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The current Administration’s efforts to reduce federal spending has resulted in cuts to grant programs that are essential to the work and financial sustainability of 340B covered entities. These clinics are the backbone of our public health system - doing the hard work to serve vulnerable communities across the country. Over the past few months we have worked closely with all of our partner clinics to develop contingency plans and budgeting scenarios to ensure their sustainability. Today, we’re sharing our Contingency Planning Guide and Financial Calculator (download here) publicly, to help all Covered Entities navigate these challenging times.
Step 1: Diligence to understand the extent of reliance on grant funding:
As with any strategic initiative, contingency planning begins with first understanding of the current state. Work with your core leadership to understand monthly and quarterly cash inflow from grant funding and other sources of revenue, as well as monthly cash outflows from staff salaries, cost of goods sold (COGS), and other expense categories. Use this data to build a trailing 3-month view of the monthly cash flow in the Calculator. Additionally, make note of any one-off, half-yearly or yearly financial obligations that may not show up in the trailing 3-month view but need to be taken into account when contingency planning.
At the end of this due diligence process you should have visibility into the percent of monthly organizational spend covered by grant funding versus other revenue sources. While running the due diligence exercise also make note of any spend that can be paused, deferred, renegotiated (vendor contracts for example), or eliminated, because this list will come in handy in Step 2.
- Funding related data gathering
- Total funding dollar value available
- Monthly cash inflow from grant funding withdraws
- Total dollar value drawn to date and dollar value left
- Date, if any, by when the funds will have to be utilized (end of the grant term)
- Limitations to how the funds are to be utilized, if any (e.g. restricted vs. unrestricted funds)
- Revenue sources
- Revenue streams for the clinic and total monthly cash inflow
- Break the revenue streams down further
- Examples: Medical billing from provider appointments, buy & bill, contract pharmacy 340B net proceeds
- Understand typical timeline and frequency for revenue sources because the timing impacts availability of cash to cover expenses
- Sources of expenses
- Total COGS for the trailing 3 months
- Total operating expenses, capturing trailing 3-month OpEx
- Capture expenses by specific categories and if possible, line item under each category
- Inventory, rent, utilities, salary, insurance and other overhead, taxes, professional services, sales & marketing, software spend, hardware spend, and other
- Inventory spend should include cash outflow to the wholesaler not only for any drug and supplies purchased by the clinic, but also from contract pharmacies
- Sales & marketing might also include spend related to testing outreach, testing supplies, spend on gas, give aways etc.
- Professional Services should include categories such as IT support, grant writing consultant, insurance enrollment consultant, and legal
- If there are any discretionary spend and budget allocated for travel & entertainment, make note of those
- Other large financial obligations
- Are there debt obligations that are not currently accounted for? If so, gather the dates and amounts
- Are there half-yearly or yearly bills that are coming due? If so, gather the dates and amounts. Examples: legal bills, lease renewals, consultant fees
- Upcoming conferences, trade shows and other events and associated spend
Calculator directions: populate trailing 3-month cash flow actuals for each row in the calculator spreadsheet. Add additional rows where applicable
Step 2: Scenario planning:
Once the current state is clear, plan for three potential scenarios using the Calculator to come up with the Gap to Close dollar value in each scenario. The three scenarios will be specific to your clinic but at a minimum should take into consideration a temporary pause in funding, partial loss of funding sources, and full loss of all grant funding. In each of these scenarios, zero out the corresponding dollar value of the affected funding sources in the Calculator, to reflect funding that will be lost. Leave the spend lines as-is unless there is a direct spend associated with that funding that will no longer apply.
- The temporary scenario requires the clinic to self-sustain for a short period of time
- The partial scenario requiring the clinic to operate from permanent loss of some funding – for example, an inclusive care-related grant is cancelled
- The total scenario where all grant funding is lost for the foreseeable future
Calculator directions: populate dollar value for grant funding under each scenario in the calculator spreadsheet. The rest of the rows in the calculator will auto populate based on assumptions, but can be manually overridden
Once you have dollar value (the Gap to Close), there are a few different ways to close the gap:
- Find other high confidence sources that can replace loss in cash inflow from grant funding, for example: existing bank savings, new donations, or increased 340B pharmacy revenue (more on this below)
- Reduce the sources of spend, by pausing, deferring, renegotiating, or eliminating spend impacting the total cash needed to operate the business
It is likely that initiatives under both #1 and #2 will be required. Once a set of initiatives have been identified, start layering in confidence level, execution time, timing of realization, etc. Factor in some extra buffer because execution takes time and the clinic will have to find a way to keep the lights on until then. For example, if the clinic plans a fundraising event which takes 2 months to fully execute and receive the donations in the bank, this plan should include a solution for any expenses that cannot be paid for in the intervening 2 months.
While planning any reductions in spending, ensure the core business (i.e., the source of revenue) is protected and resourced sufficiently. Examples include: minimum staffing needed to keep seeing patients to drive revenue from medical billing, your in-house pharmacy, if one exists, remains staffed sufficiently to process all eligible prescriptions
Step 3: Execution plan:
Build an execution plan for each of the three scenarios that is as detailed as possible. This should look like your site’s Disaster Recovery plan with clear execution steps and responsibilities, so you can spend most of your effort on execution if one of these scenarios becomes reality. This execution plan will be specific to your clinic, but here are some guardrails:
- Set up a task force – the key 3-4 people responsible for execution. This will likely include clinic leadership
- Meet regularly to track, react, and change course. Schedule a daily 15-20 minute meeting to address pressing issues. Meeting frequency can be reduced with time
- Have a communication plan. While not everything can be shared with the staff, frequent communication helps de-escalate rumors and keep staff focused on clinic operations
- Risk mitigation and backups in case something falls through. Discuss the risks as execution progresses and alternative plans based on confidence level
Step 4: Counter measures:
While you build a contingency plan, it is also a great time to start thinking of the medium to longer-term counter measures that will start diversifying your clinic’s revenue streams away from grant funding. Here are some counter measures Covered Entities should explore and apply:
- Bolster your current revenue streams: Think of ways to increase the dollar value from existing sources, thus reducing reliance on funding. Some tactical ways of achieving this include:
- Timely billing for services rendered
- Actively monitoring billing and reimbursement to catch, contest, and recover money owed
- If prescriptions are written to pharmacies that you are not contracted with, expand your contract pharmacy relationships
- Increase your 340B pharmacy capture rate. Strategically pitch your in-house or contract pharmacy to patients and encourage them to participate in the pharmacy program
- Tighten your budget: Review every single line item of spend and set targets to reduce by ‘X’ %. Engaging employees will not only speed up the process but also help with a sense of ownership
- Optimize Cash Flow: Review net payment terms on all accounts payables and negotiate these terms to extend cash outflow frequency
Finally, if your clinic does not already operate an in-house pharmacy, now is the time to consider building one. One of the best ways to secure your clinic’s financial future and maintain high-quality patient care is by owning your own in-house pharmacy. By owning your own in-house pharmacy (rather than contract pharmacy, either on-site or not), you have far more control over pharmacy operations (think prior authorizations, insurance navigation, capture rate, etc.), and ultimately your 340B revenue. When you own your own pharmacy, you can carve in Medicaid to the 340B benefit in many states, further boosting your pharmacy revenue. This is not allowed in contract pharmacy arrangements.
Interested in taking control of your financial future? Reach out to Alchemy at hello@alchemyhealth.com to learn more about how we work with Covered Entities across the country to build and operate their in-house pharmacies. We handle everything - from buildout to licensing and PBM contracts to ongoing management - so you can focus on what matters most, even in these challenging times: providing high quality care to your patients.
