Ken Perez: 3 strategic options hospitals can use to repair today’s negative margins

The year 2022 has been characterized by some economists as being the worst financial year for U.S. hospitals in decades as expense growth has outpaced revenue increases. As a result, many hospitals and health systems have a pressing need to launch initiatives that can effectively repair their negative operating margins.^a 

Labor shortages and inflation demand action

Hospital finances continue to be buffeted by labor shortages. One hospital CEO told me that her facility — the only hospital in her state that is operating in the black — is spending almost $20 million more per month on labor versus before the COVID-19 pandemic.

Meanwhile, inflation is driving significant cost increases for goods and services, leading Kaufman Hall to characterize razor-thin margins as the new normal. Hospitals can expect their expense pressures will continue this year.^b

3 priorities for hospitals

Amid these financial challenges — and the unlikelihood that material health reforms will be passed by an increasingly polarized U.S. Congress (see the sidebar below) — hospitals and health systems should give priority to three categories of initiatives.

1 Maintaining and strengthening liquidity. Hospitals and health systems should undertake initiatives to bolster their cash reserves, which have been drawn down by rising labor and supply costs. Three large health systems — Ascension, Trinity Health and CommonSpirit Health — reported an average year-to-year decrease in days cash on hand of 63 days at year end FY22, and smaller health systems were in a weaker position, with shallower reserves.^c

Many organizations have turned their attention to implementing revenue cycle management (RCM) solutions. Among respondents to the Bain-KLAS 2022 Provider Executive Survey, for example, 50% identified RCM solutions as a top five priority — the highest of any solution area.^d

Although the RCM industry has existed for about two decades, the current prioritization of revenue cycle solutions makes sense because RCM software is directly linked to cash collections and revenue cycle processes are highly labor intensive. Key focus areas include revenue integrity, charge capture and complex claims.

2 Addressing workforce challenges. A focus on workforce issues is especially relevant, given the widespread and persistent healthcare labor shortage. Among health system leaders responding to a survey conducted by the Deloitte Center for Health Solutions, 85% said staffing challenges would have a major impact on their strategy for 2023.^e Correspondingly, 87% of respondents to Deloitte’s 2022 U.S. Health Care CFO survey reported that increasing automation, robotics and digital technologies were among the top workforce initiatives in their organization.^f

3 Diversifying beyond acute care. Some health system leaders are wondering — given the combination of rising labor and supply costs along with downward pressure on reimbursements by payers — whether it is possible to operate profitably in the acute care space. It is for this reason that health systems should pursue initiatives aimed at diversifying beyond acute care, generating new, often more profitable, revenue streams. Examples include expanding into post-acute care, behavioral health, hospital-at-home, outpatient pharmacy and other pharmacy services. McKinsey & Company has highlighted specialty pharmacy in general — and home infusion in particular — as an attractive area for growth and profitability during the next two years.^g

A possible existential threat

Hospitals and health systems are exiting the COVID-19 pandemic financially weaker, and materially favorable health policies are highly unlikely to be implemented during the 118th Congress, given the divided federal government. During this challenging period — what some have described as an existential threat to hospitals — provider organizations have various strategic options to bolster liquidity, address workforce shortages and diversify their enterprises. 

Footnotes

a. Nash, D., “Hospitals bear brunt of financial fallout from COVID,” MedPage Today, Feb. 27, 2023.
b. Swanson, E., “National Hospital Flash Report: March 2023,” Kaufman Hall, March 28, 2023.
c. Dyrda, L., “Health system cash reserves plummet,” Becker’s Hospital CFO Report, Nov 14, 2022.
d. Berger, E., et al., “2022 healthcare provider IT report: Post-pandemic investment priorities,” Bain & Company, Oct. 17, 2022.
e. Wheeler, T., 2023 Outlook for Health Care, Deloitte, Dec. 13, 2022.
f. Wheeler, T., et al., “Health care organizations turn to CFOs to help navigate disruption,” Deloitte Insights, Aug. 24, 2022.
g. Singhal, S., and Patel, N., “The future of US healthcare: What’s next for the industry post-COVID-19,” McKinsey & Company, July 19, 2022.

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No help in sight from the federal government

The federal government has aided healthcare organizations financially in the past, notably providing, per the HITECH Act, over $30 billion to organizations that implemented and demonstrated “meaningful use” of certified electronic health record  technology. During the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act authorized $100 billion, and the Paycheck Protection Program and Health Care Enhancement Act authorized $75 billion in grants to hospitals and other healthcare providers.

With the Republican majority in the House, the United States will have a divided government through 2024, leading one health law firm to conclude, “[I]t will be difficult for Congress to come to bipartisan agreement and pass significant health legislation during the 118th Congress.

 “As a result, the Biden Administration will focus on implementing regulations for key legislative accomplishments and leveraging executive and regulatory authority to advance policy priorities, including implementing the Inflation Reduction Act (IRA), lowering healthcare and prescription drug costs for patients, and addressing health equity gaps across population groups.”^a

But in February, House Republicans introduced legislation to repeal the IRA, in a move that could only raise the level of acrimony in Washington. And with the ongoing heated debate about the debt ceiling and the pace of federal government spending growth, healthcare organizations should not expect to see health policy changes in the next two years that would materially improve their financial condition.

Footnote

a. Daniel, J.G., Barsky, T.A., and Kwon, A., “Top healthcare policy developments in 2023,” Crowell, Dec. 13, 2022.

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^[8]. Daniel, J.G., Barsky, T.A., and Kwon, A., “Top healthcare policy developments in 2023,” Crowell, Dec. 13, 2022.