16 Things CEOs Need to Know in 2023

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Understand the health care industry’s most urgent challenges—and greatest opportunities.

The health care industry is facing an increasingly tough business climate dominated by increasing costs and prices, tightening margins and capital, staffing upheaval, and state-level policymaking. These urgent, disruptive market forces mean that leaders must navigate an unusually high number of short-term crises.

But these near-term challenges also offer significant opportunities. The strategic choices health care leaders make now will have an outsized impact—positive or negative—on their organization’s long-term goals, as well as the equitability, sustainability, and affordability of the industry as a whole.

This briefing examines the biggest market forces to watch, the key strategic decisions that health care organizations must make to influence how the industry operates, and the emerging disruptions that will challenge the traditional structures of the entire industry.

Preview the insights below and download the full executive briefing (using the link above) now to learn the top 16 insights about the state of the health care industry today.

Preview the insights

Part 1 | Today’s market environment includes an overwhelming deluge of crises—and they all command strategic attention

Insight #1

The converging financial pressures of elevated input costs, a volatile macroeconomic climate, and the delayed impact of inflation on health care prices are exposing the entire industry to even greater scrutiny over affordability. Keep reading on pg. 6

Insight #2

The clinical workforce shortage is not temporary. It’s been building to a structural breaking point for years. Keep reading on pg. 8

Insight #3

Demand for health care services is growing more varied and complex—and pressuring the limited capacity of the health care industry when its bandwidth is most depleted. Keep reading on pg. 10

Insight #4

Insurance coverage shifted dramatically to publicly funded managed care. But Medicaid enrollment is poised to disperse unevenly after the public health emergency expires, while Medicare Advantage will grow (and consolidate). Keep reading on pg. 12

Part II | Competition for strategic assets continues at a rapid pace—influencing how and where patient care is delivered.

Insight #5

The current crisis conditions of hospital systems mask deeper vulnerabilities: rapidly eroding power to control procedural volumes and uncertainty around strategic acquisition and consolidation. Keep reading on pg. 15

Insight #6

Health care giants—especially national insurers, retailers, and big tech entrants—are building vertical ecosystems (and driving an asset-buying frenzy in the process). Keep reading on pg. 17

Insight #7

As employment options expand, physicians will determine which owners and partners benefit from their talent, clinical influence, and strategic capabilities—but only if these organizations can create an integrated physician enterpriseKeep reading on pg. 19

Insight #8

Broader, sustainable shifts to home-based care will require most care delivery organizations to focus on scaling select services. Keep reading on pg. 21

Insight #9

A flood of investment has expanded telehealth technology and changed what interactions with patients are possible. This has opened up new capabilities for coordinating care management or competing for consumer attention. Keep reading on pg. 23

Insight #10

Health care organizations are harnessing data and incentives to curate consumers choices—at both the service-specific and ecosystem-wide levels. Keep reading on pg. 25

Part III | Emerging structural disruptions require leaders to reckon with impacts to future business sustainability. 

Insight #11

For value-based care to succeed outside of public programs, commercial plans and providers must coalesce around a sustainable risk-based payment approach that meets employers’ experience and cost needs. Keep reading on pg. 28

Insight #12

Industry pioneers are taking steps to integrate health equity into quality metrics. This could transform the health care business model, or it could relegate equity initiatives to just another target on a dashboard. Keep reading on pg. 30

Insight #13

Unprecedented behavioral health needs are hitting an already fragmented, marginalized care infrastructure. Leaders across all sectors will need to make difficult compromises to treat and pay for behavioral health like we do other complex, chronic conditions. Keep reading on pg. 32

Insight #14

As the population ages, the fragile patchwork of government payers, unpaid caregivers, and strained nursing homes is ill-equipped to provide sustainable, equitable senior care. This is putting pressure on Medicare Advantage plans to ultimately deliver results. Keep reading on pg. 34

Insight #15

The enormous pipeline of specialized high-cost therapies in development will see limited clinical use unless the entire industry prepares for paradigm shifts in evidence evaluation, utilization management, and financing. Keep reading on pg. 36

Insight #16

Self-funded employers, who are now liable for paying “reasonable” amounts, may contest the standard business practices of brokers and plans to avoid complex legal battles with poor optics. Keep reading on pg. 38

30 health systems with strong finances in 2022

Here are 30 health systems with strong operational metrics and solid financial positions in 2022, according to reports from Fitch Ratings and Moody’s Investors Service.

1. Advocate Aurora Health has an “AA” rating and a stable outlook with Fitch. The health system, dually headquartered in Milwaukee and Downers Grove, Ill., has a strong financial profile and a leading market position over a broad service area in Illinois and Wisconsin, Fitch said. The health system’s fundamental operating platform is strong, the credit rating agency said.

2. Atlantic Health System has an “Aa3” rating and stable outlook with Moody’s. The Morristown, N.J.-based health system has strong operating performance and liquidity metrics, Moody’s said. The credit rating agency expects Atlantic Health System to sustain strong performance to support capital spending. 

3. Banner Health has an “AA-” rating and stable outlook with Fitch. The Phoenix-based health system’s core hospital delivery system and growth of its insurance division combine to make it a successful, highly integrated delivery system, Fitch said. The credit rating agency said it expects Banner to maintain operating EBITDA margins of about 8 percent on an annual basis, reflecting the growing revenues from the system’s insurance division and large employed physician base.

4. BayCare has an “AA” rating and stable outlook with Fitch. The 14-hospital system based in Clearwater, Fla., has excellent liquidity and operating metrics, which are supported by its leading market position in a four-county area, Fitch said. The credit rating agency expects strong revenue growth and cost management to sustain BayCare’s operating performance. 

5. Bon Secours Mercy Health has an “AA-” rating and stable outlook with Fitch. The Cincinnati-based health system has a broad geographic footprint as one of the five largest Catholic health systems in the U.S., a good payer mix and a leading or near-leading market share in eight of its 11 markets in the U.S., Fitch said.

6. Bryan Health has an “AA-” rating and stable outlook with Fitch. The Lincoln, Neb.-based health system has a leading and growing market position, very strong cash flow and a strong financial position, Fitch said. The credit rating agency said Bryan Health has been resilient through the COVID-19 pandemic and is well-positioned to accommodate additional strategic investments. 

7. CaroMont Health has an “AA-” rating and stable outlook with Fitch. The Gastonia, N.C.-based system has a leading market position in a growing services area and a track record of good cash flow, Fitch said.  

8. Christiana Care Health System has an “Aa2” rating and stable outlook with Moody’s. The Newark, Del.-based system has a unique position as the state’s largest teaching hospital and extensive clinical depth that affords strong regional and statewide market capture, and it is expected to return to near pre-pandemic level margins over the medium-term, Moody’s said.

9. Cone Health has an “AA” rating and stable outlook with Fitch. The Greensboro, N.C.-based health system has a leading market share and a favorable payer mix, Fitch said. The health system’s broad operating platform and strategic capital investments should enable it to return to stronger operating results, the credit rating agency said.

10. Deaconess Health System has an “AA” rating and stable outlook with Fitch. The Evansville, Ind.-based system has a leading market position in its primary service area and a favorable payer mix, Fitch said. The ratings agency said it expects Deaconess’ operating EBITDA margins to improve and stabilize around 10 percent by 2023, reflecting strong volumes and focus on operating efficiencies. 

11. El Camino Health has an “AA-” rating and stable outlook with Fitch. El Camino Health, which includes hospital campuses in Los Gatos, Calif., and Mountain View, Calif., has a solid market share in a competitive market and a stable payer mix, Fitch said. The credit rating agency said El Camino Health’s balance sheet provides moderate financial flexibility.

12. Gundersen Health System has an “AA-” rating and stable outlook with Fitch. The La Crosse, Wis.-based health system has strong balance sheet metrics, a leading market position and an expanding operating platform in its service area, Fitch said. The credit rating agency expects the health system to return to strong operating performance as it emerges from disruption related to the COVID-19 pandemic. 

13. Hackensack Meridian Health has an “AA-” rating and stable outlook with Fitch. The Edison, N.J.-based health system has shown consistent year-over-year increases in market share and has a solid liquidity position, Fitch said. 

14. Inova Health System has an “Aa2” rating and stable outlook with Moody’s. The Falls Church, Va.-based health system has a consistently strong operating cash flow margin and ample balance sheet resources, Moody’s said. Inova’s financial excellence will remain undergirded by its favorable regulatory and economic environment, the credit rating agency said. 

15. Intermountain Healthcare has an “Aa1” rating and stable outlook with Moody’s. The Salt Lake City-based health system has exceptional credit quality, which will continue to benefit from its leading market position in Utah, Moody’s said. The credit rating agency said the health system’s merger with Broomfield, Colo.-based SCL Health will also give Intermountain greater geographic reach.

16. Mass General Brigham has an “Aa3” rating and stable outlook with Moody’s. The Boston-based health system has an excellent clinical reputation, good financial performance and strong balance sheet metrics, Moody’s said. The credit rating agency said it expects Mass General Brigham to maintain a strong market position and stable financial performance. 

17. Mayo Clinic has an “Aa2” rating and stable outlook with Moody’s. The credit rating agency said Mayo Clinic’s strong market position and patient demand will drive favorable financial results. The Rochester, Minn.-based health system “will continue to leverage its excellent reputation and patient demand to continue generating favorable operating performance while maintaining strong balance sheet ratios,” Moody’s said. 

18. MemorialCare has an “AA-” rating and stable outlook with Fitch. The Fountain Valley, Calif.-based health system has excellent leverage metrics and a strong financial profile, Fitch said. The credit rating agency said it expects the system’s leverage metrics to remain strong over the next several years. 

19. Methodist Health System has an “Aa3” rating and stable outlook with Moody’s. The Dallas-based system has strong operating performance, and investments in facilities have allowed it to continue to capture more market share in the fast-growing Dallas-Fort Worth, Texas, area, Moody’s said. The credit rating agency said it expects Methodist Health System’s strong operating performance and favorable liquidity to continue.

20. OhioHealth has an “AA+” rating and stable outlook with Fitch. The Columbus, Ohio-based system has an exceptionally strong credit profile, broad regional operating platform and leading market position in both its competitive two-county primary service area and broader 47-county total service area, Fitch said. 

21. Parkview Health has an “Aa3” rating and stable outlook with Moody’s. The Fort Wayne, Ind.-based system has a leading market position with expansive tertiary and quaternary clinical services in Northeastern Indiana and Northwestern Ohio, Moody’s said. 

22. Presbyterian Healthcare Services has an “Aa3” rating and stable outlook with Moody’s and an “AA” rating and stable outlook with Fitch. The Albuquerque, N.M.-based system is the largest in the state, and it has strong revenue growth and a healthy balance sheet, Moody’s said. The credit rating agency said it expects the health system’s balance sheet and debt metrics to remain strong. 

23. Rady Children’s Hospital has an “AA” rating and stable outlook with Fitch. The San Diego-based hospital has a very strong balance sheet position and operating performance, and it is also a leading provider of pediatric services in the growing city and tri-county service area, Fitch said. 

24. Rush Health has an “AA-” rating and stable outlook with Fitch. The Chicago-based health system has a strong financial profile and a broad reach for high-acuity services as a leading academic medical center, Fitch said. The credit rating agency expects Rush’s services to remain profitable over time. 

25. Stanford (Calif.) Health Care has an “AA” rating and stable outlook with Fitch. The health system has extensive clinical reach in a competitive market and its financial profile is improving, Fitch said. The health system’s EBITDA margins rebounded in fiscal year 2021 and are expected to remain strong going forward, the crediting rating agency said. 

26. ThedaCare has an “AA-” rating and stable outlook with Fitch. The Neenah, Wis.-based system has a focused strategy, strong financial profile and robust market share, Fitch said. 

27. Trinity Health has an “AA-” rating and stable outlook with Fitch. The Livonia, Mich.-based system’s large size and market presence in multiple states disperses risk and the long-term ratings incorporate the expectation that Trinity will return to sustained stronger operating EBITDA margins. 

28. UnityPoint Health has an “AA-” rating and stable outlook with Fitch. The Des Moines, Iowa-based health system has strong leverage metrics and cash position, Fitch said. The credit rating agency expects the health system’s balance sheet and debt service coverage metrics to remain robust.

29. University of Chicago Medical Center has an “AA-” rating and stable outlook with Fitch. The credit rating agency said it expects University of Chicago Medical Center’s capital-related ratios to remain strong, in part because of its broad reach of high-acuity services. 

30. Yale New Haven (Conn.) Health has an “AA-” rating and stable outlook with Fitch. The health system’s turnaround efforts, brand recognition and market presence will help it return to strong operating results, Fitch said. 

2022 Was Hospitals’ Worst Financial Year in Decades, But 2023 Won’t Be Much Better

https://medcitynews.com/2023/01/2022

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.

For example, the financial reports for the country’s three largest nonprofit health systems — AscensionCommonSpirit Health and Trinity Health — revealed they are all struggling. Ascension reported a $118.6 million loss in the third quarter of 2022, CommonSpirit posted a $227 million loss, and Trinity posted a $550.9 million loss.

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 SystemsHCA 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.

High labor costs, inflation make healthcare outlook negative, Moody’s says

Sustained high labor expenses and inflationary pressures will continue to affect the healthcare industry in 2023, keeping the outlook for nonprofit hospital systems negative, Moody’s said in a Dec. 7 report.

In addition to such pressures, persistent COVID-19 surges, supply chain disruptions and the need for continued cybersecurity investments will also increase expenses, the report said. And while operating revenue is expected to modestly improve next year, the ending of federal Coronavirus Aid, Relief and Economic Security Act funding, net Medicare cuts and the end of the public health emergency will negatively affect hospital revenues, Moody’s said.

“This level of operating cash flow production will likely prove insufficient over the long term to enable adequate reinvestment in facilities, maintain investment in programs, or support organizational growth — key considerations that drive our negative outlook,” said Brad Spielman, vice president, senior credit officer for Moody’s.

Some of the less well-funded healthcare systems could even face breaches of covenant amid such a challenging backdrop, Moody’s warned. Such covenants typically refer to issues like days of cash on hand or minimum coverage of debt.

Management in such challenged systems have taken measures to mitigate the danger of such breaches, the report said. These include liquidating investments and drawing on lines of credit as well as refinancing debt, an unfavorable option in the current economic situation.

The present interest-rate environment, however, currently makes such a move relatively costly,” the report noted.

The Moody’s report follows quickly on the heels of a similar one from Fitch Ratings Dec. 1 that highlighted the “formidable challenge” of high labor expenses and inflationary pressures facing the industry.

Big payers ranked by Q3 profits

The nation’s largest payers have filed their third-quarter earnings reports, revealing which grew their profits the most year over year.

1. UnitedHealth Group: $5.3 billion
The company’s third quarter earnings increased over 28 percent year over year. Total net earnings in 2022 are $15.7 billion, an increase of 16.2 percent from $13.5 billion in 2021.

2. Cigna: $2.8 billion
The company’s third quarter earnings increased over 70 percent year over year. Total net earnings in 2022 are $5.5 billion, an increase of over 29 percent from $4.2 billion in 2021.

3. Elevance Health: $1.6 billion
The company’s third quarter earnings increased over 7 percent year over year. Total net earnings in 2022 are $5.06 billion, an increase of nearly 2 percent from $5 billion in 2021.

4. Humana: $1.2 billion
The company’s third quarter earnings decreased over 21 percent year over year. Total net earnings in 2022 are $2.8 billion, a decrease of over 4 percent from $2.9 billion in 2021.

5. Centene: $738 million
The company’s third quarter earnings increased over 26 percent year over year. Total net earnings in 2022 are $1.4 billion, an increase of over 89 percent from $748 million in 2021.

6. CVS Health: $3.4 billion losses
The company’s third quarter losses are attributable to an opioid legal settlement. Total net earnings in 2022 are $1.9 billion, a decrease of over 71 percent from $6.6 billion in 2021.

10 health systems with strong finances

Here are 10 health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings and Moody’s Investors Service.

1. Advocate Aurora Health has an “AA” rating and a stable outlook with Fitch. The health system, dually headquartered in Milwaukee and Downers Grove, Ill., has a strong financial profile and a leading market position over a broad service area in Illinois and Wisconsin, Fitch said. The health system’s fundamental operating platform is strong, the credit rating agency said. 

2. Allina Health System has an “AA-” rating and a stable outlook with Fitch. The Minneapolis-based system is the inpatient market share leader in a highly competitive market and has a strong relation with payers in the market, Fitch said. Alliana’s financial profile is strong, the ratings agency said. 

3. Banner Health has an “AA-” rating and stable outlook with Fitch. The Phoenix-based health system’s core hospital delivery system and growth of its insurance division combine to make it a successful, highly integrated delivery system, Fitch said. The credit rating agency said it expects Banner to maintain operating EBITDA margins of about 8 percent on an annual basis, reflecting the growing revenues from the system’s insurance division and large employed physician base.

4. Bon Secours Mercy Health has an “AA-” rating and stable outlook with Fitch. The Cincinnati-based health system has a broad geographic footprint as one of the five largest Catholic health systems in the U.S., a good payer mix and a leading or near-leading market share in eight of its eleven markets in the U.S., Fitch said.

5. Bryan Health has an “AA-” rating and stable outlook with Fitch. The Lincoln, Neb.-based health system has a leading and growing market position, very strong cash flow and a strong financial position, Fitch said. The credit rating agency said Bryan Health has been resilient through the COVID-19 pandemic and is well-positioned to accommodate additional strategic investments. 

6. Deaconess Health System has an “AA” rating and stable outlook with Fitch. The Evansville, Ind.-based system has a leading market position in its primary service area and a favorable payer mix, Fitch said. The ratings agency said it expects Deaconess’ operating EBITDA margins to improve and stabilize around 10 percent by 2023, reflecting strong volumes and focus on operating efficiencies.

7. Gundersen Health System has an “AA-” rating and stable outlook with Fitch. The La Crosse, Wis.-based health system has strong balance sheet metrics, a leading market position and an expanding operating platform in its service area, Fitch said. The credit rating agency expects the health system to return to strong operating performance as it emerges from disruption related to the COVID-19 pandemic. 

8. Hackensack Meridian Health has an “AA-” rating and stable outlook with Fitch. The Edison, N.J.-based health system has shown consistent year-over-year increases in market share and has a solid liquidity position, Fitch said. 

9. Intermountain Healthcare has an “Aa1” rating and stable outlook with Moody’s. The Salt Lake City-based health system has exceptional credit quality, which will continue to benefit from its leading market position in Utah, Moody’s said. The credit rating agency said the health system’s merger with Broomfield, Colo.-based SCL Health will also give Intermountain greater geographic reach.

10. Yale New Haven (Conn.) Health has an “AA-” rating and stable outlook with Fitch. The health system’s turnaround efforts, brand recognition and market presence will help it return to strong operating results, Fitch said. 

A rough year so far for health system finances

https://mailchi.mp/b1e0aa55afe5/the-weekly-gist-october-7-2022?e=d1e747d2d8

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. 

14 health systems with strong finances

Here are 14 health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings and Moody’s Investors Service.

1. Advocate Aurora Health has an “AA” rating and stable outlook with Fitch. The health system, dually headquartered in Milwaukee and Downers Grove, Ill., has a strong financial profile and a leading market position over a broad service area in Illinois and Wisconsin, Fitch said. The health system’s fundamental operating platform is strong, the credit rating agency said. 

2. AnMed Health has an “AA-” rating and stable outlook with Fitch. The Anderson, S.C.-based system has a leading market share in most service lines, strong operating performance and very solid EBITDA margins, Fitch said. 

3. Banner Health has an “AA-” rating and stable outlook with Fitch. The Phoenix-based health system’s core hospital delivery system and growth of its insurance division combine to make it a successful highly integrated delivery system, Fitch said. The credit rating agency said it expects Banner to maintain operating EBITDA margins of about 8 percent on an annual basis, reflecting the growing revenues from the system’s insurance division and large employed physician base. 

4. Bon Secours Mercy Health has an “AA-” rating and stable outlook with Fitch. The Cincinnati-based health system has a broad geographic footprint as one of the five largest Catholic health systems in the U.S., a good payer mix and a leading or near leading market share in eight of its eleven markets in the U.S., Fitch said. 

5. Lincoln, Neb.-based Bryan Health has an “AA-” rating and stable outlook with Fitch. The health system has a leading and growing market position, very strong cash flow and a strong financial position, Fitch said. The credit rating agency said Bryan Health has been resilient through the COVID-19 pandemic and is well-positioned to accommodate additional strategic investments. 

6. Franciscan Alliance has an “AA” rating and stable outlook with Fitch. The Mishawaka, Ind.-based health system has a very strong cash position and maintains leading market shares in seven of its nine defined primary service areas, Fitch said. The health system benefits from a good payer mix, the credit rating agency said. 

7. Gundersen Health System has an “AA-” rating and stable outlook with Fitch. The La Crosse, Wis.-based health system has strong balance sheet metrics and a leading market position and expanding operating platform in its service area, Fitch said. The credit rating agency expects the health system to return to strong operating performance as it emerges from disruption related to the COVID-19 pandemic. 

8. Hackensack Meridian Health has an “AA-” rating and stable outlook with Fitch. The Edison, N.J.-based health system has shown consistent year-over-year increases in market share and has a solid liquidity position, Fitch said. 

9. Falls Church, Va.-based Inova Health System has an “Aa2” rating and stable outlook with Moody’s. The health system has a consistently strong operating cash flow margin and ample balance sheet resources, Moody’s said. Inova’s financial excellence will remain undergirded by its favorable regulatory and economic environment, the credit rating agency said. 

10. Salt Lake City-based Intermountain Healthcare has an “Aa1” rating and stable outlook with Moody’s. The health system has exceptional credit quality, which will continue to benefit from its leading market position in Utah, Moody’s said. The credit rating agency said the health system’s merger with Broomfield, Colo.-based SCL Health will give Intermountain greater geographic reach.

11. Omaha-based Nebraska Medicine has an “AA-” rating and stable outlook with Fitch. The health system has a strong market position and is the only public academic provider in Nebraska with high acuity services, Fitch said. The health system continues to generate positive operating cash flow levels, and it has modest flexibility to absorb additional debt, according to the credit rating agency. 

12. Fort Wayne, Ind.-based Parkview Health has an “Aa3” rating and stable outlook with Moody’s. The health system has a leading market position with expansive tertiary and quaternary clinical services in northeastern Indiana and northwestern Ohio, Moody’s said. The credit rating agency said the stable outlook reflects management’s ability to generate strong operating performance during the pandement and with less favorable reimbursement rates. 

13. UnityPoint Health has an “AA-” rating and stable outlook with Fitch. The Des Moines, Iowa-based health system has strong leverage metrics and cash position, Fitch said. The credit rating agency expects the health system’s balance sheet and debt service coverage metrics to remain robust. 

14. Yale New Haven (Conn.) Health has an “AA-” rating and stable outlook with Fitch. The health system’s turnaround efforts, brand recognition and market presence will help it return to strong operating results, Fitch said. 

UPMC’s operating income sinks 86% in first half of year

UPMC reported higher revenue in the first half of this year than in the same period of 2021, but the Pittsburgh-based health system’s operating income declined year over year, according to financial documents released Aug. 23. 

UPMC reported revenue of $12.5 billion in the first six months of this year, up from $12.2 billion in the same period of 2021. 

Expenses also increased year over year. UPMC reported operating expenses of $12.4 billion in the first half of this year, up from $11.6 billion a year earlier. Expenses increased across all categories, including supplies and salaries and benefits. 

“Throughout 2022, the continued effect of COVID-19, along with conditions in the labor and supply markets have resulted in cost growth in employment, staffing and other operating expenses in excess of revenue growth,” UPMC management wrote in the financial filing

The health system ended the first half of this year with operating income of $81.9 million, down 86 percent from $604.6 million in the same period last year. UPMC’s operating margin was 0.7 percent for the first half of this year, compared with 5 percent in the same period last year. 

UPMC reported a net loss of $844.1 million in the first half of this year, compared to net income of $1.1 billion in the same period of 2021. The system’s loss from investing and financing activities totaled $865.9 million in the first two quarters of 2022, compared to a gain of $531.1 million in the same period a year earlier.