‘Hospital purgatory’: Confidence in healthcare plunges as criticism grows louder and larger

Payers, pharmacy benefit managers and drug manufacturers are no strangers to heavy criticism from the public and providers alike. Now another sector of the healthcare system has found itself increasingly caught in the crosshairs of constituents looking to point a finger for the rising cost of care: hospitals.

As sharp words against the industry bubble up more often and encompass a wider variety of issues, it marks an important turn in the ethos of American healthcare. Most policymakers have historically wanted hospitals on their side, and health systems are often the largest employer within their communities and in many states.

“In my career, I’ve never seen things more aligned to the detriment of hospitals than it is now,” Paul Keckley, PhD, said. Dr. Keckley is a widely known industry analyst and editor of The Keckley Report, a weekly newsletter discussing healthcare policy and current trends. 

Confidence in the medical system as a whole fell from 51 percent in 2020 to a record low of 38 percent in 2022. Though the healthcare system is among all major U.S. institutions facing record-low public confidence, are hospitals ready for an era of widespread distrust? 

We’re going into hospital purgatory. It’s a period in which old rules may not work in the future,” Dr. Keckley said. “The only thing we know for sure is that it’s not going to get easier.”

State-versus-hospital fights have popped up throughout the U.S. over the past year. Most recently, in Colorado, a back and forth unfolded between Gov. Jared Polis and the state’s hospital association over who is ultimately responsible for high care costs. In a speech Jan. 17, the Democratic governor accused Colorado’s hospitals of overcharging patients and sitting on significant cash reserves.

“It’s time that we hold them accountable,” he said.

The Colorado Hospital Association says the data supporting those claims does not reflect the several ongoing industry challenges, among them labor shortages, regulatory burdens and inflationary pressures.

“Unfortunately, we continue to hear rhetoric against the hospitals and health systems that have worked diligently on healthcare quality, access and affordability,” CHA said in a statement to Becker’s. “Colorado’s hospitals and health systems have been working with the administration on many of these programs, including reinsurance, hospital discounted care, price transparency, out-of-network patient protections, and more.”

Some 1,500 miles eastward, another incident of hospital-community conflict grew. In January, Pennsylvania lawmakers promoted a nonpartisan report that accuses UPMC of building a monopoly in the state through consolidation over the last decade — the Pittsburgh-based system refuted the claims, saying they were based on “flawed data.”

To the south, North Carolina officials accused the state’s seven largest health systems in June of using pandemic aid to enrich themselves. Hospitals said the accusations were based on “cherry-picked data” spun in a way that does not reflect their ongoing challenges.

As state- and market-level fights against hospitals intensify and grab national attention, hospitals and health systems may find themselves less familiar in steadying public perception than their payer and pharmaceutical counterparts, who are no strangers to vocal opponents.  

“With public opinion shifting a bit amid COVID, and with some anecdotal evidence that hospitals are doing some bad things, state policymakers feel that they are enjoying the political will to make these gestures,” Ge Bai, PhD, said. “It’s also a key issue for voters. Even if they don’t do anything in reality, the gesture will probably get political capital.”

Dr. Bai is a professor of accounting and health policy at Baltimore-based Johns Hopkins University. She believes a key underlying factor driving hospital critiques as of late is the reduced public confidence in medicine by way of the pandemic. 

“The hospital industry has moved away from its traditional charitable mission and toward a business orientation that is undeniable,” she said. “With the [pandemic] dust settling, I think a lot of people realize the clinicians are the heroes, but hospitals are maybe not as altruistic as they once thought.”

In 2021, over 70 percent of Americans said they trusted physicians and nurses, but only 22 percent said the same about hospital executives, according to a study from the University of Chicago and The Associated Press-NORC Center for Public Affairs Research. 

“It’s a tough job and a complicated business to run, and everybody in the community has an opinion about it based on anecdotal evidence,” Dr. Keckley said. “I think much of the blame too for hospitals taking a lot of hits has been boards that are not prepared to govern.”

For both Drs. Keckley and Bai, there are other major issues they each point to as contributing factors to the growing wariness around hospital operations: 

  • A lack of compliance with CMS price transparency rules. Some of the most recent studies estimate hospital compliance rates could range from 16 percent to 55 percent, while hospitals say the issue has been mischaracterized. CMS has penalized very few hospitals for noncompliance since the rule took effect in 2021.
  • The decades-long trend of consolidation hitting a tipping point. With consolidation, hospitals have long argued the trend would lead to more efficiency, care access, quality of care and lower costs. One of the most comprehensive consolidation studies to date was released Jan. 24 in JAMA and concluded that merged health systems have led to “marginally better care at significantly higher costs.”

    “Hospitals are doing exactly what they’re supposed to do — make money to survive and expand,” Dr. Bai said. “Instead of blaming individual players, we have to raise the bar and think about who created the system in the first place that makes competition so difficult — the government.”
  • State retirement benefits plans struggling financially. Though not a new trend, unfunded healthcare benefits promised to retired public employees and their dependents continues to grow around the country, incentivizing state lawmakers to look in new directions to save on costs. Unfunded retiree healthcare liabilities across all states surpassed $1 trillion in 2019, according to the American Legislative Exchange Council.
  • Competition from other healthcare sectors. Competition for patients has arrived from other healthcare sectors, especially from payers. In 2023, UnitedHealth Group’s Optum owns or is affiliated with the most physicians in the country at 60,000, though it’s likely higher after several large acquisitions last year.

“The center of gravity in healthcare has shifted from hospitals that muscled their way into scaling,” Dr. Keckley said. “The reality is that providing hospital services in non-hospital settings that are safe, effective and less costly is where the market, and insurers, are going.”

Despite the uptick in states and Americans that have gone into fault-finding mode against hospitals and those running them, operating a financially successful hospital or health system in 2023 is a monumental task, perhaps even close to impossible for many. Last year, approximately half of U.S. hospitals finished the year with a negative margin, making it “the worst financial year” for the industry since the start of the pandemic, according to Kaufman Hall’s latest “National Flash Hospital Report.”

“Hospitals aren’t going into this with a huge amount of goodwill at their backs, and I think that’s what they need to be prepared for,” Dr. Keckley said. “You can’t just go in and tell the story of ‘look at what we do for the community’ or ‘look at all the people we employ’ — that is not going to work anymore.”

KPMG primes shrinking CFO, CPA pipeline

The shortage of accountants is one of the main concerns keeping KPMG’s Greg Engel up at night. The firm is teaming up with universities to expand the talent pool.

KPMG’s Greg Engel likens the accounting profession to the turtle in the proverbial race with the hare — a turtle that’s seeking to pull ahead even as it competes with flashier industry sectors for workers.

The shortage of accounting talent is one of the main concerns keeping Engel — vice chair of tax in the U.S. for the Big Four accounting firm — up at night as he assesses the new year’s challenges, even as KPMG has undertaken numerous initiatives to ease the talent crunch

At the same time, he sees a potential silver lining for his sector in the recent surge of layoffs in the formerly sizzling tech sector that has won over some college graduates who might have otherwise gone into accounting.

“A lot of people went to the technology sector because it was exciting. But now that Meta and Twitter and all these other companies are laying off people, kids going into college might go, ‘wait a minute, maybe KPMG sounds a little better than Twitter,’” Engel said in an interview. “Accounting is that boring, stable profession that doesn’t do as well in hugely expansive economies but does great when the economy’s on the downslide.”  

Making accounting’s case

Historically, the Big Four accounting and consulting firms have mounted robust programs designed to recruit and train accounting students right out of colleges and major universities. 

KPMG, along with PwC, Ernst & Young and Deloitte, hire thousands of graduates and students each year out of colleges, often training them through internships which lead to full-time jobs. Many of the certified public accountants go on to be controllers, tax directors and even CFOs. The entry level accounting salary range at such programs in the tax area can be roughly in the $70,000 to $80,000 range, depending on the market, according to some industry estimates. 

“The hallmark of the Big Four was to train people really, really well,” Engel said. The longer employees stay at a firm, the better their prospects after they leave, Engel said.

That means an employee who leaves after a couple years could probably join a company’s accounting department at a lower level, he said. But if the employee leaves after rising to the level of senior manager, he or she could join the same company as controller — and those who leave as a partner might join as a CFO, Engel said.  

CFO machine showing signs of wear  

But the machine generating CPAs and CFOs has shown signs of wear in recent years. For one thing, KPMG has not been immune to the Great Resignation. It was hit by the surge in turnover that weakened the middle ladder rungs of its workforce. “There’s a kind of battle in the middle,” Engel said. The company responded in part by hiring experienced accountants from companies like Apple and Home Depot, he said. 

At the same time, accounting has attracted fewer students in recent years. The total number of U.S. students completing a Bachelor’s degree in accounting fell about 8% in the 2019-2020 school year compared with the 2011-2012 period, shrinking to 52,481 graduates from 57,482, according to a 2021 report from the American Institute of Certified Public Accountants.

Priming the pipeline

Firms and accounting organizations have been taking deliberative steps in recent years to boost their case with talent and solve the talent shortage. For instance, the AICPA and the Department of Labor announced in November that they had teamed up to cultivate candidates and expand the pool of professionals, CFO Dive reported

If students are not deterred by the accounting profession’s long hours and subdued reputation, they may feel reluctant to put in the credit hours required before taking the exam to become a Certified Public Accountant. That typically means a student will need more study beyond that of a four-year degree. 

In an effort to make the extra course work pay off, KPMG worked with a number of universities to develop a Master in Accounting and Data Analytics Program that gives students the data analysis skills that are increasingly important in the field.

Recently, an additional seven universities were added to the program and KPMG has pledged to provide more than $7 million in scholarships. The schools added to the program included some historically Black Colleges and Universities such as Howard University School of Business and North Carolina Agricultural and Technical State University. Other universities that offer the program include Villanova University and The Ohio State University. 

Separately, KPMG has teamed up with Engel’s alma mater, the University of Northern Iowa in Cedar Falls, Iowa, to help strengthen the accounting program and opportunities for students attending Des Moines Area Community College.

The company will also aim to provide internships to the students who often attend school at night or part-time, which can make it difficult to obtain the credit hours needed to become a CPA. 

“We’re going to start adding people to the profession with two-year associates degrees,” Engel said, noting that similar programs are cropping up elsewhere. “We’ll give them a pathway to add the extra courses and programs they need.” 

5 trillion-dollar questions hanging over hospitals

Big questions tend to have no easy answers. Fortunately, few people would say they went into healthcare for its ease.

The following questions about hospitals’ culture, leadership, survival and opportunity come with a trillion-dollar price tag given the importance of hospitals and health systems in the $4.3 trillion U.S. healthcare industry. 

1. How will leaders insist on quality first in a world where it’s increasingly harder to keep trains on time? 

Hospitals and health systems have had no shortage of operational challenges since the COVID-19 pandemic began. These organizations at any given time have been or still are short professionals, personal protective equipment, beds, cribs, blood, helium, contrast dye, infant formula, IV tubing, amoxicillin and more than 100 other drugs. After years of working in these conditions, it is understandable why healthcare professionals may think with a scarcity mindset

This is something strong leaders recognize and will work to shake in 2023, given the known-knowns about the psychology of scarcity. When people feel they lack something, they lose cognitive abilities elsewhere and tend to overvalue immediate benefits at the expense of future ones. Should supply problems persist for two to three more years, hospitals and health systems may near a dangerous intersection where scarcity mindset becomes scarcity culture, hurting patient safety and experience, care quality and outcomes, and employee morale and well-being as a result. 

The year ahead will be a great test and an opportunity for leaders to unapologetically prioritize quality within every meeting, rounding session, budgetary decision, huddle and town hall, and then follow through with actions aligned with quality-first thinking and commentary. Working toward a long-term vision and upholding excellence in the quality of healthcare delivery can be difficult when short-term solutions are available. But leaders who prioritize quality throughout 2023 will shape and improve culture.

2. Who or what will bring medicine past the scope-of-practice fights and turf wars that have persisted for decades? 

It is naive to think these tensions will dissolve completely, but it would be encouraging if in 2023 the industry could begin moving past the all-too-familiar stalemates and fears of “scope creep,” in which physicians oppose expanded scope of practice for non-physician medical professionals. 

Many professions have political squabbles and sticking points that are less palpable to outsiders. Scope-of-practice discord may fall in that category — unless you are in medicine or close to people in the field, it can easily go undetected. But just as it is naive to think physicians and advanced practice providers will reach immediate harmony, so too is it naive to think that aware Americans who watch nightly news segments about healthcare’s labor crisis and face an average wait of 26 days for a medical appointment will have much sympathy for physicians’ staunch resistance to change. 

The U.S. could see an estimated shortage of between 37,800 and 124,000 physicians by 2034, according to the Association of American Medical Colleges. Ideally, 2023 is the year in which stakeholders begin to move past the usual tactics, arguments and protectionist thinking and move toward pragmaticism about physician-led care teams that empower advanced practice providers to care for patients to the extent of the education and training they have. The leaders or organizations who move the needle on this stand to make a name for themselves and earn a chapter or two in the story of American healthcare. 

3. Which employers will win and which will lose in lowering the cost of healthcare? 

Employers have long been incentivized to do two things: keep their workers healthy and spend less money doing it. News of companies’ healthcare ventures can be seen as cutting edge, making it easy to forget the origins of integrated health systems like Oakland, Calif.-based Kaiser Permanente, which dates back to one young surgeon establishing a 12-bed hospital in the height of the Great Depression to treat sick and injured workers building the Colorado River Aqueduct. 

Many large companies have tried and failed, quite publicly, to improve healthcare outcomes while lowering costs. Will 2023 be the year in which at least one Fortune 500 company does not only announce intent to transform workforce healthcare, but instead point to proven results that could make for a scalable strategy? 

Walmart is doing interesting things. JPMorgan seems to have learned a good deal from the demise of Haven, with Morgan Health now making some important moves. And just as important are the large companies paying attention on the sidelines to learn from others’ mistakes. Health systems with high-performing care teams and little variation in care stand to gain a competitive advantage if they draw employers’ attention for the right reasons. 

4. Who or what will stabilize at-risk hospitals? 

More than 600 rural hospitals — nearly 30 percent of all rural hospitals in the country — are at risk of closing in the near future. Just as concerning is the growing number of inner-city hospitals at increased risk of closure. Both can leave millions in less-affluent communities with reduced access to nearby emergency and critical care facilities. Although hospital closures are not a new problem, 2022 further crystalized a problem no one is eager to confront. 

One way for at-risk hospitals to survive is via mergers and acquisitions, but the Federal Trade Commission is making buying a tougher hurdle to clear for health systems. The COVID-19 public health emergency began to seem like a makeshift hospital subsidy when it was extended after President Joe Biden declared the pandemic over, inviting questions about the need for permanent aid, reimbursement models and flexibilities from the government to hospitals. Recently, a group of lawmakers turned to an agency not usually seen as a watchdog for hospital solvency — HHS — to ask if anything was being done in response to hospital closures or to thwart them. 

Maintaining hospital access in rural and urban settings is a top priority, and the lack of interest and creativity to maintain it is strikingly stark. As a realistic expectation for 2023, it would be encouraging to at least have an injection of energy, innovation and mission-first thinking toward a problem that grows like a snowball, seemingly bigger, faster and more insurmountable year after year.

Look at what Mark Cuban was able to accomplish within one year to democratize prescription drug pricing. Remember how humble and small the origins of that effort were. Recall how he — albeit being a billionaire — has put profit secondary to social mission. There’s no one savior that will curb hospital closures in the U.S., but it would be a good thing if 2023 brought more leadership in problem-solving and matching a big problem with big energy and ideas. 

5. Which hospital and health system CEOs will successfully redefine the role? 

Many of the largest and most prominent health systems in the country saw CEO turnover over the past two years. With that, health systems lost decades of collective industry and institutional knowledge. Their tenure spanned across numerous milestones and headwinds, including input and compliance with the Affordable Care Act, the move from paper to digital records, and major mergers and labor strikes. The retiring CEOs had been top decision-makers as their organizations met the demands of COVID-19 and its consequences. They set the tone and had final say in how forcefully their institutions condemned racism and what actions they took to address health inequities. 

To assume the role of health system CEO now comes with a different job description than it did when outgoing leaders assumed their posts. Many Americans may carry on daily life with little awareness as to who is at the top of their local hospital or health system. The pandemic challenged that status quo, throwing hospital leaders into the limelight as many Americans sought leadership, expertise and local voices to make sense of what could easily feel unsensible. The public saw hospital CEOs’ faces, heard their voices and read their words more within the past two years than ever. 

In 2023, newly named CEOs and incoming leaders will assume greater responsibility in addition to a fragile workforce that may be more susceptible to any slight change in communication, transparency or security. They will need to avoid white-collar ivory towers, and earn reputations as leaders who show up for their people in real, meaningful ways. Healthcare leaders who distance themselves from their workforce will only let the realistic, genuine servant leaders outshine them. In 2023, watch for the latter, emulate them and help up-and-comers get as much exposure to them as possible. 

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.

6 health systems hit with credit downgrades

A number of health systems experienced downgrades to their financial ratings in recent weeks amid ongoing operating losses, declines in investment values and challenging work environments.

Here is a summary of recent ratings since Becker’s last roundup Nov. 15:

The following systems experienced downgrades:

Adventist Health (Roseville, Calif.): Saw a downgraded long-term credit rating on bonds it holds, declining from “A” (negative) to “A-” (stable) by S&P Global Ratings.

The December downgrade follows a 2021 downgrade from Fitch Ratings from “A+” to “A.” That downgrade reflected “a series of one-time events and the lingering deleterious impact from the novel coronavirus” which “resulted in lower than anticipated operating EBITDA margins,” Fitch said. In November, Fitch added to this assessment by downgrading Adventist’s outlook from stable to negative, reflecting “continued negative operational pressure.” 

The group, which operates 23 hospitals in California, Hawaii and Oregon, was also assigned an “A” rating by Fitch to 2022 bonds and other outstanding debt.

Catholic Health (Buffalo, N.Y.): The group was downgraded on debt from “B1” to “Caa2” by Moody’s and is in danger of defaulting on its covenants.

The nonprofit health system, which serves residents in Western New York with four acute care hospitals and several other facilities, saw its rating drop in November on approximately $364 million of debt.

Duke University Health System (Durham, N.C.): Downgraded to an “AA-” credit rating by Fitch Ratings.

The December downgrade comes amid concern over Duke’s planned integration of the Private Diagnostic Clinic, a for-profit medical group with more than 1,800 physicians.

The rating, reduced from “AA,” applies both to specific bonds the group holds and to its overall issuer default rating. In addition to the integration of the Private Diagnostic Clinic, Fitch also cited concern over macro issues such as labor and inflationary pressures, which have helped to drag down operating results for the health group.

Main Line Health (Radnor Township, Pa.): – Had its bond rating downgraded to “A1” from “Aa3” by Moody’s.

The December downgrade reflects a multiyear trend of weak operating performance and expectations of tepid progress into 2023, Moody’s said.

In addition to Main Line’s revenue bond rating declining, its outlook has been revised to stable from negative at the lower rating. The hospital group has approximately $651 million in outstanding debt, Moody’s said.

Prime Healthcare (Ontario, Calif.): The group was downgraded on probability of default rating to “B2-PD” from “B1-PD” as well as its ratings of the system’s senior secured notes to “B3” from “B2” by Moody’s.

Moody’s also revised the outlook in November to negative from stable because it projects operating expenses will continue to pressure the 45-hospital system’s profitability in the near term, presenting challenges for “the company’s pace of deleveraging,” according to a Nov. 18 news release.

Westchester County Health Care Corp. and Charity Health System (Valhalla, N.Y): The group was downgraded from “Baa2” to “Baa3” by Moody’s.

The December downgrade for CHS is based on WCHCC’s legal guarantee to pay debt service on CHS’ Series 2015 bonds, if CHS is unable. The outlook for both systems remains negative with WCHCC and CHS having $773 million and $127 million of debt, respectively, at the end of fiscal year 2021, Moody’s said.

New Jersey hospital shifts to freestanding ER after Trinity, Capital Health transaction closes

St. Francis Medical Center in Trenton, N.J., on Dec. 21 transitioned to a freestanding emergency room that offers various outpatient services after Capital Health acquired the hospital from Trinity Health, according to PBS affiliate WHYY.

The campus, renamed Capital Health – East Trenton, must feature a primary family health clinic and a women’s OB/GYN clinic, according to terms of the transaction. 

Other services, such as cardiac surgery, are moving to Capital Health Regional Medical Center in Trenton, where “extensive capital projects” are being planned, the health system said in a Dec. 8 news release. 

A St. Francis spokesperson told the news outlet that the hospital had been financially struggling for years. 

“St. Francis has done many great things for the Trenton community, but the current healthcare landscape has made it unsustainable,” Capital Health President and CEO Al Maghazehe said. “Without these key approvals, Trenton would have lost desperately needed healthcare services, including emergency services, behavioral health and cardiac surgery.” 

Capital Health said it has taken “a significant risk” to try and prevent a healthcare crisis for Trenton’s 90,000 residents, according to the report.

The dire state of hospital finances (Part 1: Hospital of the Future series)

About this Episode

The majority of hospitals are predicted to have negative margins in 2022, marking the worst year financially for hospitals since the beginning of the Covid-19 pandemic.

In Part 1 of Radio Advisory’s Hospital of the Future series, host Rachel (Rae) Woods invites Advisory Board experts Monica WestheadColin Gelbaugh, and Aaron Mauck to discuss why factors like workforce shortages, post-acute financial instability, and growing competition are contributing to this troubling financial landscape and how hospitals are tackling these problems.

Links:

As we emerge from the global pandemic, health care is restructuring. What decisions should you be making, and what do you need to know to make them? Explore the state of the health care industry and its outlook for next year by visiting advisory.com/HealthCare2023.

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.

Health system cash reserves plummet

Cash reserves, an important indicator of financial stability, are dropping for hospitals and health systems across the U.S.

Both large and small health systems are affected by rising labor and supply costs while reimbursement remains low. St. Louis-based Ascension reported days cash on hand dropped from 336 at the end of the 2021 fiscal year to 259 as of June 30, 2022, the end of the fiscal year. The system also reported accounts receivable increased three days from 47.3 in 2021 to 50.3 in 2022 because commercial payers were slow, especially in large dollar claims.

Trinity Health, based in Livonia, Mich., also reported days cash on hand dropped to 211 in fiscal year 2022, ending June 30, compared to 254 days at the end of 2021. Trinity attributed the 43-day decrease in cash on hand to “investment losses and the recoupment of the majority of the Medicare cash advances.”

Chicago-based CommonSpirit Health reported days cash on hand decreased by 69 days in the last year. The 140-hospital health system reported 245 days cash on hand at the 2021 fiscal year’s end June 30, and 176 days for 2022.

Lehigh Valley Health Network in Allentown, Pa., said unfavorable trends in the capital market led to investment losses and a drop in days cash on hand from 216 to 150 days in the 2022 fiscal year ending June 30. The health system also had a scheduled repayment of $191.1 million in advance Medicare dollars as well as $25 million in deferred payroll tax payments.

Philadelphia-based Thomas Jefferson University reported cash on hand for clinical operations dropped by 10.9 days in just the last quarter due to nonoperating investment losses and repaying government advances, which equaled about five days cash on hand. The health system reported 158.5 days cash on hand as of Sept. 30.

While the large health systems’ days cash on hand are dropping, they still have deep reserves. Smaller hospitals and health systems are in a more dire situation. Doylestown (Pa.) Hospital reported as of Sept. 30 the system had 81 days cash on hand, and Moody’s downgraded the hospital in June after the days cash on hand dropped below 100.

Kaweah Health in Visalia, Calif., saw reserves plummet since the pandemic began from 130 to 84 days cash on hand. Gary Herbst, CEO of Kaweah Health, blamed lost elective procedures, high labor costs, inflation and more for the system’s financial issues.

“The COVID-19 pandemic, and its aftermath, have brought District hospitals to the brink of financial collapse,” Mr. Herbst wrote in an open letter to Gov. Gavin Newsom published in the Visalia Times Delta. He asked Mr. Newsom to provide additional funding for public district hospitals. “Without your help, it will soon be virtually impossible for Medi-Cal patients to receive anything but emergency medical care in the State of California.”

For hospitals, ‘difficult decisions’ loom after 9 months of negative margins

The third quarter brought little relief to hospitals in what is shaping up to be one of their worst financial years. 

Kaufman Hall’s October National Hospital Flash Report — based on data from more than 900 hospitals — found slightly lower hospital expenses in September did not outweigh lower revenue across the board, with decreases in discharges, inpatient minutes and operating minutes.

The median year-to-date operating margin index for hospitals was -0.1 percent in September, marking a ninth straight month of negative operating margins and a dimmer outlook for their climb back into the black by year’s end. 

Kaufman Hall noted that expense pressures and volume and revenue declines could force hospitals to make “difficult decisions” about service reductions and cuts. 

“Health systems are starting to get a clear picture of what service lines have a positive effect on their margins and which ones are weighing them down,” said Matthew Bates, managing director and Physician Enterprise service line lead with Kaufman Hall. “Without a positive margin there is no mission. Health systems must think carefully and strategically about what areas of care they invest in for the future.”