cohort analysis to study the drivers of financial sustainability for 21 health centers, examining audited financials, payor/patient data and conducting in-depth interviews with Colorado’s health center leaders. Below are four key findings and recommendations from this research.

Four Key Findings

1) Health centers have seen a rapid growth in operating budgets and balance sheets, with future expansion on the horizon.

This growth is largely driven by increases in net patient service revenue and fixed assets, and many health centers reported increased Medicaid reimbursements as previously uninsured patients enroll.

Following this robust growth trajectory, several health centers are planning to scale existing medical services, and/or add new services such as dental or school-based services. While growth can represent opportunity, growth also comes with challenges and risk. Future growth and adaptation to integrated models and outcomes approaches depend on attracting and keeping high quality personnel, building collaborative relationships, bolstering internal infrastructure, retooling business models, and addressing capitalization needs to better support delivering on mission.

2) Despite stable and improving operating results, full cost coverage is an ongoing challenge.

On average, unrestricted operating surpluses for the cohort were positive and growing (6-10% between 2010 and 2013, growing to 11% in 2014 before depreciation). While these findings are indicative of good financial management, health centers must produce surpluses sufficient to cover not only operating expenses (personnel, support, and occupancy) and depreciation, but also to support the “full costs” of doing business. Full cost coverage must address balance sheet needs such as debt principal repayment, savings, future replacements and renovations of fixed assets, and capital for continued growth or adaptation. Several health centers interviewed reported that achieving surpluses to cover full costs was an ongoing challenge, especially given facility needs. Without full cost coverage, health centers will struggle to sustainably deliver on mission from a whole enterprise perspective.

3) Health centers have facility intensive balance sheets, with expansion and maintenance costs expected in the near future.

Fixed assets continue to grow and dominate the cohort’s capital structure. Health centers reported the need for additional future funding to manage both the continued expansion and ongoing renovations that will be required in the years ahead.

4) Even with increasing budgets and balance sheets, health centers have unchanged liquidity levels. As centers seek to respond to future uncertainty, they need flexible capital to grow and adapt.

Despite growth, measures of liquidity are modest but static at approximately 3.6 months of cash and 3.1 months of unrestricted liquid net assets (ULNA). These unchanged levels suggest the cohort is using operating surpluses to cover debt, facility needs, etc. rather than being able to fund additional reserves to bolster flexibility and the ability to adapt to future challenges or opportunities.

Recommendations for Future Adaptation

Given some of these key findings from the cohort analysis and recognizing the future needs, NFF suggests the following action steps for health centers and funders:

Health Centers

  • Assess balance sheet needs and engage in capitalization planning to assess current and future needs (facility, growth, adaptation, savings, and business model risks and opportunities)
  • Conduct financial modeling to explore expansion planning, infrastructure improvements, and/or new services (i.e. staffing, upfront capital, additional “back-office” support)
  • Clearly articulate the full costs beyond operating expenses
  • Investigate approaches for IT, strategic financial management, and human capital* capacities
  • Develop and deepen partnerships with other healthcare stakeholders (e.g., hospital systems, community-based organizations addressing social determinants of health, etc.) on potential collaborative approaches to integrated care and addressing population health outcomes

Philanthropic Community

  • Understand and assess full costs of grantees (i.e. infrastructure and technology investments, outcomes measurement investments, facility expansion and reinvestment planning, savings goals)
  • Assess grantees’ capitalization needs to provide flexible grant capital for growth, adaptation or facility reserves; consider offering Program-Related Investments for facility needs (expansion, renewals, replacements, and renovations) or investments for outcomes-based systems
  • Engage subsets of health centers in customized cohort-based education sessions and/or convenings to build peer group social capital

Shifts in the healthcare space are game-changing for all stakeholders — hospitals, health centers, government, and philanthropy. Safety-net health centers are at the forefront of these changes and the next several years will be critical. Health centers will be unable to deliver on their mission without adequate resources and the adaptive capacity to convert those resources into positive outcomes for vulnerable individuals, families and communities. Funders like TCHF have modeled how to support this environmental shift by unearthing and deeply understanding how to align philanthropic strategies with the unique needs of health centers.

It’s our hope that by sharing research and learnings from our cohort analysis that we can inform best practices for funding health centers in this ever-shifting field. With effective financial management and planning, the right kind of revenue and capital to support sustainable business models and healthy capital structures, health centers will be better positioned to adapt and improve health outcomes for their communities.

Sara Overby, Program Officer at TCHF

*Note: NFF now uses "people and skills" in place of the term "human capital" to describe the abilities, values, and perspectives people bring to an organization beyond their contribution to the organization's bottom line.