Hospitals need ‘transformational changes’ to stem margin erosion

https://www.healthcaredive.com/news/Fitch-ratings-nonprofit-hospital-changes/627662/

Dive Brief:

  • Nonprofit hospitals are reporting thinner margins this year, stretched by rising labor, supply and capital costs, and will be pressed to make big changes to their business models or risk negative rating actions, Fitch Ratings said in a report out Tuesday.
  • Warning that it could take years for provider margins to recover to pre-pandemic levels, Fitch outlined a series of steps necessary to manage the inflationary pressures. Those moves include steeper rate increases in the short term and “relentless, ongoing cost-cutting and productivity improvements” over the medium term, the ratings agency said.
  • Further out on the horizon, “improvement in operating margins from reduced levels will require hospitals to make transformational changes to the business model,” Fitch cautioned.

Dive Insight:

It has been a rough year so far for U.S. hospitals, which are navigating labor shortages, rising operating costs and a rebound in healthcare utilization that has followed the suppressed demand of the early pandemic. 

The strain on operations has resulted in five straight months of negative margins for health systems, according to Kaufman Hall’s latest hospital performance report.

Fitch said the majority of the hospitals it follows have strong balance sheets that will provide a cushion for a period of time. But with cost inflation at levels not seen since the late 1970s and early 1980s, and the potential for additional coronavirus surges this fall and winter, more substantial changes to hospitals’ business models could be necessary to avoid negative rating actions, the agency said.

Providers will look to secure much higher rate increases from commercial payers. However, insurers are under similar pressures as hospitals and will push back, using leverage gained through the sector’s consolidation, the report said.

As a result, commercial insurers’ rate increases are likely to exceed those of recent years, but remain below the rate of inflation in the short term, Fitch said. Further, federal budget deficits make Medicare or Medicaid rate adjustments to offset inflation unlikely.

An early look at state regulatory filings this summer suggests insurers who offer plans on the Affordable Care Act exchanges will seek substantial premium hikes in 2023, according to an analysis from the Kaiser Family Foundation. The median rate increase requested by 72 ACA insurers was 10% in the KFF study.

Inflation is pushing more providers to consider mergers and acquisitions to create economies of scale, Fitch said. But regulators are scrutinizing deals more strenuously due to concerns that consolidation will push prices even higher. With increased capital costs, rising interest rates and ongoing supply chain disruptions, hospitals’ plans for expansion or renovations will cost more or may be postponed, the report said.

From Amazon to New Balance, consumer brand execs bring ‘outsider’ perspective to healthcare

boardroom with woman leading team meeting

Massachusetts-based health system Wellforce recently appointed its first ever chief consumer officer, tapping an executive from a well-known sneaker brand.

Christine Madigan joined the health system to lead marketing and consumer engagement, Wellforce announced in January. She comes from New Balance Athletics, where she led the global marketing and brand management organization. Madigan was attracted to what she termed the “challenger brand” because of its nimble innovation strategy and its mission to help people live healthier. “I can’t imagine a more purpose-driven culture than that,” she told Fierce Healthcare. 

“As a marketing veteran from consumer products, Christine understands the importance of envisioning and building services around consumer needs. She will be a great asset in improving and modernizing the way consumers engage with the health care industry,” David Storto, Wellforce’s executive vice president and chief strategy and growth officer, said in the announcement. 

The move comes amid a rising trend in healthcare: executives sourced from outside the industry, and in particular from consumer brands, to lead innovation strategies. Fierce Healthcare spoke to several, some of whom have been in their roles for years. They agree that while there are many transferrable skills, there is also an advantage to being an outsider. 

To Madigan, the core challenge remains the same business to business—understanding who the consumer is and the different ways they engage with one’s brand. 

Aaron Martin, chief digital officer at Providence St. Joseph Health, who joined the health system from Amazon in 2016, echoed Madigan. “Bringing the patient focus—what we called at Amazon ‘customer obsession’—to Providence was key,” he told Fierce Healthcare.

Society is bombarded by healthcare marketing messages, Madigan noted. She wants to “drive some simplicity into the process.” While the system is built to provide reactive, acute care, Madigan sees preventive care as just as important. And a crucial part of facilitating that is establishing not only awareness of but trust in a provider. “Every detail matters in what you communicate in an experience,” she said.

And for organizations that don’t innovate, “somebody else is going to disrupt us,” Martin said.

To drive innovation at scale, Martin sees a disciplined strategy as key. At Amazon, that looked like picking an area to impact and measuring the value of closing that gap. Applying that to Providence, Martin worked with the clinical team to discover patients in need of low-acuity care were going to other providers instead of to Providence. So Providence launched ExpressCare, offering virtual appointments to recapture those patients and establish continuity of care.

Like Madigan, Novant’s chief digital and transformation officer Angela Yochem, who has held chief information officer roles at Rent-A-Center and BDP International, believes passive care is not enough to eradicate health inequities. “We’ve optimized for fixing things,” she said of the healthcare system. “I’d like to see the healthcare industry become more engaged continually. We need to understand our patients beyond what their last condition is,” she added, referring to social determinants of health.

“In retail, we used to say that customers shouldn’t have to shop our merchandising organizational chart,” said Prat Vemana, Kaiser Permanente’s chief digital officer, who transitioned in 2019 from chief product and experience officer at The Home Depot. To streamline how patients navigate an already highly fragmented healthcare system, Kaiser starts with the patient and works backward when developing digital experiences. 

A challenge in healthcare, Vemana acknowledged, is the lag in data around health outcomes. Whereas in retail, results are immediately visible, healthcare is less straightforward. “We have to develop workarounds to get directional information while waiting to see the results,” he said. 

The transformation of the sector won’t happen without diversity of thought and experience, Yochem said. It’s less about hiring from a particular sector and more about hiring from all over. Those people will have seen the potential for consumer engagement and will be able to “apply what we know to be possible,” Yochem said. Without those outsider insights in the insular sector, “you create an echo chamber, because you respond to problems in the same way.”