The AHA has previously noted the third party observers who demonstrate a tenuous grasp of the data and rules regarding federal hospital transparency requirements. Now, some of those same entities with deep pockets and an apparent vendetta against hospitals and health systems have turned their attention toward the broader financial challenges facing the field. The results, as described in a recent Health Affairs blog, are as expected — a complete misunderstanding of current economic realities.
The three most egregious suggestions in this piece are that hospitals are seeking some kind of bailout from the federal government, employers and patients; that investment losses are the most problematic aspect of hospital financing; and that hospitals’ analyses of their financial situation are dishonest.
We debunk these in turn.
Hospitals are seeking fair compensation, not a government bailout. The authors state that hospitals are asking “constituents to foot the bill for hospitals’ investment losses.” This is patently false. Indeed, if you read the request we made to Congress cited in their blog, hospitals and health systems are simply asking to get paid for the care they deliver or to lower unnecessary administrative costs. This includes asking Medicare to pay for the days hospitals care for patients who are otherwise ready for discharge. Increasingly, this has occurred because there is no space in the next site of care or the patient’s insurer has delayed the authorization for that care. Keeping someone in a hospital bed for days, if not weeks, requires skilled labor, supplies and basic infrastructure costs. This doesn’t even account for the impact on a patient’s health for not being in the most appropriate care setting. Today, hospitals are not paid for these days. Asking for fair compensation is not a bailout; it is a basic responsibility of any purchaser.
While investment income may be down, hospitals and health systems have faced massive expense increases in the last year. The authors note that patient care revenue was up “by just below 1 percent in relative terms from 2021 to 2022,” suggesting that implies a positive financial trend. However, hospital total expenses were up 7% in 2022 over 2021, and were up by even more, 20%, when compared to pre-pandemic levels, according to Kaufman Hall. And it’s not just the AHA and Kaufman Hall saying this either: in its 2023 outlook, credit rating agency Moody’s noted that “margins will remain constrained by high expenses.” Hospitals should not need to rely on investment income for operations. However, many have been forced into this situation by substantial underpayments from their largest payers (Medicare and Medicaid), which even the Medicare Payment Advisory Commission (MedPAC), an independent advisor to Congress, has acknowledged. MedPAC’s most recent report showed a negative 8.3% Medicare operating margin. Hospitals and health systems are experiencing run-away increases in the supplies, labor and technology needed to care for patients. At the same time, commercial insurance companies are increasing their use of policies that can cause dangerous delays in care for patients, result in undue burden on health care providers and add billions of dollars in unnecessary costs to the health care system.
Hospitals and health systems are committed to an honest examination of the facts. The authors imply that the studies documenting hospitals’ financial distress are biased. They note that certain studies conducted by Kaufman Hall are based on proprietary data and therefore “challenging to draw general inferences.” They then go on to cherry-pick metrics from specific non-profit health care systems voluntarily released financial disclosures to make general claims about “the primary driver of hospitals’ financial strain.” The authors and their financial backers clearly seem to have a preconceived narrative, and ignore all the other realities that hospital and health system leaders are confronting every day to ensure access to care and programs for the patients and communities they serve.
It is imperative to acknowledge financial challenges facing hospitals and health systems today. Too much is at stake for the patients and communities that depend upon hospitals and health systems to be there, ready to care.
I have been both a frontline officer and a staff officer at a health system. I started a solo practice in 1977 and cared for my rheumatology, internal medicine and geriatrics patients in inpatient and outpatient settings. After 23 years in my solo practice, I served 18 years as President and CEO of a profitable, CMS 5-star, 715-bed, two-hospital healthcare system.
From 2015 to 2020, our health system team added 0.6 years of healthy life expectancy for 400,000 folks across the socioeconomic spectrum. We simultaneously decreased healthcare costs 54% for 6,000 colleagues and family members. With our mentoring, four other large, self-insured organizations enjoyed similar measurable results. We wanted to put our healthcare system out of business. Who wants to spend a night in a hospital?
During the frontline part of my career, I had the privilege of “Being in the Room Where It Happens,” be it the examination room at the start of a patient encounter, or at the end of life providing comfort and consoling family. Subsequently, I sat at the head of the table, responsible for most of the hospital care in Southwest Florida. [1]
Many folks commenting on healthcare have never touched a patient nor led a large system. Outside consultants, no matter how competent, have vicarious experience that creates a different perspective.
At this point in my career, I have the luxury of promoting what I believe is in the best interests of patients — prevention and quality outcomes. Keeping folks healthy and changing the healthcare industry’s focus from a “repair shop” mentality to a “prevention program” will save the industry and country from bankruptcy. Avoiding well-meaning but inadvertent suboptimal care by restructuring healthcare delivery avoids misery and saves lives.
RESPONDING TO AN ATTACK
Preemptive reinvention is much wiser than responding to an attack. Unfortunately, few industries embrace prevention. The entire healthcare industry, including health systems, physicians, non-physician caregivers, device manufacturers, pharmaceutical firms, and medical insurers, is stressed because most are experiencing serious profit margin squeeze. Simultaneously the public has ongoing concerns about healthcare costs. While some medical insurance companies enjoyed lavish profits during COVID, most of the industry suffered. Examples abound, and Paul Keckley, considered a dean among long-time observers of the medical field, recently highlighted some striking year-end observations for 2022. [2]
Recent Siege Examples
Transparency is generally good but can and has led to tarnishing the noble profession of caring for others. Namely, once a sector starts bleeding, others come along, exacerbating the exsanguination. Current literature is full of unflattering public articles that seem to self-perpetuate, and I’ve highlighted standout samples below.
The Federal Government is the largest spender in the healthcare industry and therefore the most influential. Not surprisingly, congressional lobbying was intense during the last two weeks of 2022 in a partially successful effort to ameliorate spending cuts for Medicare payments for physicians and hospitals. Lobbying spend by Big Pharma, Blue Cross/Blue Shield, American Hospital Association, and American Medical Association are all in the top ten spenders again. [3, 4, 5] These organizations aren’t lobbying for prevention, they’re lobbying to keep the status quo.
Concern about consistent quality should always be top of mind. “Diagnostic Errors in the Emergency Department: A Systematic Review,” shared by the Agency for Healthcare Research and Quality, compiled 279 studies showing a nearly 6% error rate for the 130 million people who visit an ED yearly. Stroke, heart attack, aortic aneurysm, spinal cord injury, and venous thromboembolism were the most common harms. The defense of diagnostic errors in emergency situations is deemed of secondary importance to stabilizing the patient for subsequent diagnosing. Keeping patients alive trumps everything. Commonly, patient ED presentations are not clear-cut with both false positive and negative findings. Retrospectively, what was obscure can become obvious. [6, 7]
Spending mirrors motivations. The Wall Street Journal article “Many Hospitals Get Big Drug Discounts. That Doesn’t Mean Markdowns for Patients” lays out how the savings from a decades-old federal program that offers big drug discounts to hospitals generally stay with the hospitals. Hospitals can chose to sell the prescriptions to patients and their insurers for much more than the discounted price. Originally the legislation was designed for resource-challenged communities, but now some hospitals in these programs are profiting from wealthy folks paying normal prices and the hospitals keeping the difference. [8]
“Hundreds of Hospitals Sue Patients or Threaten Their Credit, a KHN Investigation Finds. Does Yours?” Medical debt is a large and growing problem for both patients and providers. Healthcare systems employ collection agencies that typically assess and screen a patient’s ability to pay. If the credit agency determines a patient has resources and has avoided paying his/her debt, the health system send those bills to a collection agency. Most often legitimately impoverished folks are left alone, but about two-thirds of patients who could pay but lack adequate medical insurance face lawsuits and other legal actions attempting to collect payment including garnishing wages or placing liens on property. [9]
“Hospital Monopolies Are Destroying Health Care Value,” written by Rep. Victoria Spartz (R-Ind.) in The Hill, includes a statement attributed to Adam Smith’s The Wealth of Nations, “that the law which facilitates consolidation ends in a conspiracy against the public to raise prices.” The country has seen over 1,500 hospital mergers in the past twenty years — an example of horizontal consolidation. Hospitals also consolidate vertically by acquiring physician practices. As of January 2022, 74 percent of physicians work directly for hospitals, healthcare systems, other physicians, or corporate entities, causing not only the loss of independent physicians but also tighter control of pricing and financial issues. [10] The healthcare industry is an attractive target to examine. Everyone has had meaningful healthcare experiences, many have had expensive and impactful experiences. Although patients do not typically understand the complexity of providing a diagnosis, treatment, and prognosis, the care receiver may compare the experience to less-complex interactions outside healthcare that are customer centric and more satisfying.
PROFIT-MARGIN SQUEEZE
Both nonprofit and for-profit hospitals must publish financial statements. Three major bond rating agencies (Fitch Ratings, Moody’s Investors Service, and S & P Global Ratings) and other respected observers like KaufmanHall, collate, review, and analyze this publicly available information and rate health systems’ financial stability.
One measure of healthcare system’s financial strength is operating margin, the amount of profit or loss from caring for patients. In January of 2023 the median, or middle value, of hospital operating margin index was -1.0%, which is an improvement from January 2022 but still lags 2021 and 2020.
Erik Swanson, SVP at KaufmanHall, says 2022,
“Is shaping up to be one of the worst financial years on record for hospitals. Expense pressures — particularly with the cost of labor — outpaced revenues and drove poor performance. While emergency department visits and operating room minutes increased slightly, hospitals struggled to discharge patients due to internal staffing shortages and shortages at post-acute facilities,” [11]
Another force exacerbating health system finance is the competent, if relatively new retailers (CVS, Walmart, Walgreens, and others) that provide routine outpatient care affordably. Ninety percent of Americans live within ten miles of a Walmart and 50% visit weekly. CVS and Walgreens enjoy similar penetration. Profit-margin squeeze, combined with new convenient options to obtain routine care locally, will continue disrupting legacy healthcare systems.
Providers generate profits when patients access care. Additionally, “easy” profitable outpatient care can and has switched to telemedicine. Kaiser-Permanente (KP), even before the pandemic, provided about 50% of the system’s care through virtual visits. Insurance companies profit when services are provided efficiently or when members don’t use services. KP has the enviable position of being both the provider and payor for their members. The balance between KP’s insurance company and provider company favors efficient use of limited resources. Since COVID, 80% of all KP’s visits are virtual, a fact that decreases overhead, resulting in improved profit margins. [12]
On the other hand, KP does feel the profit-margin squeeze because labor costs have risen. To avoid a nurse labor strike, KP gave 21,000 nurses and nurse practitioners a 22.5% raise over four years. KP’s most recent quarter reported a net loss of $1.5B, possibly due to increased overhead. [13]
The public, governmental agencies, and some healthcare leaders are searching for a more efficient system with better outcomes
at a lower cost. Our nation cannot continue to spend the most money of any developed nation and have the worst outcomes. In a globally competitive world, limited resources must go to effective healthcare, balanced with education, infrastructure, the environment, and other societal needs. A new healthcare model could satisfy all these desires and needs.
Even iconic giants are starting to feel the pain of recent annual losses in the billions. Ascension Health, Cleveland Clinic, Jefferson Health, Massachusetts General Hospital, ProMedica, Providence, UPMC, and many others have gone from stable and sustainable to stressed and uncertain. Mayo Clinic had been a notable exception, but recently even this esteemed system’s profit dropped by more than 50% in 2022 with higher wage and supply costs up, according to this Modern Healthcare summary. [14]
The alarming point is even the big multigenerational health system leaders who believed they had fortress balance sheets are struggling. Those systems with decades of financial success and esteemed reputations are in jeopardy. Changing leadership doesn’t change the new environment.
Nonprofit healthcare systems’ income typically comes from three sources — operations, namely caring for patients in ways that are now evolving as noted above; investments, which are inherently risky evidence by this past year’s record losses; and philanthropy, which remains fickle particularly when other investment returns disappoint potential donors. For-profit healthcare systems don’t have the luxury of philanthropic support but typically are more efficient with scale and scope.
The most stable and predictable source of revenue in the past was from patient care. As the healthcare industry’s cost to society continues to increase above 20% of the GDP, most medically self-insured employers and other payors will search for efficiencies. Like it or not, persistently negative profit margins will transform healthcare.
Demand for nurses, physicians, and support folks is increasing, with many shortages looming near term. Labor costs and burnout have become pressing stresses, but more efficient delivery of care and better tools can ameliorate the stress somewhat. If structural process and technology tools can improve productivity per employee, the long-term supply of clinicians may keep up. Additionally, a decreased demand for care resulting from an effective prevention strategy also could help.
Most other successful industries work hard to produce products or services with fewer people. Remember what the industrial revolution did for America by increasing the productivity of each person in the early 1900s. Thereafter, manufacturing needed fewer employees.
PATIENTS’ NEEDS AND DESIRES
Patients want to live a long, happy and healthy life. The best way to do this is to avoid illness, which patients can do with prevention because 80% of disease is self-inflicted. When prevention fails, or the 20% of unstoppable episodic illness kicks in, patients should seek the best care.
The choice of the “best care” should not necessarily rest just on convenience but rather objective outcomes. Closest to home may be important for take-out food, but not healthcare.
Care typically can be divided into three categories — acute, urgent, and elective. Common examples of acute care include childbirth, heart attack, stroke, major trauma, overdoses, ruptured major blood vessel, and similar immediate, life-threatening conditions. Urgent intervention examples include an acute abdomen, gall bladder inflammation, appendicitis, severe undiagnosed pain and other conditions that typically have positive outcomes even with a modest delay of a few hours.
Most every other condition can be cared for in an appropriate timeframe that allows for a car trip of a few hours. These illnesses can range in severity from benign that typically resolve on their own to serious, which are life-threatening if left undiagnosed and untreated. Musculoskeletal aches are benign while cancer is life-threatening if not identified and treated.
Getting the right diagnosis and treatment for both benign and malignant conditions is crucial but we’re not even near perfect for either. That’s unsettling.
In a 2017 study,
“Mayo Clinic reports that as many as 88 percent of those patients [who travel to Mayo] go home [after getting a second opinion] with a new or refined diagnosis — changing their care plan and potentially their lives. Conversely, only 12 percent receive confirmation that the original diagnosis was complete and correct. In 21 percent of the cases, the diagnosis was completely changed; and 66 percent of patients received a refined or redefined diagnosis. There were no significant differences between provider types [physician and non-physician caregivers].” [15]
The frequency of significant mis- or refined-diagnosis and treatment should send chills up your spine. With healthcare we are not talking about trivial concerns like a bad meal at a restaurant, we are discussing life-threatening risks. Making an initial, correct first decision has a tremendous influence on your outcome.
Sleeping in your own bed is nice but secondary to obtaining the best outcome possible, even if car or plane travel are necessary. For urgent and elective diagnosis/treatment, travel may be a
good option. Acute illness usually doesn’t permit a few hours of grace, although a surprising number of stroke and heart attack victims delay treatment through denial or overnight timing. But even most of these delayed, recognized illnesses usually survive. And urgent and elective care gives the patient the luxury of some time to get to a location that delivers proven, objective outcomes, not necessarily the one closest to home.
Measuring quality in healthcare has traditionally been difficult for the average patient. Roadside billboards, commercials, displays at major sporting events, fancy logos, name changes and image building campaigns do not relate to quality. Confusingly, some heavily advertised metrics rely on a combination of subjective reputational and lagging objective measures. Most consumers don’t know enough about the sources of information to understand which ratings are meaningful to outcomes.
Arguably, hospital quality star ratings created by the Centers for Medicare and Medicaid Services (CMS) are the best information for potential patients to rate hospital mortality, safety, readmission, patient experience, and timely/effective care. These five categories combine 47 of the more than 100 measures CMS publicly reports. [16]
A 2017 JAMA article by lead author Dr. Ashish Jha said:
“Found that a higher CMS star rating was associated with lower patient mortality and readmissions. It is reassuring that patients can use the star ratings in guiding their health care seeking decisions given that hospitals with more stars not only offer a better experience of care, but also have lower mortality and readmissions.”
The study included only Medicare patients who typically are over 65, and the differences were most apparent at the extremes, nevertheless,
“These findings should be encouraging for policymakers and consumers; choosing 5-star hospitals does not seem to lead to worse outcomes and in fact may be driving patients to better institutions.” [17]
Developing more 5-star hospitals is not only better and safer for patients but also will save resources by avoiding expensive complications and suffering.
As a patient, doing your homework before you have an urgent or elective need can change your outcome for the better. Driving a
couple of hours to a CMS 5-star hospital or flying to a specialty hospital for an elective procedure could make a difference.
Business case studies have noted that hospitals with a focus on a specific condition deliver improved outcomes while becoming more efficient. [18] Similarly, specialty surgical areas within general hospitals have also been effective in improving quality while reducing costs. Mayo Clinic demonstrated this with its cardiac surgery department. [19] A similar example is Shouldice Hospital near Toronto, a focused factory specializing in hernia repairs. In the last 75 years, the Shouldice team has completed four hundred thousand hernia repairs, mostly performed under local anesthesia with the patient walking to and from the operating room. [20] [21]
THE BOTTOM LINE
The Mayo Brother’s quote, “The patient’s needs come first,” is more relevant today than when first articulated over a century ago. Driving treatment into distinct categories of acute, urgent, and elective, with subsequent directing care to the appropriate facilities, improves the entire care process for the patient. The saved resources can fund prevention and decrease the need for future care. The healthcare industry’s focus has been on sickness,
not prevention. The virtuous cycle’s flywheel effect of distinct categories for care and embracing prevention of illness will decrease misery and lower the percentage of GDP devoted to healthcare.
Editor’s note: This is a multi-part series on reinventing the healthcare industry. Part 2 addresses physicians, non-physician caregivers, and communities’ responses to the coming transformation.
Hospital finances are starting to stabilize as razor-thin margins become the new normal, according to Kaufman Hall’s latest “National Flash Hospital Report,” which is based on data from more than 900 hospitals.
External economic factors including labor shortages, higher material expenses and patients increasingly seeking care outside of inpatient settings are affecting hospital finances, with the high level of fluctuation that margins experienced since 2020 beginning to subside.
Hospitals’ median year-to-date operating margin was -1.1 percent in February, down from -0.8 percent in January, according to the report. Despite the slight dip, February marked the eight month in which the variation in month-to-month margins decreased relative to the last three years.
“After years of erratic fluctuations, over the last several months we are beginning to see trends emerge in the factors that affect hospital finances like labor costs, goods and services expenses and patient care preferences,” Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said. “In this new normal of razor thin margins, hospitals now have more reliable information to help make the necessary strategic decisions to chart a path toward financial security.”
High expenses continued to eat into hospitals’ bottom lines, with February signaling a shift from labor to goods and services as the main cost driver behind hospital expenses. Inflationary pressures increased non-labor expenses by 6 percent year over year, but labor expenses appear to be holding steady, suggesting less dependence on contract labor, according to Kaufman Hall.
“Hospital leaders face an existential crisis as the new reality of financial performance begins to set in,” Mr. Swanson said. “2023 may turn out to be the year hospitals redefine their goals, mission, and idea of success in response to expense and revenue challenges that appear to be here for the long haul.”
Workforce problems in U.S. hospitals are troublesome enough for the American College of Healthcare Executives to devote a new category to them in its annual survey on hospital CEOs’ concerns. In the latest survey, executives identified “workforce challenges” as the No. 1 concern for the second year in a row.
Financial challenges, which consistently held the top spot for 16 years in a row until 2021, were listed the second-most pressing concern in the American College of Healthcare Executives’ annual survey.
Although workforce challenges were not seen as the most pressing concern for 16 years, they rocketed to the top quickly and rather universally for healthcare organizations in the past two years. Most CEOs (90 percent) ranked shortages of registered nurses as the most pressing within the category of workforce challenges, followed by shortages of technicians (83 percent) and burnout among non-physician staff (80 percent).
Here are the most concerning issues hospital CEOs ranked in 2022, along with the score of how pressing CEOs find each issue.
1. Workforce challenges (includes personnel shortages and staff burnout, among other issues) — 1.8
2. Financial challenges — 2.8
3. Behavioral health and addiction issues — 5.2
4. Patient safety and quality — 5.9
5. Governmental mandates — 5.9
6. Access to care — 6.0
7. Patient satisfaction — 6.6
8. Physician-hospital relations — 7.6
9. Technology — 7.7
10. Population health management — 8.6
11. Reorganization (mergers and acquisitions, partnerships and restructuring) — 8.7
Within financial challenges, most CEOs (89 percent) ranked increasing costs for staff and supplies as the most pressing, followed by operating costs (66 percent) and Medicaid reimbursement (63 percent). CEOs are less concerned about price transparency and moving away from fee-for-service.
Seventy-eight percent of CEOs ranked lack of appropriate facilities/programs as most pressing within the category of behavioral health and addiction issues. That was followed by lack of funding for addressing behavioral health and addiction issues (77 percent).
The results are based on a survey administered to CEOs of community hospitals (non-federal, short-term, non-specialty hospitals). ACHE asked respondents to rank 11 issues affecting their hospitals in order of how pressing they are. Results are based on responses from 281 executives.
Financial analysts have said that 2022 may have been the worst year for hospital finances in decades. This year looks like it will be yet another year of financial underperformance, with rural providers in especially dire circumstances.
What’s driving this bleak financial reality? It’s “primarily an expense story,” said Erik Swanson, a senior vice president at Kaufman Hall‘s data analytics practice.
“Growth in expenses has vastly outpaced growth in revenues — since pre-pandemic levels since last year, and even the year prior — such that margins are ultimately being pushed downward. And hospitals’ median operating margin is still below zero on a cumulative basis,” he declared, referring to 2021 and 2020.
Here’s some context about how dismal this situation is: Even in 2020, a year in which hospitals saw extraordinary losses during the first few months of the pandemic, they still reported operating margins of 2%.
What’s even more disconcerting is that hospitals are underperforming financially pretty much across the board, Swanson said.
Even Kaiser Permanente, one of the country’s largest health systems with an integrated delivery model, reported a $1.5 billion loss for the third quarter of 2022.
Rural hospitals are in even worse shape, but more on that below.
Other hospitals have been forced to shutter service lines to offset these financial losses. Some are also turning to integration and consolidation.
For example, Hermann Area District Hospital in Missouri said last month that it is seeking a “deeper affiliation” with Mercy Health or another provider. This announcement came after the hospital eliminated its home health agency as a cost-cutting measure. In December, the hospital projected a loss of $2 million for 2022.
We can also look at the mega-merger between Atrium Health and Advocate Aurora Health, which was completed last month. The deal, which is designed for cost synergy, creates the fifth-largest nonprofit integrated health system in the U.S.
The merger was finalized one day after North Carolina Attorney General Josh Stein expressed concern about how the deal could impact rural communities. He said that while he didn’t have a legal basis within his office’s limited statutory authority to block the deal, he was worried that it could further restrict access to healthcare in rural and underserved communities.
Stein brings up an extremely valid concern. Rural hospitals’ dismal financial circumstances are becoming more and more worrisome — in fact, about 30% of all rural hospitals are at risk of closing in the near future, according to a recent report from the Center for Healthcare Quality and Payment Reform (CHQPR).
A crucial reason for this is that it is more expensive to deliver healthcare in rural areas — usually because of smaller patient volumes and higher costs for attracting staff. Another factor is that payments rural hospitals receive from commercial health plans isn’t enough to cover the cost of delivering care to patients in rural areas, said Harold Miller, CEO of CHQPR.
“Many people assume that private commercial insurance plans pay more than Medicare and Medicaid. But for small rural hospitals, the exact opposite is true,” he said. “In many cases, Medicare is their best payer. And private health plans actually pay them well below their costs — well below what they pay their larger hospitals. One of the biggest drivers of rural hospital losses is the payments they receive from private health plans.”
In Miller’s view, rural hospitals perform two main functions: taking care of sick people in the hospital and being there for people in case they need to go to the hospital.
To fulfill the latter job, rural hospitals must operate 24/7 emergency rooms. These hospitals get paid when there’s an emergency, but not when there isn’t — even though the hospital is incurring costs by operating and staffing these units.
“Rural hospitals have a physician on duty 24/7 to be available for emergencies. But they don’t get paid for that by most payers. Medicare does pay them for that, but other payers don’t. If the hospital is doing two different things, we should be paying them for both of those things. Hospitals should be paid for what I refer to as ‘standby capacity,’” Miller said.
He bolstered his argument by pointing to these analogies: Do we only pay firefighters when there’s a fire? Do we only pay police officers when there’s a crime?
It’s also important to remember that rural hospitals are in the midst of transitioning to a post-pandemic environment, now without the pandemic-era financial assistance they received from the government, said Brock Slabach, chief operations officer at the National Rural Health Association.
“Rural providers are looking to move into the future without the benefit of those extra payments. And they’re in an environment of really high inflation. It’s over 8%, and for some goods and services in the healthcare sector, that’s going to be over 20% in terms of increased prices. Wages and salaries have also gone up significantly. But patient volumes have maintained below average or average. That all presents a huge challenge,” Slabach said.
Rural providers across the country are dealing with the stressors Slabach described and clamoring for more government help. For example, the Michigan Health & Hospital Association sought more money from the state last month after having to take 1,700 beds offline.
Many rural hospitals can’t escape their fate. From 2010 to 2021, there were 136 rural hospital closures. There were only two closures in 2021, and Slabach said 2022 produced a similarly low number. But these low totals are due to government relief, he explained. Slabach said he’s expecting an increase in rural hospital closures in 2023.
When a rural hospital closes, it means community members have to travel far distances for emergency or inpatient care. Miller pointed out another problem: in many rural communities, the hospital is the only place people can go to get laboratory or imaging work done. The hospital might also be the only source of primary care for the community. Shuttering these hospitals would be a massive blow to rural Americans’ healthcare access.
In the face of these potentially devastating blows to patient access, financial analysts’ outlook is bleak.
Higher inflation and costly labor expenses will continue to have negative effects on hospitals — both rural and urban — in 2023, according to an analysis from Moody’s. Expenses will also continue to increase due to supply chain bottlenecks, the need for more robust cybersecurity investments and longer hospital stays due to higher levels of patient acuity.
All of this doom and gloom begs the question — are any hospitals doing well financially?
The answer is yes, a select few. Let’s look at the three largest for-profit health systems in the nation — Community Health Systems, HCA Healthcare and Tenet Healthcare. As of 2020, these three public health systems accounted for about 8% of hospital beds in the U.S.
These three systems all had positive operating margins for the majority of the pandemic, including most recently in the third quarter of 2022.
Large public health systems have shareholders to report to and stock prices to worry about. Does this mean they’re more likely to deny care to patients who can’t afford it while other hospitals pick up the slack?
Slabach said it’s tough to say.
“Obviously, hospitals try to mitigate their exposure to risk when it comes to taking care of patients. Most hospitals do a really good job of providing services and care to people who don’t have insurance or don’t have the means to pay. But that gets stressed in this current financial environment. So indeed, there may be instances where what you suggested might happen, but it’s not because they want to deny services or deny care. It’s because they have a bigger picture they have to maintain,” Slabach said.
And the big picture involving dollar signs for hospitals looks pretty bleak in 2023.
As everyone in our industry knows, sluggish volumes amid persistently rising costs, especially for labor, have sent health system margins into a downward spiral across 2022. Using the latest data from consultancy Kaufman Hall, the graphic above shows that by the end of this year, employed labor expenses will have increased more than all non-labor costs combined.
While contract labor usage, namely travel nursing, is declining, the constant battle for nursing talent means travel nurses are still a significant expense at many hospitals. Through the first six months of this year, over half of hospitals reported a negative operating margin, and the median hospital operating margin has dropped over 100 percent from 2019.
Larger health systems are not faring better: all five of the large, multi-regional, not-for-profit systems we’ve highlighted below saw their operating margins tumble this year, with drops ranging from three points (Kaiser Permanente) to nearly seven points (CommonSpirit Health and Providence).
While these unfavorable cost trends have been building throughout COVID, health systems now have neither federal relief nor returns from a thriving stock market to help stabilize their deteriorating financial outlooks.
Health system boards will tolerate negative margins in the short-term (especially given that many have months’ worth of days cash on hand), but if this situation persists into 2023, pressure for service cuts, layoffs, and restructuring will mount quickly.
Envision will see weak liquidity over the following 12 to 18 months, and its $1.4B cash reserve will likely run dry by the end of next year.
Physician staffing company Envision Healthcare is struggling financially, and these struggles are reflected in a Moody’s Investors Service credit rating downgrade, which took into account ongoing labor pressures and a decline in volumes linked to the COVID-19 pandemic.
According to Moody’s, Envision will see weak liquidity over the following 12 to 18 months, and its $1.4 billion cash reserve will likely run dry by the end of next year. Moody’s said bankruptcy or restructuring is likely in the cards, and its Corporate Family Rating (CFR) has been downgraded from C to Caa3.
The rating action follows a series of transactions including restructuring of Envision’s senior secured credit facilities, and issuing a new revolving credit facility in July 2022 and other debt in April 2022 at its subsidiary, AmSurg. Moody’s deemed Envision’s transactions to be a distressed exchange, as the loans were exchanged at a price below par. That’s a default under Moody’s definition.
Envision’s capital structure is unsustainable, the rating agency said. Recovery rates for much of the company’s debt will be low. Moody’s expects operating performance will continue to deteriorate due to ongoing labor pressures within the industry, as well as rising interest rates that will cause interest expense to nearly double.
The refinancing has not materially reduced debt, and while the maturities have been extended, Envision remains at risk of being unable to service its debt.
WHAT’S THE IMPACT
There are some factors in play that mitigate some of the risks. Envision has considerable scale and market position as one of the largest physician staffing outsourcers in the country, said Moody’s. The company has strong product diversification within its physician staffing and ambulatory surgery center segments.
However, continuing business pressures and increased interest expense will cause Envision’s free cash flow to be significantly negative in 2022 and beyond.
When assigning the new ratings, Moody’s considered the expected loss on the Envision debt, which the Rating Agency expects will be significant. Moody’s noted that to the extent that there is asset recovery on the Envision business, the share of proceeds to the term loans will be applied to the Envision senior secured first out term loan before the other debt. But it’s expected that there will be material losses.
The outlook is stable for both Envision and the AmSurg subsidiary. Moody’s expects the company to remain distressed and there is a heightened risk of default given the weak liquidity and risks surrounding the ongoing sustainability of the business.
THE LARGER TREND
Envision operates an extensive emergency department, hospital, anesthesiology, radiology and neonatology physician outsourcing segment. The company also operates more than 250 ambulatory surgery centers in 34 states, and is owned by private equity firm KKR. Revenues for the period ending June 30 were about $7 billion.
Although it’s unlikely in the near term, a substantial improvement in Envision’s liquidity position – including refinancing of the existing debt – would be needed to support an upgrade. Envision would also need an improvement in its operating performance, Moody’s said.
Earlier this month, Envision filed a lawsuit against UnitedHealthcare over the insurer’s denied claims, sparking a countersuit from UHC, which claimed Envision fraudulently upcoded claims for services provided to UHC members.
UHC removed Envision from its network last year, claiming the firm’s costs did not reflect fair market rates. According to Envision’s lawsuit, UHC denied about 18% of submitted commercial claims – a number that swelled to 48% of all claims after Envision’s removal from UHC networks, the firm said. And for the highest-acuity claims, Envision is accusing UHC of denying 60% of those claims.
Meanwhile, in June, physicians at Corona Regional Medical Center and Temecula Valley Hospital in California threatened to leave the hospitals if for-profit owner Universal Health Services changes the staffing management firm to Envision, according to an emergency room doctor who heads the hospitals’ current staffing firm, Emergent Medical Associates (EMA). Physicians objected to Envision citing concerns of lower pay and staffing levels leading to lower quality of care.
Despite a a seventh straight month of industrywide negative margins, “hospitals and health systems must think strategically and make investments to strengthen performance toward long-term institutional goals despite the day-to-day financial challenges they experience,” Kaufman Hall’s Erik Swanson said.
Months of inching performance gains were upended in July as the nation’s hospitals logged “some of the worst margins since the beginning of the COVID-19 pandemic,” Kaufman Hall wrote in its latest industry report.
Decreasing outpatient revenues paired with pricier inpatient stays were chief among the culprits and outpaced minor improvements in expenses, the group wrote in its monthly sector update for July.
What’s more, seven straight months of negative margins “reversed any gains hospitals saw this year” and has the advisory group forecasting a brutal year for the industry.
“July was a disappointing month for hospitals and put 2022 on pace to be the worst financial year hospitals have experienced in a long time,” Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said in a statement. “Over the past few years, hospitals and health systems have been able to offset some financial hardship with federal support, but those funding sources have dried up, and hospitals’ bottom lines remain in the red.”
Kaufman Hall placed its median year-to-date operating margin index at -0.98% through July, compared to the -0.09% from January to June the group had reported during last month’s report. Hospitals’ median percent change in operating margin from June to July was -63.9%, according to the report, and -73.6% from July 2021.
The month’s volume trends hinted at the larger shift toward scheduling procedures for ambulatory settings, Kaufman Hall wrote. For instance, operating room minutes declined 10.3% from June to July and 7.7% year over year, according to the report.
Patients who did come into the hospital tended to be sicker, the firm continued. Average length of stay increased 2% from last month and 3.4% year over year. Patient days increased 2.8% from the previous month but were down 2.6% from the prior year, while adjusted discharges dipped 2.8% from June and 4.2% from July 2021.
These trends came together as a brake check on 2022’s to-date revenue gains. Gross operating revenue fell 3.6% from June but remains up 5.5% year to date. Outpatient revenue was down 4.8% from June and maintains a 7.1% year-to-date increase. Inpatient revenue declined 0.7% from June but is still up 3.6% year to date.
The silver lining in Kaufman Hall’s report were total expenses that, although up 7.6% from July 2021, saw a modest 0.4% decline since June. Those savings came squarely among supply and drug expenses as total labor costs and labor expense per adjusted discharge still grew 0.8% and 3.5%, respectively, since June. Increases in full-time employees per adjusted occupied bed “possibly” suggest increased hiring, the group wrote in the report.
Kaufman Hall acknowledged the “urgency of day-to-day pressures” driving the month’s sudden performance dips but urged hospital leaders to prioritize long-term operational improvements as they work to keep the organization afloat.
“2022 has been, and will likely continue to be, a challenging year for hospitals and health systems, but it would not be prudent to focus on short-term solutions at the expense of long-term planning,” Swanson said. “Hospitals and health systems must think strategically and make investments to strengthen performance toward long-term institutional goals despite the day-to-day financial challenges they experience.”
Kaufman Hall’s monthly reports are based on a sample of more than 900 nationally representative hospitals.
The group isn’t alone in its doom-and-gloom warnings for providers. Fitch Ratings recently wrote that high expenses, jilted volume gains and other challenges are unlikely to resolve before the end of the year. As such, the agency downgraded its outlook for the nonprofit hospital industry from “neutral” to “deteriorating.”
Expenses are still weighing heavily on hospitals, health systems, and physician’s practices as the cost of care continues to rise.
Hospitals, health systems, and physician’s practices are still struggling under the weight of significant financial pressure, that the rise in patient volume and revenue can’t seem to outweigh.
The increase in patient volume and revenue has not been able to offset the historically high operating margins these organizations are facing, according to data from Kaufman Hall’s National Hospital Flash Report and Physician Flash Report. Hospitals, health systems, and physician’s practices dealt with negative margins in June for the sixth consecutive month this year.
“To say that 2022 has challenged healthcare providers is an understatement,” Erik Swanson, a senior vice president of data and analytics with Kaufman Hall, said in an email report. “It’s unlikely that hospitals and health systems can undo the damage caused by the COVID-19 waves of earlier this year, especially with material and labor costs at record highs this summer.”
The median Kaufman Hall year-to-date operating margin index for hospitals was -0.09% through June, for the sixth month of cumulative negative actual operating margins. However, the median change in operating margin in June was up 30.8% compared to May, but down 49.3% from June 2021.
Hospital revenues for June continued to trend upward, even as volumes evened out, according to the Kauffman Hall data. Organizations saw a 2.1% drop in patient length of stay. Both patient days and emergency department visits each dropped by 2.6% in June when compared to May. Hospital’s gross operating revenue was up 1.2% in June from May.
Expenses have been dragging down hospital margins for months, however, June saw a slight month-over-month improvement as total hospital expenses dropped 1.3%, despite this, year-over-year expenses are still up 7.5% from June 2021. Physician practices saw a drop in provider compensation, according to the Kaufman Hall data, however, this wasn’t enough to offset expenses. The competitive labor market for healthcare support staff resulted in a new high for total direct expense per provider FTE in Q2 2022 of $619,682—up 7% from the second quarter of 2021 and 12% from the second quarter of 2020.
“Given the trends in the data, physician practices need to focus on efficiency in the second half of 2022,” Matthew Bates, managing director and Physician Enterprise service line lead with Kaufman Hall, said in the email report. “Amid historically high expenses, shifting some services away from physicians to advanced practice providers like nurse practitioners or physician assistants could help rein in the costs of treating an increased patient load while taking some of the weight off the shoulders of physicians.”
HENRY KOTULA 