By Michael Haas and Lori Kalic, health care senior analysts with RSM US LLP
Health care organizations across the country are reporting reduced operating margins as they deal with the impacts of the COVID-19 disruption, volatility in patient volumes, inflation and supply chain constraints. In this article, we will explore the economic trends impacting health care organizations and various strategies that hospital leadership and consumers can consider to address economic uncertainty and the rising costs of health care.
Throughout the pandemic and most recently in 2022, consumer pricing has continued to increase. The U.S. and most of the global economy is being impacted by inflation, which is defined as a general increase in the price of goods and services in an economy. Consumer price inflation rose to 8.6% in May, the highest rate in 40 years. This rate of inflation exceeds wage increases, which is undercutting consumers’ real purchasing power. In addition, the worries associated with this degree of inflation have wreaked havoc on the stock and bond markets, slashing investor returns and household net worth. Now, the big question the Federal Reserve is noodling on, is how much to raise rates to reduce inflation.
In the June 2022 issue of RSM’s publication The Real Economy, RSM Chief Economist Joe Brusuelas reported that the overall consumer price index increased by 1.24% for the month which, over 12 months, amounts to an inflation rate of around 15%. RSM does not anticipate this pace will continue. As in the 1980s, an increase in interest rates to levels needed to end 15% inflation would cause a severe drop in demand and a deep recession, sending millions out of work and defeating the Fed’s mandate for full and equitable employment. This suggests that some reprieve is coming.
As the following table illustrates, the health care components of the U.S. consumer price index have grown over 14% since June 2017.
Source: US Bureau of Labor Statistics, RSM US LLP
Data suggests that inflation will continue to plague the health care industry. Centers for Medicare and Medicaid Services (CMS) forecasts that health care spending is projected to increase 4.6% in 2022, or $4.5 trillion, and ultimately climb to $6 trillion by 2027, which is approximately $17,000 per person annually. Household out-of-pocket costs are projected to climb 6.1% in 2022 and continue at a rate of about 4.6% annually to 2030, at roughly the same rate as wages. In summary, total health care spending is projected to increase 50.2% from 2022 to 2030, but household out-of-pocket spending will increase only 41.4%. As the gap between rising health care costs and consumer out-of-pocket spending widens, health care providers will face increased pressure to cut costs to keep health care affordable. That pressure will continue to intensify if Medicare’s scheduled sequestration cuts are not delayed.
The following chart provides a visualization of how the gap between total health care expenditures, the consumer price index and average wages of all employees has expanded over time.
Source: CMS, RSM US LLP
Taking a deeper dive into trends associated with hospital operating expenses, the May 2022 Kaufman Hall report, which is based on information gathered from more than 900 hospitals, indicates that total expenses remain high in April, dropping 4.3% from March and up 25.2% year-over-year since 2020. As labor challenges and supply chain issues continue, total expenses were up 8.3% year-over-year. The more significant non-labor specific expense fluctuations are supply, drug and purchased service expenses. Other key indicators from the report are as follows.
Source: May Kaufman Hall Report
Further exacerbating the challenge health care leadership is facing in managing operating margins and ensuring high quality of care is supply chain shortages of raw materials. This is of great concern because these materials are used to manufacture drugs and facilitate capital expansion for providers.
Proactive strategies for providers and consumers
As health care costs continue to rise, employers and consumers alike will need to implement various strategies to keep out-of-pocket costs in check.
While there is no clear path on how to navigate the current environment or a “one-size-fits all” approach that will help providers manage costs and maximize operating margins, there are a few strategies to consider in these uncertain times.
- Identify alternative revenue streams such as pursuing risk-based contracts that are focused on achieving savings and value creation.
- Reduce fixed and variable costs. It is a great time to review existing procurement policies and procedures and make enhancements where appropriate, ensure that adequate vendor relationships are in place to mitigate the negative impact of supply chain threats and evaluate whether the existing vendor relationships are leveraged to maximize purchasing power.
- Invest in technology that will allow for an adequate understanding of the costs of care that is provided and then work to standardize care across the system. Review and evaluate the way care is provided to patients and use technology where it makes sense. The health care internet of things is changing the patient encounter environment. Wearable monitors and remote scanning and imaging devices are technologies that can reduce operational costs. Utilization of telemedicine, online portals and health system apps are taking health care to a new level and reducing the need for in-office visits while at the same time allowing for the delivery of quality care.
- Streamline systems and processes throughout the health care system to maximize efficiency. For example, many hospital systems acquire physician practices and then remain hands off in their day-to-day operations. Look to identify duplicative, manual and/or inefficient processes and create consistent policies and procedures surrounding key transaction cycles.
- Improve revenue cycle systems and revenue integrity. Identify opportunities throughout the revenue cycle that will translate into reduced revenue losses and leakage and improve overall financial health.
In addition, health care consumers can deploy a variety of strategies to combat the rising costs of health care. Considerations include:
- Begin by making informed benefit decisions and understanding plan benefits in detail.
- Be proactive in managing health rather than reactive, which, if done effectively, can reduce the frequency of visits and/or hospital stay.
- Take advantage of programs offered by employers to sustain and maintain healthy physical, emotional and psychological well-being.
- Leverage technology whenever possible to reduce out-of-pocket costs. For example, schedule a telehealth visit rather than an in-person visit.
Any economic impact to the health care industry carries implications for everyone. In order to reduce out-of-pocket costs, consumers need to be educated in their health care options and benefits, and proactively take steps to ensure good health. Likewise, health care leadership must remain vigilant in protecting operating margins as they navigate through this volatile environment of inflation, supply chain shortages and the threat of reduced reimbursement.
The solution to these challenges does not solely rest with increasing patient volumes. The solution will require leadership to remain agile as they establish various initiatives to manage operating costs and maximize revenue and cash collection in order to create sustainable operating models. The solution should be approached proactively rather than reactively to be successful.
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