Category Archives: Financial Stewardship

The Four Conflicts that Hospitals must Resolve in 2024

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The Four Conflicts that Hospitals must Resolve in 2024

If you’re a U.S. health industry watcher, it would appear the $4.5 trillion system is under fire at every corner.

Pressures to lower costs, increase accessibility and affordability to all populations, disclose prices and demonstrate value are hitting every sector. Complicating matters, state and federal legislators are challenging ‘business as usual’ seeking ways to spend tax dollars more wisely with surprisingly strong bipartisan support on many issues. No sector faces these challenges more intensely than hospitals.

In 2022 (the latest year for NHE data from CMS), hospitals accounted for 30.4% of total spending ($1.35 trillion. While total healthcare spending increased 4.1% that year, hospital spending was up 2.2%–less than physician services (+2.7%), prescription drugs (+8.4%), private insurance (+5.9%) and the overall inflation rate (+6.5%) and only slightly less than the overall economy (GDP +1.9%). Operating margins were negative (-.3%) because operating costs increased more than revenues (+7.7% vs. 6.5%) creating deficits for most. Hardest hit: the safety net, rural hospitals and those that operate in markets with challenging economic conditions.

In 2023, the hospital outlook improved. Pre-Covid utilization levels were restored. Workforce tensions eased somewhat. And many not-for-profits and investor-owned operators who had invested their cash flows in equities saw their non-operating income hit record levels as the S&P 500 gained 26.29% for the year.

In 2024, the S&P is up 5.15% YTD but most hospital operators are uncertain about the future, even some that appear to have weathered the pandemic storm better than others. A sense of frustration and despair is felt widely across the sector, especially in critical access, rural, safety net, public and small community hospitals where long-term survival is in question. 

The cynicism felt by hospitals is rooted in four conflicts in which many believe hospitals are losing ground:

Hospitals vs. Insurers:

Insurers believe hospitals are inefficient and wasteful, and their business models afford them the role of deciding how much they’ll pay hospitals and when based on data they keep private. They change their rules annually to meet their financial needs. Longer-term contracts are out of the question. They have the upper hand on hospitals.

Hospitals take financial risks for facilities, technologies, workforce and therapies necessary to care. Their direct costs are driven by inflationary pressures in their wage and supply chains outside their control and indirect costs from regulatory compliance and administrative overhead, Demand is soaring. Hospital balance sheets are eroding while insurers are doubling down on hospital reimbursement cuts to offset shortfalls they anticipate from Medicare Advantage. Their finances and long-term sustainability are primarily controlled by insurers. They have minimal latitude to modify workforces, technology and clinical practices annually in response to insurer requirements.

Hospitals vs. the Drug Procurement Establishment: 

Drug manufacturers enjoy patent protections and regulatory apparatus that discourage competition and enable near-total price elasticity. They operate thru a labyrinth of manufacturers, wholesalers, distributors and dispensers in which their therapies gain market access through monopolies created to fend-off competition. They protect themselves in the U.S. market through well-funded advocacy and tight relationships with middlemen (GPOs, PBMs) and it’s understandable: the global market for prescription drugs is worth $1.6 trillion, the US represents 27% but only 4% of the world population.

And ownership of the 3 major PBMs that control 80% of drug benefits by insurers assures the drug establishment will be protected.

Prescription drugs are the third biggest expense in hospitals after payroll and med/surg supplies. They’re a major source of unexpected out-of-pocket cost to patients and unanticipated costs to hospitals, especially cancer therapies. And hospitals (other than academic hospitals that do applied research) are relegated to customers though every patient uses their products.

Prescription drug cost escalation is a threat to the solvency and affordability of hospital care in every community.

Hospitals vs. the FTC, DOJ and State Officials: 

Hospital consolidation has been a staple in hospital sustainability and growth strategies. It’s a major focus of regulator attention. Horizontal consolidation has enabled hospitals to share operating costs thru shared services and concentrate clinical programs for better outcomes. Vertical consolidation has enabled hospitals to diversify as a hedge against declining inpatient demand: today, 200+ sponsor health insurance plans, 60% employ physicians directly and the majority offer long-term, senior care and/or post-acute services. But regulators like the FTC think hospital consolidation has been harmful to consumers and third-party data has shown promised cost-savings to consumers are not realized.

Federal regulators are also scrutinizing the tax exemptions afforded not-for-profit hospitals, their investment strategies, the roles of private equity in hospital prices and quality and executive compensation among other concerns. And in many states, elected officials are building their statewide campaigns around reining in “out of control” hospitals and so on.

Bottom line: Hospitals are prime targets for regulators.

Hospitals vs. Congress: 

Influential members in key House and Senate Committees are now investigating regulatory changes that could protect rural and safety net hospitals while cutting payments to the rest. In key Committees (Senate HELP and Finance, House Energy and Commerce, Budget), hospitals are a target. Example: The Lower Cost, More Transparency Act passed in the the House December 11, 2023. It includes price transparency requirements for hospitals and PBMs, site-neutral payments, additional funding for rural and community health among more. The American Hospital Association objected noting “The AHA supports the elimination of the Medicaid disproportionate share hospital (DSH) reductions for two years. However, hospitals and health systems strongly oppose efforts to include permanent site-neutral payment cuts in this bill. In addition, the AHA has concerns about the added regulatory burdens on hospitals and health systems from the sections to codify the Hospital Price Transparency Rule and to establish unique identifiers for off-campus hospital outpatient departments (HOPDs).” Nonetheless, hospitals appear to be fighting an uphill battle in Congress.

Hospitals have other problems:

Threats from retail health mega-companies are disruptive. The public’s trust in hospitals has been fractured. Lenders are becoming more cautious in their term sheets.  And the hospital workforce—especially its doctors and nurses—is disgruntled. But the four conflicts above seem most important to the future for hospitals.

However, conflict resolution on these is problematic because opinions about hospitals inside and outside the sector are strongly held and remedy proposals vary widely across hospital tribes—not-for profits, investor-owned, public, safety nets, rural, specialty and others.

Nonetheless, conflict resolution on these issues must be pursued if hospitals are to be effective, affordable and accessible contributors and/or hubs for community health systems in the future. The risks of inaction for society, the communities served and the 5.48 million (NAICS Bureau of Labor 622) employed in the sector cannot be overstated. The likelihood they can be resolved without the addition of new voices and fresh solutions is unlikely.

PS: In the sections that follow, citations illustrate the gist of today’s major message: hospitals are under attack—some deserved, some not. It’s a tough business climate for all of them requiring fresh ideas from a broad set of stakeholders.

PS If you’ve been following the travails of Mission Hospital, Asheville NC—its sale to HCA Healthcare in 2019 under a cloud of suspicion and now its “immediate jeopardy” warning from CMS alleging safety and quality concerns—accountability falls squarely on its Board of Directors. I read the asset purchase agreement between HCA and Mission: it sets forth the principles of operating post-acquisition but does not specify measurable ways patient safety, outcomes, staffing levels and program quality will be defined. It does not appear HCA is in violation with the terms of the APA, but irreparable damage has been done and the community has lost confidence in the new Mission to operate in its best interest. Sadly, evidence shows the process was flawed, disclosures by key parties were incomplete and the hospital’s Board is sworn to secrecy preventing a full investigation.

The lessons are 2 for every hospital:

Boards must be prepared vis a vis education, objective data and independent counsel to carry out their fiduciary responsibility to their communities and key stakeholders. And the business of running hospitals is complex, easily prone to over-simplification and misinformation but highly important and visible in communities where they operate.

Business relationships, price transparency, board performance, executive compensation et al can no longer to treated as private arrangements.

Fitch says lower operating margins may be the new normal for nonprofit hospitals

Posted on by • Posted in Credit Downgrade, Credit Quality, Credit Ratings, Debt Capacity, Debt Levels, Debt Service, Debt Service Coverage Ratio, Financial Reserves, Financial Stewardship, Financial Strength, Financial Viability, Financially Distressed, Health System, Hospital, Hospital Industry, Operating Expenses, Operating Income, Operating Margin, Operating Margin Drivers, Operating Performance, Operating Revenue, Outpatient Migration, Strategic Imperative • Leave a comment

https://mailchi.mp/09f9563acfcf/gist-weekly-february-2-2024?e=d1e747d2d8

On Monday, Fitch Ratings, the New York City-based credit rating agency, released a report predicting that the US not-for-profit hospital sector will see average operating margins reset in the one-to-two percent range, rather than returning to historical levels of above three percent. 

Following disruptions from the pandemic that saw utilization drop and operating costs rise, hospitals have seen a slower-than-expected recovery.

But, according to Fitch, these rebased margins are unlikely to lead to widespread credit downgrades as most hospitals still carry robust balance sheets and have curtailed capital spending in response. 

The Gist: As labor costs stabilize and volumes return, the median hospital has been able to maintain a positive operating margin for the past ten months. 

But nonprofit hospitals are in a transitory period, one with both continued challenges—including labor costs that rebased at a higher rate and ongoing capital restraints—and opportunities—including the increase in outpatient demand, which has driven hospital outpatient revenue up over 40 percent from 2020 levels.

While the future margin outlook for individual hospitals will depend on factors that vary greatly across markets, organizations that thrive in this new era will be the ones willing to pivot, take risks, and invest heavily in outpatient services.

What’s going on at Steward Health Care?

Posted on by • Posted in Audit, Audited Financial Statements, Auditor External, Bankruptcy, Debt Capacity, Debt Structure, Financial Stewardship, Financial Transparency, Financial Viability, Financially Distressed, For-Profit, Health System, Leverage, Management, Management Company, Monetize, Physician Leadership, Private Equity • Leave a comment
https://www.healthcaredive.com/news/steward-health-care-distress/706940/?utm_source=Sailthru&utm_medium=email&utm_campaign=Newsletter%20Weekly%20Roundup:%20Healthcare%20Dive:%20Daily%20Dive%2002-17-2024&utm_term=Healthcare%20Dive%20Weekender

The physician-led healthcare network formed to save hospitals from financial distress. Now, hospitals in its own portfolio need bailing out after years of alleged mismanagement.

Steward Health Care formed over a decade ago when a private equity firm and a CEO looking to disrupt a regional healthcare environment teamed up to save six Boston-based hospitals from the brink of financial collapse. Since that time, Steward has expanded from a handful of facilities to become the largest physician-led for-profit healthcare network in the country, operating 33 community hospitals in eight states, according to its own corporate site.

However, Steward has also found itself once again on the precipice of failure. 

The health system has been emanating signs of distress since late last year. Its landlord says Steward owes over $50 million in unpaid debts. A federal lawsuit alleges Steward defrauded the Medicare program. Steward has closed hospitals in Massachusetts and Texas, and publicly contracted restructuring advisors in January, fueling speculation about a potential bankruptcy filing.

Steward’s ongoing issues in Massachusetts have played out in regional media outlets in recent weeks. Massachusetts Gov. Maura Healey warned there would be no bailout for Steward in an interview on WBUR’s Radio Boston.  

Worries about financial problems prompted Boston-based Mass General Brigham to pull doctors from Steward-owned Holy Family Hospital late last month. Steward has also been accused of mismanaging other facilities.

The Massachusetts Department of Public Health said it is investigating concerns raised about Steward facilities and began conducting daily site inspections at some Steward sites to ensure patient safety beginning Jan. 31.

However, the tide may have begun to change. Steward executives said on Feb. 2 they had secured a deal to stabilize operations and keep Massachusetts hospitals open — for now. Steward will receive bridge financing under the deal and consider transferring ownership of one or more hospitals to other companies, a Steward spokesperson confirmed to Healthcare Dive on Feb. 7.

While politicians welcomed the news, some say Steward’s long term outlook in the state is uncertain. Other politicians sought answers for how a prominent system could seemingly implode overnight. 

“I am cautiously optimistic at this point that [Steward] will be able to remain open, because it’s really critical they do,” said Brockton City Councilor Phil Griffin. “But they owe a lot of people a lot of money, so we’ll see.” 

Built on financial engineering

Steward Health Care was created in October 2010, when private equity firm Cerberus Capital Management purchased failing Caritas Christi Health Care for $895 million. Steward CEO Ralph de la Torre, who stayed on from his post as president of CCHC, wanted to revolutionize healthcare in the region. His strategy was to woo patients away from larger health systems by recruiting their physicians and offering routine, inpatient care for a fraction of the price.

However, the business model wasn’t immediately a financial success. Steward didn’t turn a profit between 2011 and 2014, according to a 2015 monitoring report from the Massachusetts attorney general. Instead, Steward’s debt increased from $326 million in 2011 to $413 million at the end of the 2014 fiscal year, while total liabilities ballooned to $1.4 billion in the same period as Steward engaged in real estate sale and leaseback plays. 

Under the 2010 deal, Steward agreed to assume Caritas’ debt and carry out $400 million in capital expenditures over four years to upgrade the hospitals’ infrastructure. However, that capital expenditure could come in part from financial engineering, such as monetizing Steward’s own assets, according to Zirui Song, associate professor of health care policy and medicine at the Harvard Medical School who has studied private equity’s impact on healthcare since 2019.

Cerberus did not contribute equity into Steward after making its initial investment of $245.9 million, according to the December 2015 monitoring report. Meanwhile, according to reporting at the time, de la Torre wanted to expand Steward. Steward was on its own to raise funds.

To generate cash, Steward engaged in another leaseback play, selling its properties to Alabama-based real estate investment trust Medical Properties Trust for $1.25 billion in 2016. Steward used the funds to pay back its remaining obligations to Cerberus and expand beyond Massachusetts, acquiring 18 hospitals from IASIS Healthcare in 2017.

Such deals are typically short-sighted, Song explained. When hospitals sell their property, they voluntarily forfeit their most valuable assets and tend to be saddled with high rent payments.

Cerberus exited its Steward play in 2020, $800 million richer. Steward lost more than $800 million between 2017 and 2020.

A pattern of poor performance

Healthcare Dive spoke with four workers across Steward’s portfolio who said Steward’s emphasis on the bottom line negatively impacted the company’s operations for years. 

Terra Ciurro worked in the emergency department at Steward Health Care-owned Odessa Regional Medical Center in January 2022 as a travel nurse. She recalled researching Steward and being attracted to the fact the company was physician owned.

“I remember thinking, ‘That’s all I need to know. Surely, doctors will have their heart in the right place,’” Ciurro said. “But yeah — that’s not the experience I had at all.”

The emergency department was “shabby, rundown and ill-equipped,” and management didn’t fix broken equipment that could have been hazardous, she said. Nine weeks into her 13-week contract and three hours before Ciurro was scheduled to work, Ciurro said her staffing agency called to cut her contract unceremoniously short. Steward hadn’t paid its bills in six months, and the agency was pulling its nurses, she said she was told. 

In Massachusetts, Katie Murphy, president of the Massachusetts Nurses Association, which represents more than 3,000 registered nurses and healthcare professionals who work in eight Steward hospitals, said there were “signals” that Steward facilities had been on the brink of collapse for “well over a year.”  

Steward hospitals are often “significantly” short staffed and lack supplies from the basics, like dressings, to advanced operating room equipment, said Murphy. While most hospitals in the region got a handle on staffing and supply shortages in the aftermath of the COVID pandemic, at Steward hospitals shortages “continued to accelerate,” Murphy said.

A review of Steward’s finances by BDO USA, a tax and advisory firm contracted last summer by the health system itself to demonstrate it was solvent enough to construct a new hospital in Massachusetts, showed Steward had a liquidity problem. The health system had few reserves on hand last year to pay down its debts owed to vendors, possibly contributing to the shortages. The operator carried only 10.2 days of cash on hand in 2023. In comparison, most healthy nonprofit hospital systems carried 150 days of cash on hand or more in 2022, according to KFF.

One former finance employee, who worked for Steward beginning around 2018, said that the books were routinely left unbalanced during her tenure. Each month, she made a list of outstanding bills to determine who must be paid and who “we can get away with holding off” and paying later. 

Food, pharmaceuticals and staff were always paid, while all other vendors were placed on an “escalation list,” she said. Her team prioritized paying vendors that had placed Steward on a credit hold.

The worker permanently soured on Steward when she said operating room staff had to “make do” without a piece of a crash cart — which is used in the event of a heart attack, stroke or trauma. 

She stopped referring friends to Steward facilities, telling them “Don’t go — if you can go anywhere else, don’t go [to Steward], because there’s no telling if they’ll have the supplies needed to treat you.” 

Away from regulatory review

Massachusetts officials maintain that it hasn’t been easy to see what was happening inside Steward.

Steward is legally required to submit financial data to the MA Center for Health Information and Analysis (CHIA) and to the Massachusetts Registration of Provider Organizations Program (MA-RPO Program), according to a spokesperson from the Health Policy Commission, which analyzes the reported data. Under the latter requirement, Steward is supposed to provide “a comprehensive financial statement, including information on parent entities and corporate affiliates as applicable.” 

However, Steward fought the requirements. During Stuart Altman’s tenure as the chair of the Commission from 2012 to 2022, Altman told Healthcare Dive that the for-profit never submitted documents, despite CHIA levying fines against Steward for non-compliance. Steward even sued CHIA and HPC for relief against the reporting obligations.

Steward is currently appealing a superior court decision and order from June 2023 that required it to comply with the financial reporting requirements and produce audited financial reports that cover the full health system, Mickey O’Neill, communications director for the HPC told Healthcare Dive. As of Feb. 6, Steward’s non-compliance remained ongoing, O’Neill said.

Without direct insight into Steward’s finances, the state was operating at a disadvantage, said John McDonough, professor of the practice of public health at The Harvard T.H. Chan School of Public Health. He added that some regulators saw a crisis coming generally, “but the timing was hard to predict.” 

Altman gives his team even more of a pass for not spotting the Steward problem.

“There was no indication while I was there that Steward was in deep trouble,” Altman said. Although Steward was the only hospital system that failed to report financial data to the HPC, that alone had not raised red flags for him. “[CEO] Ralph [de la Torre] was just a very contrarian guy. He didn’t do a lot of things.”

Song and his co-author, Sneha Kannan, a clinical research fellow at Harvard Medical School, are hopeful that in the future, regulatory agencies can make better use of the data they collect annually to track changes in healthcare performance over time. They can potentially identify problem operators before they become crises. 

“State legislators, even national legislators, are not in the habit of comparing hospitals’ performances on [quality] measures to themselves over time — they compare to hospitals’ regional partners,” Kannan said. “Legislators, Medicare, [and] CMS has access to that information.” 

However, although there’s interest from regulators in scrutinizing healthcare quality more closely — particularly when private equity gets involved — a streamlined approach to analyzing such data is still a “ways off,” according to the pair. For now, all parties interviewed for this piece agreed that the best way to avoid being caught off guard by a failing system was to know how such implosions could occur. 

“If there’s a lesson from [Steward],” McDonough ventured, “it is that the entire state health system and state government need to be much more wary of all for-profits.”

Healthcare CFOs explore M&A, automation and service line cuts in 2024

Posted on by • Posted in Artificial Intelligence, Artificial Intelligence Generative, CFO, Cost Management, Cost Structure, Cybersecurity, Data Breaches, Days Cash on Hand, Financial Performance, Financial Pressure, Financial Reserves, Financial Stewardship, Financial Strength, Financial Viability, Financially Distressed, Market Consolidation, Market Trends, Mergers & Acquisitions, Operating Income, Operating Margin, Operating Margin Drivers, Operating Metrics, Operating Performance, Service Line Profitability, Service Line Rationalization • Leave a comment
https://www.cfodive.com/news/healthcare-cfos-automation-service-line-cuts-bdo-usa/706153/?utm_source=Sailthru&utm_medium=email&utm_campaign=Issue:%202024-02-01%20CFO%20Dive%20%5Bissue:58721%5D&utm_term=CFO%20Dive

Companies grappling with liquidity concerns are looking to cut costs and streamline operations, according to a new survey.

Dive Brief:

  • Over three-quarters of healthcare chief financial officers expect to see profitability increases in 2024, according to a recent survey from advisory firm BDO USA. However, to become profitable, many organizations say they will have to reduce investments in underperforming service lines, or pursue mergers and acquisitions.
  • More than 40% of respondents said they will decrease investments in primary care and behavioral health services in 2024, citing disruptions from retail players. They will shift funds to home care, ambulatory services and telehealth that provide higher returns, according to the report.
  • Nearly three-quarters of healthcare CFOs plan to pursue some type of M&A deal in the year ahead, despite possible regulatory threats.

Dive Insight:

Though inflationary pressures have eased since the height of the COVID-19 pandemic, healthcare CFOs remain cognizant of managing costs amid liquidity concerns, according to the report.

The firm polled 100 healthcare CFOs serving hospitals, medical groups, outpatient services, academic centers and home health providers with revenues from $250 million to $3 billion or more in October 2023.

Just over a third of organizations surveyed carried more than 60 days of cash on hand. In comparison, a recent analysis from KFF found that financially strong health systems carried at least 150 days of cash on hand in 2022.

Liquidity is a concern for CFOs given high rates of bond and loan covenant violations over the past year. More than half of organizations violated such agreements in 2023, while 41% are concerned they will in 2024, according to the report. 

To remain solvent, 44% of CFOs expect to have more strategic conversations about their economic resiliency in 2024, exploring external partnerships, options for service line adjustments and investments in workforce and technology optimization.

The majority of CFOs surveyed are interested in pursuing external partnerships, despite increased regulatory roadblocks, including recent merger guidance that increased oversight into nontraditional tie-ups. Last week, the FTC filed its first healthcare suit of the year to block the acquisition of two North Carolina-based Community Health Systems hospitals by Novant Health, warning the deal could reduce competition in the region.

Healthcare CFOs explore tie-ups in 2024

Types of deals that CFOs are exploring, as of Oct. 2023.

https://datawrapper.dwcdn.net/aiFBJ/1

Most organizations are interested in exploring sales, according to the report. Financially struggling organizations are among the most likely to consider deals. Nearly one in three organizations that violated their bond or loan covenants in 2023 are planning a carve-out or divestiture this year. Organizations with less than 30 days of cash on hand are also likely to consider carve-outs.

Organizations will also turn to automation to cut costs. Ninety-eight percent of organizations surveyed had piloted generative AI tools in a bid to alleviate resource and cost constraints, according to the consultancy. 

“Healthcare leaders believe AI will be essential to helping clinicians operate at the top of their licenses, focusing their time on patient care and interaction over administrative or repetitive tasks,” authors wrote. Nearly one in three CFOs plan to leverage automation and AI in the next 12 months.

However, CFOs are keeping an eye on the risks. As more data flows through their organizations, they are increasingly concerned about cybersecurity. More than half of executives surveyed said data breaches are a bigger risk in 2024 compared to 2023.

Intermountain’s Saltzer Health seeks buyer or risks closure

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https://mailchi.mp/cd8b8b492027/the-weekly-gist-january-26-2024?e=d1e747d2d8

Saltzer Health, a Meridian, ID-based multispecialty group with over 100 providers that’s been owned by Intermountain Health since 2020, shared this week that it will shut down if it cannot find a buyer within the next two months, due to its ongoing financial and economic challenges. Beyond the rising costs of care that have plagued provider organizations across the country, Saltzer leaders pointed to a lack of progress around contracts and market relationships in its Boise, ID service area as contributing factors. The group announced that it’s in active negotiations with other healthcare companies potentially interested in purchasing some of its assets, and is optimistic it can avoid full closure.

Saltzer has experienced several ownership changes in recent years: Intermountain bought the group from development firm Ball Ventures Ahlquist in 2020, which had purchased it from Change Healthcare in 2019. Change acquired it two years prior after a Federal Trade Commission (FTC) challenge led to Saltzer’s divestment from St. Luke’s Health System. 

The Gist: It’s notable that Intermountain appears uninterested in continuing to grow its presence as a provider in the Boise market, suggesting the system is opting to instead focus its resources on faster growing markets like Denver, which it unlocked through its purchase of SCL Health in 2022.

Given that the FTC previously signaled opposition to Saltzer’s acquisition by a local health system, and a dominant regional integrated delivery system is no longer interested in the group, a nontraditional buyer—like a vertically integrated payer—may use this as an opportunity to enter the Treasure Valley and attempt to steal market share from Intermountain’s Select Health insurance arm.

Credit and Capital Markets Outlook for 2024

Posted on by • Posted in 2024 Election Issues, ACA, Aging Population, Balance Sheet, Capital, Capital Allocation Process, Capital Analysis, Capital Budget, Capital Expenditure, Capital Financing, Capital Planning, Capital Structure, Cash to Debt, Critical Success Factors, Days Cash on Hand, Debt to Revenue, Financial Stewardship, Financial Viability, Health System, Hospital, Hospital Industry, Key Credit Metrics, Key Metrics, Key Performance Indicators, Medicare, Medicare Advantage, Operating Cashflow Margin, Operating Margin, Operating Margin Drivers, Operating Metrics, Operating Performance, Strategic Balance Sheet Management • Leave a comment
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For many providers, 2023 provided a return to profitability (albeit at modest levels) following the devastating operating and investment losses experienced in 2022. Kaufman Hall’s National Hospital Flash Report data illustrated generally improving operating margins throughout the year, leveling off at 2.0% in November on a year-to-date basis.

This level of performance is commendable given 2022 and early 2023 margins, although it is still well below the 3% to 4% range which we believe is needed for long-term sustainability in the not-for-profit healthcare world. We may well have reached a point of stability with respect to operating performance, but at a lower level.

The question for hospital and health system leaders is whether this level of operating stability provides sustainability?

From stabilization to normalization

Since the pandemic began in 2020, the progress of recovery has been viewed over three phases: crisis, stabilization, and normalization. In last year’s outlook, we noted that we were in the midst of a potentially multi-year stabilization phase, which would continue to be marked with volatility—including ongoing labor market dislocations, inflationary pressures, and restrictive monetary policies. As we enter 2024, there are signs that we are now at the bridge between stabilization and normalization (Figure 1).

Figure 1: The Three Phases of Recovery from the Covid Pandemic

“The question for hospital and health system leaders is whether that level of stability provides sustainability?”

These signs include evidence that the first two indicators for normalization—a recalibrated or stabilized workforce environment and a return from an erratic interest rate environment—are coming into place. In our 2023 State of Healthcare Performance Improvement survey, respondents indicated that the spike in contract labor utilization that has been a dominant factor in operating expense increases was subsiding. Sixty percent of respondents said that utilization of contract labor was decreasing, and 36% said it was holding steady. Only 4% noted an increase in contract labor usage. Overall employee cost inflation seems to be subsiding as well: for all three labor categories in our survey (clinical, administrative, and support services), more organizations were able to hold salary increases to the 0% – 5% range in 2023 than in 2022.

There is good news on the interest rate front as well. After a series of rate increases in 2023, the Federal Reserve has held steady the last six months and has signaled rate cuts in 2024. Inflation has cooled markedly (albeit not yet at target levels), and employment rates have held steady. The Fed may have achieved a “soft landing” that satisfies its dual mandate of stable prices and maximum sustainable employment. Borrowing costs for not-for-profit hospital issuers have declined nearly 100 basis points in the last two months and we are expecting a return to more normal issuance levels in the first half of 2024.

There are other indications of normalization, including in the rating agencies’ outlooks for 2024. Regardless of the headline, all saw significant improvement in healthcare performance 2023.

The final answer to the question of whether the healthcare industry is entering the normalization phase likely will hinge on the last two indicators. Will we see a return of normalized strategic capital investments, and will we see a revival of strategic initiatives driving the core business (perhaps newly imagined)?

In effect, are health care systems simply surviving or are they thriving?

Looking forward, several factors could either bolster or undermine healthcare leaders’ confidence and willingness to resume a more normal level of investment in both capital needs and strategic growth. These include:

  • Politics and the 2024 elections. When North Carolina—a state that has traditionally leaned “red”—decided to opt into the Affordable Care Act’s (ACA’s) Medicaid expansion in 2023, it seemed that political debates over the ACA might be in the rearview mirror. But last November, former president Trump—currently the leading candidate for the Republican presidential nomination after strong wins in the Iowa caucuses and New Hampshire primary—indicated his intent to replace the ACA with something else. President Biden is now making protection and expansion of the ACA a key part of his 2024 campaign. What had appeared to be a settled issue may be a significant point of contention in the 2024 presidential election and beyond.

Although we do not anticipate any significant healthcare-related legislation in advance of the 2024 elections, healthcare leaders should be prepared for renewed attention to the costs of government-funded healthcare programs leading up to and following the elections. The national debt has increased rapidly over the past 20 years, tripling from $11 trillion in 2003 to $33 trillion in 2023. If the deficit and national debt become an important issue in the election, a move toward a balanced budget—akin to the Balanced Budget Act of 1997—post election could lead to further cuts to Medicare and Medicaid.

  • Temporary relief payments. Health systems continue to receive one-time cash infusions through the 340B settlement, Federal Emergency Management Agency (FEMA) payments and other governmental programs. Approximately 1,600 hospitals have or will be receiving a lump-sum payment to compensate them for a change in the Department of Health & Human Services’ (HHS’s) reimbursement rates for the 340B program from 2018 to 2022, which was ruled unlawful by the Supreme Court in a 2022 decision. The total amount to be distributed is approximately $9 billion and began hitting bank accounts in January 2024.

But what the right hand giveth, the left hand taketh away. Budget neutrality requirements will force HHS to recoup this offset—amounting to approximately $7.8 billion—which it will do by reducing payments for non-drug items and services to all Outpatient Prospective Payment System (OPPS) providers by 0.5% until the offset has been fully recouped, beginning in calendar year 2026. HHS estimates that this process will take approximately 16 years. Is this a harbinger of lower payments on other key governmental programs?

Many hospitals also continue to receive Covid-related payments from FEMA for expenses occurred during the pandemic. In addition, state supplemental payments—especially under Medicaid managed care and fee-for-service programs—are providing some relief. The Centers for Medicare & Medicaid Services has issued a proposed rule, however, that would limit states’ use of provider-based funding sources, such as provider taxes, and cap the rate of growth for state-directed payments. 

As all of these payment programs dry up over the next few years, hospitals will need to replace the revenue and/or get leaner on the expense side in order to maintain today’s level of performance.

  • The hollowing of the commercial health insurance market. Our colleague, Joyjit Saha Choudhury, recently published a blog on the hollowing of the commercial health insurance market, driven by long-term concerns over the affordability of healthcare. While volumes have been recovering to pre-pandemic levels, this hollowing threatens the loss of the most profitable volumes and will pressure hospitals and health systems to create and deliver value, compete for inclusion in narrow networks, and develop more direct relationships with the employer community.

Related, the growing penetration of Medicare Advantage plans is reducing the number of traditional Medicare beneficiaries. Many CFOs report that these programs can be the most difficult with which to work given their high denial rates and required pre-authorization rates. A new rule requiring insurers to streamline prior authorizations for Medicare Advantage, Medicaid, and Affordable Care Act plans may help alleviate this issue; however, it will be incumbent upon management teams to stay ahead of them. Aging demographics are also reducing the percentage of commercially insured patients for many hospitals and health systems, further exacerbating the problem. This combination of fewer commercial patients (who often subsidize governmental patients) and more pressure on receiving the duly owed commercial revenue threatens to be an ongoing headache for management teams.

  • Ongoing impact of the Baby Boom generation. Despite the good news on inflation—and indications that the Fed may begin lowering interest rates in 2024—the economy is by no means out of the woods yet. The Baby Boom generation, which holds more than 50% of the wealth in the U.S. and is seemingly price agnostic, still has many years of spending ahead, in healthcare and general purchasing. This will likely continue to pressure inflation, especially in the healthcare sector, where demand will continue to grow. As the generation starts to shrink, the resulting wealth transfer will be the largest ever in our country’s history and have profound (and unforeseen) consequences on the overall economy and healthcare in general.

In sum, these other factors will continue to affect the sector (both positively and negatively) and require health system management teams to navigate an everchanging world. While many signs point toward short-term relief, the longer-term challenges persist. Improvements in the short term may, however, provide the opportunity to reposition organizations for the future.

How hospitals and health systems should respond

Healthcare leaders should view ongoing uncertainty in the political and economic climate as a tailwind as much as a headwind. This uncertainty, in other words, should be a motivation to put in place strategies that will buffer healthcare organizations from potential bumps in the road ahead. Setting balance sheet strategy should be a part of an organization’s planning process.

How an organization sets that strategy, measures its performance, and makes improvements will set apart top-performing organizations. 

Although heightened debt issuance early in 2024 signals a return for many systems to a climate of investment, there is still limited energy around strategy and debt conversations in many boardrooms, especially in those organizations where financial improvement continues to lag. The last two years have illustrated that hospitals and health systems will not be able to cut their way to profitability. Lackluster performance cannot and will not improve without some level of strategic change, whether it is through market share gains, payer mix shift, or operational improvements. This strategic change requires investment and investment requires capital. Capital can be obtained in many forms—whether through growth in capital reserves, improved cash flow, or new debt issuance—but is essential for change. Reengaging in conversations about strategy and growth should be an imperative in 2024 and will require reexamining how that growth is funded.

Healthcare leaders should engage their partners as they continue or refocus on:

  • Changing the conversation from debt capacity to capital capacity. Management teams need to determine what they can afford to spend on capital if the new normal of cash flow will be constrained going forward. Capital capacity is and should be agnostic to the source of that capital, such as debt, cash flow from operations, or liquidity reserves. Healthcare leaders must focus on what they can spend, before deciding how to fund that spending. The conversation will need to balance investment for the future with maintaining key credit metrics in the short term.
  • Conducting a capitalization analysis. Separate but related to the previous entry, how much leverage should your organization have relative to its overall capitalization? Ostensibly, many organizations have been paying principal while curtailing borrowing needs, so capitalization may have improved. While that may be the case, many organizations have depleted reserves and/or experienced investment losses that have reduced capitalization. Understanding where the organization stands is an essential next step.
  • Evaluating surplus return. Consider surplus return as investment income net of interest expense. Organizations should evaluate their ability to reliably generate both operating cash flow and net surplus. How an organization’s balance sheet is positioned to generate returns and manage risk will be a critical success factor.   
  • Focusing on the metrics that matter. These include operating cashflow margin, cash to debt, debt to revenue, and days cash on hand. As key metrics for rating analysts and investors continue to evolve, management teams need to make sure they are focused on the correct numbers. The discussion should be dually focused on ensuring adequate-to-ample headroom to basic financial covenants as well as a comparison to key medians and peers. Strong financial planning will address how these metrics can be improved over time through synergies, growth, and diversification strategies.

Although it has been a difficult few years, hospitals and health systems seem to have moved onto a more stable footing over the last twelve months. In order to build upon the upward trajectory, now is the time to harness strategy, planning, and investment to move organizations from stability to sustainability.

3 Philadelphia hospitals reportedly up for grabs

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Three Philadelphia-based hospitals are reportedly up for sale, according to an email notice from Los Angeles-based investment bank Xnergy, The Philadelphia Inquirer reported Dec. 19.

The names of three hospitals are not confirmed. And the notice, which was obtained by the publication, did not name an owner of the hospitals. However, it did describe the hospitals’ owner as one that has acute care facilities with an average of 136 beds. 

Three Philadelphia-area hospitals fit the bed parameters in the notice: Bristol-based Lower Bucks Hospital, Philadelphia-based Roxborough Memorial Hospital, and Norristown-based Suburban Community Hospital. All three are owned by Ontario, Calif.-based Prime Healthcare Services, The Philadelphia Inquirer reported.

Roxborough and Lower Bucks were acquired by Prime in 2012, with Suburban acquired by Prime’s nonprofit affiliate Prime Healthcare Foundation in 2016. The hospitals have also seen significant annual operating loss over the last five years with a 43% combined inpatient volume drop, from 3,795 discharges in 2018 to 2,250 discharges in 2022, the publication shared.

Members of the Pennsylvania Association of Staff Nurses & Allied Professionals at both Suburban and Lower Bucks are also set to launch five-day strikes Dec. 22 due to ongoing labor contract negotiations for things like increased wages and important benefits, a union spokesperson told Becker’s.

“Prime Healthcare’s mission is to always do what’s best for our communities and patients, however, we do not comment on strategic merger and acquisition initiatives,” Elizabeth Nikels, vice president of communications and public relations for Prime Healthcare, said in an email response to Becker’s regarding the sale. 

68 health systems with strong finances

Posted on by • Posted in Balance Sheet, Credit Quality, Credit Ratings, Financial Performance, Financial Reserves, Financial Stewardship, Financial Strength, Financial Viability, Health System, Hospital, Hospital Industry, Net Income, Nonoperating Income, Operating Income, Operating Margin, Operating Performance • Leave a comment
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Here are 68 health systems with strong operational metrics and solid financial positions, according to reports from credit rating agencies Fitch Ratings, Moody’s Investors Service and S&P Global in 2023. 

AdventHealth has an “AA” rating and stable outlook with Fitch. The rating reflects the  Altamonte Springs, Fla.-based system’s strong financial profile, characterized by still-adequate liquidity and moderate leverage, typically strong and highly predictable profitability, Fitch said. 

Advocate Aurora Health has an “AA” rating and stable outlook with Fitch. The Downers Grove, Ill.- and Milwaukee-based system’s rating reflects a very strong financial profile in the context of an already sound market position and geographic reach that was enhanced after merging with Charlotte, N.C.-based Atrium Health, Fitch said.    

AnMed Health has an “AA-” rating and stable outlook with Fitch. The Anderson, S.C.-based system has maintained strong performance through the COVID-19 pandemic and current labor market pressures, Fitch said.  

AtlantiCare has an “AA-” rating and stable outlook with Fitch. The Atlantic City, N.J.-based system has a strong balance sheet with solid liquidity position and low debt burden, Fitch said. 

Atrium Health has an “AA-” rating and stable outlook with S&P Global. The Charlotte, N.C.-based system’s rating reflects a robust financial profile, growing geographic diversity and expectations that management will continue to deploy capital with discipline. 

Banner Health has an “AA-” and stable outlook with Fitch. The Phoenix-based system’s rating highlights the strength of its core hospital delivery system and growth of its insurance division, Fitch said. 

BayCare Health System has an “AA” rating and stable outlook with Fitch. The Tampa, Fla.-based system’s rating reflects its excellent financial profile supported by its leading market position in a four-county area and the ability to sustain a solid operating outlook in the face of inflationary sector headwinds, Fitch said. 

Bayhealth has an “AA” rating and stable outlook with Fitch. The rating reflects the strength of the Dover, Del.-based system’s market positions and the stability of its financial profile, Fitch said.  

Beacon Health System has an “AA-” rating and stable outlook with Fitch. The rating reflects the strength of the South Bend, Ind.-based system’s balance sheet, the rating agency said.   

Berkshire Health has an “AA-” rating and stable outlook with Fitch. The Pittsfield, Mass.-based system has a strong financial profile, solid liquidity and modest leverage, according to Fitch. 

Bryan Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Lincoln, Neb., system’s leading and growing market position as a regional referral center with strong expense flexibility and cash flow, Fitch said.  

Cape Cod Healthcare has an “AA-” and stable outlook with Fitch. The Hyannis, Mass.-based system’s rating reflects a dominant market position in its service area and historically solid operating results, the rating agency said. 

Carle Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Urbana, Ill.-based system’s distinctly leading market position over a broad service area, Fitch said. 

CaroMont Health has an “AA-” rating and stable outlook with S&P Global. The Gastonia, N.C.-based system has a healthy financial profile and robust market share in a competitive region.  

CentraCare has an “AA-” rating and stable outlook with Fitch. The St. Cloud, Minn.-based system has a leading market position, and its management’s focus on addressing workforce pressures, patient access and capacity constraints will improve operating margins over the medium term, Fitch said. 

Children’s Health System of Texas has an “AA” and stable outlook with Fitch. The Dallas-based system’s rating reflects its solid operating performance in 2022, resulting from inpatient, outpatient and surgical volume growth, as well as one-time support from pandemic-era stimulus funding, Fitch said. 

Children’s Minnesota has an “AA” rating and stable outlook with Fitch. The Minneapolis-based system’s broad reach within the region continues to support long-term sustainability as a market leader and preferred provider for children’s health care, Fitch said. 

Concord (N.H.) Hospital has an “AA-” rating and stable outlook with Fitch. The rating reflects the strength of Concord’s leverage and liquidity assessment and Fitch’s assessment that two recently acquired hospitals will be strategically and financially accretive. 

Cone Health has an “AA” rating and stable outlook with Fitch. The rating reflects the expectation that the Greensboro, N.C.-based system will gradually return to stronger results in the medium term, the rating agency said.

Cottage Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Santa Barbara, Calif.-based system’s leading market position and broad reach in a service area that exhibits modest population growth but consistently high demand for acute care services, Fitch said. 

Deaconess Health System has an “AA” rating and stable outlook with Fitch. The Evansville, Ind.-based system demonstrated operating cost flexibility through the pandemic and recent labor and inflationary pressure, Fitch said. 

Duke University Health System has an “AA-” rating and stable outlook with Fitch. Fitch projects the Durham, N.C.-based system will benefit from the integration of the former Private Diagnostic Clinic and from North Carolina’s recently enacted Medicaid expansion and Healthcare Access and Stabilization Program. 

El Camino Health has an “AA-” rating and stable outlook with Fitch. The Mountain View, Calif.-based system has a history of generating double-digit operating EBITDA margins, driven by a solid market position that features strong demographics and a very healthy payer mix, Fitch said. 

Franciscan Health has an “AA” rating and stable outlook with Fitch. The rating reflects the Mishawaka, Ind.-based system’s strong and stable balance sheet, favorable payer mix, and leading or near leading market share in its service areas, Fitch said. 

Froedtert Health has an “AA” rating and stable outlook with Fitch. The rating reflects the Milwaukee-based system’s maintenance of a strong, albeit compressed, operating performance and a robust liquidity position, Fitch said. 

Geisinger has an “AA-” credit rating and stable outlook with S&P. The Danville, Pa.-based system enjoys strong integration and value-based care experience, the ratings agency said.

Hackensack Meridian Health has an “AA-” rating and stable outlook with Fitch. The Edison, N.J.-based system’s rating is supported by its strong presence in its large and demographically favorable market, Fitch said.  

Harris Health System has an “AA” rating and stable outlook with Fitch. The Houston-based system has a “very strong” revenue defensibility, primarily based on the district’s significant taxing margin that provides support for operations and debt service, Fitch said.

Hoag Memorial Hospital Presbyterian has an “AA” rating and stable outlook with Fitch. The Newport Beach, Calif.-based system’s rating is supported by a leading market position in its immediate area and very strong financial profile, Fitch said.  

Intermountain Health has an “Aa1” rating and stable outlook with Moody’s. The Salt Lake City-based system’s rating is reflected by its distinctly leading market position in Utah and strong absolute and relative cash levels, Moody’s said.   

Inspira Health has an “AA-” rating and stable outlook with Fitch. The Mullica Hill, N.J.-based system’s rating reflects its leading market position in a stable service area and a large medical staff supported by a growing residency program, Fitch said. 

IU Health has an “AA” rating and stable outlook with Fitch. The Indianapolis-based system has a long track record of strong operating margins and an overall credit profile that is supported by a strong balance sheet, the rating agency said. 

Lucile Packard Children’s Hospital has an “AA-” rating and stable outlook with Fitch. The rating reflects the Palo Alto, Calif.-based hospital’s role as a nationally known, leading children’s hospital, Fitch said. It also benefits from resilient clinical volumes and a solid market position, as well as its relationship with Stanford University and Stanford Health Care. 

Kaiser Permanente has an “AA-” and stable outlook with Fitch. The Oakland, Calif.-based system’s rating is driven by a strong financial profile, which is maintained despite a challenging operating environment in fiscal year 2022. 

Mayo Clinic has an “Aa2” rating and stable outlook with Moody’s. The Rochester, Minn.-based system’s credit profile characterized by its excellent reputations for clinical services, research and education, Moody’s said.

McLaren Health Care has an “AA-” rating and stable outlook with Fitch. The Grand Blanc, Mich.-based system has a leading market position over a broad service area covering much of Michigan and a track-record of profitability despite sector-wide market challenges in recent years, Fitch said.

McLeod Regional Medical Center has an “AA-” rating and stable outlook with Fitch. The rating reflects the Florence, S.C.-based system’s very strong financial profile assessment, historically strong operating EBITDA margins and its solid market position, Fitch said.   

MemorialCare has an “AA-” rating and stable outlook with Fitch. The rating reflects the Fountain Valley, Calif.-based system’s strong financial profile and excellent leverage metrics despite its weaker operating performance, Fitch said. 

Memorial Sloan-Kettering Cancer Center has an “AA” rating and stable outlook with Fitch. The rating reflects Fitch’s expectation that the New York City-based system’s national and international reputation as a premier cancer hospital will continue to support growth in its leading and increasing market share for its specialty services. 

Midland (Texas) Health has an “AA-” rating and stable outlook with Fitch. The rating reflects Midland’s exceptional market position and limited competition for acute-care services and growing outpatient services, Fitch said.  

Monument Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Rapid City, S.D.-based system’s dominant inpatient market share and excellent market position across its geographically broad service area, Fitch said. 

Munson Healthcare has an “AA” rating and stable outlook with Fitch. The rating reflects the strength of the Traverse City, Mich.-based system’s market position and its leverage and liquidity profiles.  

MyMichigan Health has an “AA-” rating and stable outlook with Fitch. The Midland-based system reflects the system’s market position as the largest provider of acute care services and its leading market position in a sizable geographic area covering 25 counties in mid and northern Michigan, the rating agency said. 

North Mississippi Health Services has an “AA” rating and stable outlook with Fitch. The Tupelo-based system’s rating reflects its very strong cash position and strong market position, Fitch said. 

NewYork-Presbyterian Hospital has an “AA” rating and stable outlook with Fitch. The rating reflects the New York City-based system’s market position as one of New York’s major academic healthcare systems with a reputation that extends beyond the region, Fitch said. 

Novant Health has an “AA-” rating and stable outlook with Fitch. The Winston-Salem, N.C.-based system has a highly competitive market share in three separate North Carolina markets, Fitch said, including a leading position in Winston-Salem (46.8 percent) and second only to Atrium Health in the Charlotte area.  

NYC Health + Hospitals has an “AA-” rating with Fitch. The New York City system is the largest municipal health system in the country, serving more than 1 million New Yorkers annually in more than 70 patient locations across the city, including 11 hospitals, and employs more than 43,000 people. 

OhioHealth has an “AA+” rating and stable outlook with Fitch. The Columbus-based system has an exceptionally strong credit profile, very favorable leverage metrics and reliably strong profitability, Fitch said.    

Orlando (Fla.) Health has an “AA-” rating and stable outlook with Fitch. The system’s upgrade from “A+” reflects the continued strength of the health system’s operating performance, growth in unrestricted liquidity and excellent market position in a demographically favorable market, Fitch said.  

Phoenix Children’s Hospital has an “AA-” and stable outlook with Fitch. The rating reflects its position as a distinct leading provider of pediatric health services in a growing primary service area, Fitch said. 

The Queen’s Health System has an “AA” rating and stable outlook with Fitch. The Honolulu-based system’s rating reflects its leading state-wide market position, historically strong operating performance and diverse revenue streams, the rating agency said. 

Rush System for Health has an “AA-” and stable outlook with Fitch. The Chicago-based system has a strong financial profile despite ongoing labor issues and inflationary pressures, Fitch said. 

Saint Francis Healthcare System has an “AA” rating and stable outlook with Fitch. The Cape Girardeau, Mo.-based system enjoys robust operational performance and a strong local market share as well as manageable capital plans, Fitch said. 

Salem (Ore.) Health has an “AA-” rating and stable outlook with Fitch. The system has a “very strong” financial profile and a leading market share position, Fitch said. 

Sanford Health has an “AA-” rating and stable outlook with Fitch. The Sioux Falls, S.D.-based system rating reflects its leading inpatient market share positions in multiple markets and strong overall financial profile, the rating agency said. 

Stanford Health Care has an “AA” rating and stable outlook with Fitch. The Palo Alto, Calif.-based system’s rating is supported by its extensive clinical reach in the greater San Francisco and Central Valley regions and nationwide/worldwide destination position for extremely high-acuity services, Fitch said. 

SSM Health has an “AA-” rating and stable outlook with Fitch. The St. Louis-based system has a strong financial profile, multi-state presence and scale, with solid revenue diversity, Fitch said.  

St. Clair Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Pittsburgh-based system’s strong financial profile assessment, solid market position and historically strong operating performance, the rating agency said. 

St. Tammany Parish Hospital has an “AA-” rating and stable outlook with Fitch. The rating reflects the Covington, La.-based system’s strong operating risk assessment and very strong financial profile supported by consistently robust operating cash flows, Fitch said.  

Texas Medical Center has an “AA-” rating and stable outlook with Fitch. The rating reflects the Houston-based system’s profitable service enterprise, its long and collaborative relationship with strong university, nonprofit and medical industry partners, and sizable financial reserve levels, Fitch said. 

TriHealth has an “AA-” rating and stable outlook with Fitch. The Cincinnati-based system’s rating reflects its broad reach, high-acuity services and stable market position in a highly fragmented and competitive market, Fitch said.  

UChicago Medicine has an “AA-” rating and stable outlook with Fitch. The rating reflects the system’s broad and growing reach for high-acuity services and the considerable benefits it receives from its high degree of integration with the University of Chicago, Fitch said.   

UCHealth has an “AA” rating and stable outlook with Fitch. The Aurora, Colo.-based system’s margins are expected to remain robust, and the operating risk assessment remains strong, Fitch said.  

University of Kansas Health System has an “AA-” rating and stable outlook with S&P Global. The Kansas City-based system has a solid market presence, good financial profile and solid management team, though some balance sheet figures remain relatively weak to peers, the rating agency said. 

Virtua Health has an “AA-” rating and stable outlook with Fitch. The rating is supported by the Marlton, N.J.-based system’s leading market position in a stable service area and the successful integration of the Lourdes Health System, Fitch said.  

VHC Health has an”AA-” rating and stable outlook with Fitch. The Arlington-based system has demonstrated strong operating cost flexibility, growth in high acuity service lines and an expanding outpatient footprint, Fitch said.  

WellSpan Health has an “Aa3” rating and stable outlook with Moody’s. The York, Pa.-based system has a distinctly leading market position across several contiguous counties in central Pennsylvania, and management’s financial stewardship and savings initiatives will continue to support sound operating cash flow margins when compared to peers, Moody’s said.

Willis-Knighton Health System has an “AA-” rating and stable outlook with Fitch. The Shreveport, La.-based system has a “dominant inpatient market position” and is well positioned to manage operating pressures, Fitch said.

Health systems risk being reduced to their core

Posted on by • Posted in Competition, Competition on Price, Core Business, Core Competencies, Core Services, Cost Management, Cost Structure, Cost Variation, Cost-Effective, Disruption, Financial Stewardship, Financial Viability, Financially Distressed, Health System, Hospital, Hospital Industry, Operating Income, Operating Margin, Operating Margin Drivers, Operating Performance, Strategic Alignment, Strategic Imperative, Strategic Leadership, Strategy, Strategy and Transformation, Streamlining Operations • Leave a comment

https://mailchi.mp/9b1afd2b4afb/the-weekly-gist-december-1-2023?e=d1e747d2d8

This week’s graphic features our assessment of the many emerging competitive challenges to traditional health systems.

Beyond inflation and high labor costs, health systems are struggling because competitors—ranging from vertically integrated payers to PE-backed physician groups—are effectively stripping away profitable services and moving them to lower-cost care sites. The tandem forces of technological advancement, policy changes, and capital investment have unlocked the ability of disruptors to enter market segments once considered safely within health system control. 

While health systems’ most-exposed services, like telemedicine and primary care, were never key revenue sources (although they are key referral drivers), there are now more competitors than ever providing diagnostics and ambulatory surgery, which health systems have relied on to maintain their margins. 

Moving forward, traditional systems run the risk of being “crammed down” into a smaller portfolio of (largely unprofitable) services: the emergency department, intensive care unit, and labor and delivery. 

Health systems cannot support their operations by solely providing these core services, yet this is the future many will face if they don’t emulate the strategies of disruptors by embracing the site-of-care shift, prioritizing high-margin procedures, rethinking care delivery within the hospital, and implementing lower-cost care models that enable them to compete on price.

2023 State of Healthcare Performance Improvement Report: Signs of Stabilization Emerge

Posted on by • Posted in Denial, Denial Management, Denial Rates, Financial Distress, Financial Instability, Financial Performance, Financial Pressure, Financial Stewardship, Financial Strength, Health System, Hospital, Hospital Industry, Labor Cost Structure, Labor Shortages, Labor Spend Management, Medicare Advantage, Operating Expense Reduction, Operating Expenses, Operating Income, Operating Margin, Operating Metrics, Operating Performance, Operating Revenue, Physician, Recruiting, Retention, Rev Cycle Management, Revenue Cycle, Talent Imperative, Talent Management • Leave a comment
https://www.kaufmanhall.com/insights/research-report/2023-state-healthcare-performance-improvement-report?utm_source=mkto&utm_campaign=performance-improvement-report&utm_medium=em&utm_term=231024&mkt_tok=NjU0LUNOWS0yMjQAAAGPAPUh710iwb064xaRlzY2WARShgaprdNgJVvWDHv-EME-8h09yOjwqrm4xTcKRudO8J4tgkmKnc5lTtM08o8H7-ncGEvE4iTRowqwBdti-kuW

Executive Summary

Hospitals and health systems are seeing some signs of stabilization in 2023 following an extremely difficult year in 2022. Workforce-related challenges persist, however, keeping costs high and contributing to issues with patient access to care. The percentage of respondents who report that they have run at less than full capacity at some time over the past year because of staffing shortages, for example, remains at 66%, unchanged from last year’s State of Healthcare Performance Improvement report. A solid majority of respondents (63%) are struggling to meet demand within their physician enterprise, with patient concerns or complaints about access to physician clinics increasing at approximately one-third (32%) of respondent organizations.

Most organizations are pursuing multiple strategies to recruit and retain staff. They recognize, however, that this is an issue that will take years to resolve—especially with respect to nursing staff—as an older generation of talent moves toward retirement and current educational pipelines fail to generate an adequate flow of new talent. One bright spot is utilization of contract labor, which is decreasing at almost two-thirds (60%) of respondent organizations.

Many of the organizations we interviewed have recovered from a year of negative or breakeven operating margins. But most foresee a slow climb back to the 3% to 4% operating margins that help ensure long-term sustainability, with adequate resources to make needed investments for the future. Difficulties with financial performance are reflected in the relatively high percentage of respondents (24%) who report that their organization has faced challenges with respect to debt covenants over the past year, and the even higher percentage (34%) who foresee challenges over the coming year. Interviews confirmed that some of these challenges were “near misses,” not an actual breach of covenants, but hitting key metrics such as days cash on hand and debt service coverage ratios remains a concern.

As in last year’s survey, an increased rate of claims denials has had the most significant impact on revenue cycle over the past year. Interviewees confirm that this is an issue across health plans, but it seems particularly acute in markets with a higher penetration of Medicare Advantage plans. A significant percentage of respondents also report a lower percentage of commercially insured patients (52%), an increase in bad debt and uncompensated care (50%), and a higher percentage of Medicaid patients (47%).

Supply chain issues are concentrated largely in distribution delays and raw product and sourcing availability. These issues are sometimes connected when difficulties sourcing raw materials result in distribution delays. The most common measures organizations are taking to mitigate these issues are defining approved vendor product substitutes (82%) and increasing inventory levels (57%). Also, as care delivery continues to migrate to outpatient settings, organizations are working to standardize supplies across their non-acute settings and align acute and non-acute ordering to the extent possible to secure volume discounts.

Survey Highlights

98% of respondents are pursuing one or more recruitment and retention strategies
90% have raised starting salaries or the minimum wage
73% report an increased rate of claims denials
71% are encountering distribution delays in their supply chain
70% are boarding patients in the emergency department or post-anesthesia care unit because of a lack of staffing or bed capacity
66% report that staffing shortages have required their organization to run at less than full capacity at some time over the past year
63% are struggling to meet demand for patient access to their physician enterprise
60% see decreasing utilization of contract labor at their organization
44% report that inpatient volumes remain below pre-pandemic levels
32% say that patients concerns or complaints about access to their physician enterprise are increasing
24% have encountered debt covenant challenges during the past 12 months
None of our respondents believe that their organization has fully optimized its use of the automation technologies in which it has already invested