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Tackling Health Care’s Financial and Operational Challenges

Considerations for today’s leaders in uncertain times

Health care systems have had significant financial and operational challenges this year and could likely be on track for the worst financial year in decades. The industry is dealing with staffing shortages, inflation, supply chain disruption and cybersecurity pressures, in addition to overall economic uncertainty. 

With operating margins in the negative and well behind pre-pandemic levels, provider cash flow and liquidity are taking a beating. While there was some uptick in volumes the past few months which generated increased revenue, the government and state grants that subsidized operating expenses during the pandemic have run out, leaving providers with significant cash flow constraints. Other issues top of mind for provider senior leadership include the following.

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Inflationary pressure. Inflation is hitting health systems especially hard because the rise in expense is outpacing the rate of increase in revenue or rate of reimbursement, which is negotiated with the government or commercial payors. Bloomberg’s health care industry analyst, Glen Losev, reports that government payment rates remain below hospital costs, with Centers for Medicare & Medicaid Services’ (CMS) final inpatient update of 2.5% for fiscal 2022 and an outpatient update of 2.4% for calendar 2022. Medicare payment-to-cost ratios averaged 86.6% and Medicaid 89.3% in 2018. In addition, the record-high costs to attract and retain labor are making the inflation fight more difficult. Kaufman Hall reports that gross operating revenue improved by 5.5% while supply and wage costs drove hospital costs 9.6% higher during the month of August this year, according to a recent Healthcare Financial Management Association post

Declining labor force. The burdens of the COVID-19 pandemic and the financial challenges facing the hospital industry are contributing to executive departures. An estimated 334,000 providers dropped out of the labor force in 2021, according to a report from Definitive Healthcare and highlighted in a recent Becker’s Hospital Review article. The hardest hit physical specialties were internal and family medicine and clinical psychology. In addition, the United States is projected to experience a shortage of registered nurses, according to the American Association of Colleges of Nursing, that is expected to intensify as Baby Boomers age and the need for health care grows. Compounding the problem is the fact that nursing schools across the country are struggling to expand capacity to meet the rising demand for care.

Payor contract negotiation.Health care providers will look to renegotiate contracts with insurers to seek higher reimbursements to mitigate the impact of rising costs. For 2022 and 2021, the average cost of employer health coverage for a family was approximately $22,000 and will likely increase next year as a result of these negotiations. This is a trend that will impact all health care consumers.

Information technology investment and cybersecurity threats. For health care organizations large and small, a cyberattack is not a matter of “if” but “when.” Healthcare IT News, a HIMSS Media publication, found more than 40 million patient records were compromised in 2021 by incidents reported to the federal government. A healthcare data breach cost the industry $7.13 million on average, surpassing the average cost of breaches in 17 other industries worldwide.

Opportunities on the horizon

However, despite all of the challenges, there are indicators that the industry can expect new opportunities, too. Travel nurse contracts, which were signed in January 2022 during the omicron variant, expired in September this year, thus alleviating some of the labor cost pressure. Bloomberg’s health care industry analyst, Losev, predicts that hospital operating margins will get a 240-basis point boost through 2024 as labor costs ease and the backlog of surgical cases is worked down, assuming no new disruptive COVID-19 variants. Losev also predicts that labor costs will be about 70% of what they’ve been the past 16 months, as staff take time off after the exhausting pandemic workload and as traveling nurse expenses as a percentage of total hospital labor declines closer to the pre-pandemic mix of 4%.  

Patient volumes have been on the rise over the summer months and we expect this trend to continue with surgical-care utilization driving revenue growth in 2023. Losev predicts surgical case growth at 3.8% for the third and fourth quarters of 2022 and calendar year 2023, with inpatient surgeries leading the way since these procedures were more likely to be deferred during the pandemic.   

Addressing the challenges

In the meantime, strategies that can be deployed by providers to mitigate the adverse impact of financial and operational challenges include the following.  

Health care financial transformation. Defined as improving care delivery while lowering costs, this strategy is an ongoing challenge for health systems, pre- and post-pandemic. Billions of dollars are being wasted on supply chain and labor management inefficiencies. According to a recent Modern Healthcare article, some health systems are adopting centralized operating models as they look to cut costs and better distribute resources. Executives are starting to oversee larger areas which can be attributed to health systems shifting to shared technological systems, standardizing operations and allowing wider geographic purviews. Providers should review their entire cost structure to see where money can be saved in order to be more efficient. In addition, organizations should conduct an evaluation at the service line level and make decisions about the lines that require continued attention and investment, as well as those that require an exit strategy.   

Improve patient satisfaction.Address satisfaction by keeping the rate of patient readmission down. Hospitals that have high readmission rates are penalized by CMS. It is estimated that one in six patients discharged from a U.S. hospital is readmitted within a 30-day period. One way to prevent and or reduce the rate of patient readmissions is to evaluate the quantity, quality and effectiveness of follow-up care and consider using telehealth to implement this strategy. Effective follow-up care utilizing telehealth capabilities will have positive impact to the bottom line because both of these strategies are less costly than readmissions. 

Invest in cybersecurity strategies. According to RSM’s recent outlook on cybersecurity in health care, given the risks and costs associated with cyber threats, health care information security should be of utmost importance for organizational leadership. Ignoring security needs or failing to appropriately analyze and invest in protective measures will lead to heightened exposure, increased costs and disruption to patient care that could mean the difference between life and death. 

Health care providers and organizations should consider the following measures:

  • General risk analysis: Measures data storage, access controls, security policies, governance, antivirus protection, incident response planning, liability insurance and more.
  • Remote workforce assessment: Evaluates employee tools, solutions, controls, shared data processes, virtual private networks and regulatory requirements.
  • Framework certification: Aligns to a framework certification that fits organizational needs and can help control risks.

While there is still plenty of work to do in tackling ongoing financial and operational challenges, opportunities for mitigation and improvement exist and can make for a brighter outlook for many providers. Vigilance, resilience and agility will be key in the coming months for leaders and their organizations. 

Lori Kalic is a health care senior analyst with RSM US LLP.

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