In this week’s graphic, we highlight the importance of broadening the domain of health system experience initiatives beyond patients to include consumers and even employees.
While reimbursements tied to HCAHPS (Hospital Consumer Assessment of Healthcare Providers and Systems) and CG-CAHPS (Clinician and Group Consumer Assessment of Healthcare Providers and Systems) scores have made patient experience a main focus for years, an increasingly consumer-driven healthcare industry means that health systems must consider the experience of all consumers in their markets, with the hopes of meeting their needs and eventually welcoming them as new—or retuning—patients.
Embracing this mindset requires focusing on the entirety of a consumer’s interactions with the health system and the tracking of non-traditional metrics that measure the strength and value of their relationship to the system. Some systems are expanding their experience purview even further by also focusing on the working conditions and morale of their providers and other staff, as a healthy workplace environment serves to better both the patient and consumer experience. Easily accessible services and positive interactions with providers and other staff can determine a consumer’s view of their experience before any care is actually delivered.
Cultural and strategic shifts that integrate experience from the top down into all operational facets of the health system will ultimately strengthen consumer loyalty, employee retention, and the financial health of the system.
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.
The upheaval of the past few years has permanently changed the healthcare landscape, and while many sectors of the industry continue to endure financial hardship, there is reason for cautious optimism in 2024 as healthcare begins to see a return on investment in technology and a resurgence in dealmaking.
This year, BDO surveyed healthcare CFOs to discover their plans, priorities, and concerns heading into 2024.
In today’s newsletter, I’ve outlined the top research findings that every healthcare leader needs to know to prepare for the year ahead.
Top 3 Workforce Investment Areas
Clinician burnout and staffing shortages remain challenging in the healthcare industry, but BDO’s survey indicated that many CFOs are bullish that the worst is behind them, with 47% stating they feel that in 2024, the talent shortage will represent less of a risk than in 2023.
Investment in the workforce is crucial to addressing staffing challenges, and in the year ahead, healthcare CFOs intend to invest in the following ways:
1. Training: 48% of CFOs plan to spend more on training, in part to buttress ongoing investment in new technologies like AI that can help with predictive staffing and financial reporting.
2. Recruitment: 48% of CFOs will spend more on recruiting, as the talent shortfall tightens an already restricted pool of candidates.
3. Compensation & Benefits: Alongside greater spending on recruiting itself, 46% of CFOs intend to increase compensation and benefits as a means of attracting talent from competitors and retaining current staff.
Transaction Plans
Dealmaking turned a corner in 2023, with activity returning to pre-pandemic levels in Q2. Despite fluctuating interest rates and the volatility of an election year, we can expect more transactions in 2024, with 72% of CFOs planning some kind of deal, relative to their organization’s financial health and liquidity. An increase in antitrust activity, however, could impact the size and type of deals that see success. Healthcare CFOs planning a large deal should be prepared for heightened scrutiny.
While we expect to see a wide range of deals taking place over the next year, two specific deal types are worth calling out:
1. Carve-outs/Divestitures: We may see an uptick in enterprise sales, carve-outs, and divestitures, particularly for institutions that have been struggling financially — 31% of institutions that violated their bond or loan covenants in 2023 are planning to pursue deals of this kind.
2. Private Equity (PE) and Venture Capital (VC): Nearly one in five (19%) CFOs, particularly those working with physician groups, plan to explore PE and VC investment as avenues toward scaling, sharing services, and safeguarding succession planning.
Service Line Investment Plans
There are still many areas where CFOs are intending to increase investment, but changed market conditions mean that some core areas of healthcare may see decreased investment as the industry realigns:
1. Specialty Services: Fifty-two percent of CFOs plan to increase their investments in specialty services like cardiology, oncology, and dermatology, while 23% of CFOs intend to partner with a capital provider or operator.
2. Service Expansion: Home care (51%), virtual/telehealth (48%), and ambulatory service centers (49%) are also priority areas for investment as institutions continue to expand and maintain access to healthcare outside of traditional hospital and clinic settings.
3. Primary Care: Although primary care remains at the heart of the healthcare industry, many CFOs (42%) have in fact signaled an intent to reduce investment in this area, reassessing their primary care strategies due to significant cash flow pressures and ongoing realignment as the retail market gains ground.
Want to know more about healthcare leaders’ plans for the year ahead? Get more insights and data in BDO’s 2024 Healthcare CFO Outlook Survey.
Where are you planning on increasing investment in your organization this year? Let me know in the comments below.
Saint Peter’s Healthcare System in New Brunswick, N.J., was six years ahead of the C-suite streamlining curve.
The health system slimmed down its leadership structure in 2017, President and CEO Les Hirsch told Becker’s. A top-heavy executive team grew unsustainable as the system struggled financially, operating at a loss. Saint Peter’s board decided to combine the president and CEO positions — which were previously split in two. Then, as president and CEO, Mr. Hirsch cut five vice presidents’ positions, including the consolidation of the chief information officer and chief medical information officer roles. More than 20 middle-manager positions were also cut or consolidated.
The streamlining of senior leadership positions alone at the time eliminated over $4 million in salaries and benefits, according to Mr. Hirsch. With the old leadership structure, Saint Peter’s spent about 2.4% of its revenue on senior leaders’ compensation. Last year, that percentage sank to 1.34%.
But finances shouldn’t be the only consideration for a health system planning to whittle down its structure.
“The good news is, we’re lean,” Mr. Hirsch said. “The bad news is, we’re lean.”
Since consolidating the president and CEO roles — and not having a chief operating officer — succession planning is more complicated, per Mr. Hirsch.
“There’s no designated No. 2,” he said. “Our senior leadership team structure is very flat.”
A condensed C-suite also means more work for some members of the leadership team — which is taken in stride, Mr. Hirsch said. There’s no specific “planning” department, so executives put their heads together on strategy, growth and development initiatives. There is no government relations officer, but Mr. Hirsch, as CEO, takes primary responsibility for this function and is very active in advocacy.
Anyone who works on a lean team like this also “has to be a generalist,” Mr. Hirsch said. He stays up to date on the literature and sends relevant articles to other executives.
“Considering our size as one of the few remaining single-hospital health systems in New Jersey, we don’t have the luxury of having somebody specifically responsible for artificial intelligence or other niche responsibilities as these are functions that are absorbed within people’s roles,” Mr. Hirsch said. “And we all develop the knowledge needed so that we can understand how new ideas or resources may apply to us. When you’re smaller and don’t have the scale of these mega-organizations, you have to do more yourself. You roll up your sleeves.”
Despite these challenges, a little can go a long way; three departmental administrators now split the job once shared by seven people at Saint Peter’s. There’s been no hit to efficiency; “they’re more effective in their roles as departmental administrators than anybody that I’ve ever seen,” Mr. Hirsch said.
The changes to streamline management were also well-received by the workforce. Often layoffs affect front-line workers more than management or senior leadership — which may have contributed to the lack of outcry, per Mr. Hirsch. But he primarily attributes the positive reception to intentional transparency.
“Most importantly, I’m a very active communicator. So, I communicated about it. It wasn’t that there was some intrigue and mystery in the organization that people were hearing by rumor,” Mr. Hirsch said.
“Rumors — like fear — are two things that equate to being like a cancer in an organization,” he continued. “I always want to do everything I possibly can to set the facts straight and communicate with people. If it’s not confidential and I can communicate it, I will. In fact, I’ll err more on the side of communicating than keeping information close to the vest.”
Regardless of who is affected by layoffs, executives should always handle them with sensitivity, Mr. Hirsch emphasized; the right choice for an organization is not always the easy choice for its people.
“It’s always painful when you’re making these kinds of changes because they affect people, and you always have to go about those changes in a very thoughtful, considerate, and compassionate way,” Mr. Hirsch said. “You’re eliminating roles and impacting people’s lives, their careers and their family. So, I always keep that top of mind.”
Asexpected, 2023 saw a material increase in downgrades over 2022 while the number of upgrades declined from the prior year. Volume showed favorable growth for many hospitals during 2023 although some indicators remained below pre-pandemic levels. Other hospitals reported a payer mix shift toward more Medicare as the population continued to age and Medicare Advantage plans gained momentum at the expense of commercial revenues. Continued labor challenges drove expense growth, even with many organizations reporting a reduction in temporary labor, as permanent hires pressured salary and benefit expenses. Some of the downgrades reflected pronounced operating challenges that led to covenant violations while others were due to a material increase in leverage viewed to be too high for the rating category.
Figure1: Downgrades at Moody’s, S&P, and Fitch
Here are five key takeaways:
The ratio of downgrades to upgrades reached a high level for all three rating agencies: Moody’s, 3.2-to-1; S&P: 3.8-to-1; and Fitch: 3.5-to-1. In 2022, the ratio crested just above 2.0-to-1 at the highest among the three firms.
Downgrades covered a wide swath of hospitals, ranging from single-site general acute care facilities to academic medical centers as well as large regional and multistate systems. Many of the hospital downgrades were concentrated in New York, Pennsylvania, Ohio, and Washington. All rating categories saw downgrades, although the majority were clustered in the Baa/BBB and lower categories.
Multi-notch downgrades were mainly relegated to ratings that were already deep into speculative grade. Multi-notch upgrades were due to mergers or acquisitions where the debt was guaranteed by or added to the legal borrowing group of the higher rated system.
Upgrades reflected fundamental improvement in financial performance and debt service coverage along with strengthening balance sheet indicators. Like the downgraded organizations, upgraded hospitals and health systems ranged from single-site hospitals to expansive, super-regional systems. Some of the upgrades reflected mergers into higher-rated systems.
The wide span between downgrades to upgrades in 2023 would suggest that the credit gap between highly rated hospitals (say, the “A” or “Aa/AA” category) compared to “Baa/BBB” and speculative grade is widening. That said, given that rating affirmations remain the predominant rating activity annually, the rating agencies reported only a subtle shift in the overall distribution of ratings since the beginning of the pandemic in their panel discussion at Kaufman Hall’s October 2023 Healthcare Leadership Conference.
One person’s prediction for 2024?
It’s a safe bet that downgrades will outpace upgrades given the persistent challenges, although the ratio may narrow if the improvement in current performanceholds. That said, the rating agencies are maintaining mixed views for 2024. S&P and Fitch are sticking with negative and deteriorating outlooks, respectively, while Moody’s has revised its outlook to stable, anticipating that the rough times of 2022 are behind us.
All three rating agencies predict that we are not out of the woods yet when it comes to covenant challenges, especially in the lower rating categories or for those organizations that report a second year of covenant violations.
Earlier this month, leaders from more than 400 organizations descended on San Francisco for J.P. Morgan‘s 42nd annual healthcare conference to discuss some of the biggest issues in healthcare today. Here’s how Advisory Board experts are thinking about Modern Healthcare’s 10 biggest takeaways — and our top resources for each insight.
How we’re thinking about the top 10 takeaways from JPM’s annual healthcare conference
Following the conference, Modern Healthcare provided a breakdown of the top-of-mind issues attendees discussed.
Here’s how our experts are thinking about the top 10 takeaways from the conference — and the resources they recommend for each insight.
1. Ambulatory care provides a growth opportunity for some health systems
By Elizabeth Orr, Vidal Seegobin, and Paul Trigonoplos
At the conference, many health system leaders said they are evaluating growth opportunities for outpatient services.
However, results from our Strategic Planner’s Survey suggest only the biggest systems are investing in building new ambulatory facilities. That data, alongside the high cost of borrowing and the trifurcation of credit that Fitch is predicting, suggests that only a select group of health systems are currently poised to leverage ambulatory care as a growth opportunity.
Systems with limited capital will be well served by considering other ways to reach patients outside the hospital through virtual care, a better digital front door, and partnerships. The efficiency of outpatient operations and how they connect through the care continuum will affect the ROI on ambulatory investments. Buying or building ambulatory facilities does not guarantee dramatic revenue growth, and gaining ambulatory market share does not always yield improved margins.
While physician groups, together with management service organizations, are very good at optimizing care environments to generate margins (and thereby profit), most health systems use ambulatory surgery center development as a defensive market share tactic to keep patients within their system.
This approach leaves margins on the table and doesn’t solve the growth problem in the long term. Each of these ambulatory investments would do well to be evaluated on both their individual profitability and share of wallet.
On January 24 and 25, Advisory Board will convene experts from across the healthcare ecosystem to inventory the predominant growth strategies pursued by major players, explore considerations for specialty care and ambulatory network development, understand volume and site-of-care shifts, and more. Register here to join us for the Redefining Growth Virtual Summit.
Also, check out our resources to help you plan for shifts in patient utilization:
2. Rebounding patient volumes further strain capacity
By Jordan Peterson, Eliza Dailey, and Allyson Paiewonsky
Many health system leaders noted that both inpatient and outpatient volumes have surpassed pre-pandemic levels, placing further strain on workforces.
The rebound in patient volumes, coupled with an overstretched workforce, underscores the need to invest in technology to extend clinician reach, while at the same time doubling down on operational efficiency to help with things like patient access and scheduling.
For leaders looking to leverage technology and boost operational efficiency, we have a number of resources that can help:
3. Health systems aren’t specific on AI strategies
By Paul Trigonoplos and John League
According to Modern Healthcare, nearly all health systems discussed artificial intelligence (AI) at the conference, but few offered detailed implementation plans and expectations.
Over the past year, a big part of the work for Advisory Board’s digital health and health systems research teams has been to help members reframe the fear of missing out (FOMO) that many care delivery organizations have about AI.
We think AI can and will solve problems in healthcare. Every organization should at least be observing AI innovations. But we don’t believe that “the lack of detail on healthcare AI applications may signal that health systems aren’t ready to embrace the relatively untested and unregulated technology,” as Modern Healthcare reported.
The real challenge for many care delivery organizations is dealing with the pace of change — not readiness to embrace or accept it. They aren’t used to having to react to anything as fast-moving as AI’s recent evolution. If their focus for now is on low-hanging fruit, that’s completely understandable. It’s also much more important for these organizations to spend time now linking AI to their strategic goals and building out their governance structures than it is to be first in line with new applications.
Check out our top resources for health systems working to implement AI:
Digital health companies like Teladoc, R1 RCM, Veradigm, and Talkspace all spoke out about their use of generative AI.
This does not surprise us at all. In fact, we would be more surprised if digital health companies were not touting their AI capabilities. Generative AI’s flexibility and ease of use make it an accessible addition to nearly any technology solution.
However, that alone does not necessarily make the solution more valuable or useful. In fact, many organizations would do well to consider how they want to apply new AI solutions and compare those solutions to the ones that they would have used in October 2022 — before ChatGPT’s newest incarnation was unveiled. It may be that other forms of AI, predictive analytics, or robotic process automation are as effective at a better cost.
Again, we believe that AI can and will solve problems in healthcare. We just don’t think it will solve every problem in healthcare, or that every solution benefits from its inclusion.
During the conference, providers criticized insurers for the rate of denials, Modern Healthcare reports.
Denials — along with other utilization management techniques like prior authorization — continue to build tension between payers and providers, with payers emphasizing their importance for ensuring cost effective, appropriate care and providers overwhelmed by both the administrative burden and the impact of denials on their finances.
Many health plans have announced major moves to reduce prior authorizations and CMS recently announced plans to move forward with regulations to streamline the prior authorization process. However, these efforts haven’t significantly impacted providers yet.
In fact, most providers report no decrease in denials or overall administrative burden. A new report found that claims denials increased by 11.99% in the first three quarters of 2023, following similar double digit increases in 2021 and 2022.
Our team is actively researching the root cause of this discrepancy and reasons for the noted increase in denials. Stay tuned for more on improving denials performance — and the broader payer-provider relationship — in upcoming 2024 Advisory Board research.
For now, check out this case study to see how Baptist Health achieved a 0.65% denial write-off rate.
6. Insurers are prioritizing Star Ratings and risk adjustment changes
By Mallory Kirby
Various insurers and providers spoke about “the fallout from star ratings and risk adjustment changes.”
2023 presented organizations focused on MA with significant headwinds. While many insurers prioritized MA growth in recent years, leaders have increased their emphasis on quality and operational excellence to ensure financial sustainability.
With an eye on these headwinds, it makes sense that insurers are upping their game to manage Star Ratings and risk adjustment. While MA growth felt like the priority in years past, this focus on operational excellence to ensure financial sustainability has become a priority.
We’ve already seen litigation from health plans contesting the regulatory changes that impact the bottom line for many MA plans. But with more changes on the horizon — including the introduction of the Health Equity Index as a reward factor for Stars and phasing in of the new Risk Adjustment Data Validation model — plans must prioritize long-term sustainability.
Check out our latest MA research for strategies on MA coding accuracy and Star Ratings:
Pharmacy benefit manager (PBM) leaders discussed the ways they are preparing for potential congressional action, including “updating their pricing models and diversifying their revenue streams.”
Healthcare leaders should be prepared for Congress to move forward with PBM regulation in 2024. A final bill will likely include federal reporting requirements, spread pricing bans, and preferred pricing restrictions for PBMs with their own specialty pharmacy. In the short term, these regulations will likely apply to Medicare and Medicaid population benefits only, and not the commercial market.
Congress isn’t the only entity calling for change. Several states passed bills in the last year targeting PBM transparency and pricing structures. The Federal Trade Commission‘s ongoing investigation into select PBMs looks at some of the same practices Congress aims to regulate. PBM commercial clients are also applying pressure. In 2023, Blue Cross Blue Shield of California‘s (BSC) decided to outsource tasks historically performed by their PBM partner. A statement from BSC indicated the change was in part due to a desire for less complexity and more transparency.
Here’s what this means for PBMs:
Transparency is a must
The level of scrutiny on transparency will force the hand of PBMs. They will have to comply with federal and state policy change and likely give something to their commercial partners to stay competitive. We’re already seeing this unfold across some of the largest PBMs. Recently, CVS Caremarkand Express Scripts launched transparent reimbursement and pricing models for participating in-network pharmacies and plan sponsors.
While transparency requirements will be a headache for larger PBMs, they might be a real threat to smaller companies. Some small PBMs highlight transparency as their main value add. As the larger PBMs focus more on transparency, smaller PBMs who rely on transparent offerings to differentiate themselves in a crowded market may lose their main competitive edge.
PBMs will have to try new strategies to boost revenue
PBM practice of guiding prescriptions to their own specialty pharmacy or those providing more competitive pricing is a key strategy for revenue. Stricter regulations on spread pricing and patient steerage will prompt PBMs to look for additional revenue levers.
PBMs are already getting started — with Express Scripts reporting they will cut reimbursement for wholesale brand name drugs by about 10% in 2024. Other PBMs are trying to diversify their business opportunities. For example, CVS Caremark’s has offered a new TrueCost model to their clients for an additional fee. The model determines drug prices based on the net cost of drugs and clearly defined fee structures. We’re also watching growing interest in cross-benefitutilization management programs for specialty drugs. These offerings look across both medical and pharmacy benefits to ensure that the most cost-effective drug is prescribed for patients.
At the conference, retailers such as CVS, Walgreens, and Amazon doubled down on their healthcare services strategies.
Typically, disruptors do not get into care delivery because they think it will be easy. Disruptors get into care delivery because they look at what is currently available and it looks so hard — hard to access, hard to understand, and hard to pay for.
Many established players still view so-called disruptors as problematic, but we believe that most tech companies that move into healthcare are doing what they usually do — they look at incumbent approaches that make it hard for customers and stakeholders to access, understand, and pay for care, and see opportunities to use technology and innovative business models in an attempt to target these pain points.
CVS, Walgreens, and Amazon are pursuing strategies that are intended to make it more convenient for specific populations to get care. If those efforts aren’t clearly profitable, that does not mean that they will fail or that they won’t pressure legacy players to make changes to their own strategies. Other organizations don’t have to copy these disruptors (which is good because most can’t), but they must acknowledge why patient-consumers are attracted to these offerings.
For more information on how disruptors are impacting healthcare, check out these resources:
9. Financial pressures remain for many health systems
By Vidal Seegobin and Marisa Nives
Health systems are recovering from the worst financial year in recent history. While most large health systems presenting at the conference saw their finances improve in 2023, labor challenges and reimbursement pressures remain.
We would be remiss to say that hospitals aren’t working hard to improve their finances. In fact, operating margins in November 2023 broke 2%. But margins below 3% remain a challenge for long-term financial sustainability.
One of the more concerning trends is that margin growth is not tracking with a large rebound in volumes. There are number of culprits: elevated cost structures, increased patient complexity, and a reimbursement structure shifting towards government payers.
For many systems, this means they need to return to mastering the basics: Managing costs, workforce retention, and improving quality of care. While these efforts will help bridge the margin gap, the decoupling of volumes and margins means that growth for health systems can’t center on simply getting bigger to expand volumes.
Maximizing efficiency, improving access, and bending the cost curve will be the main pillars for growth and sustainability in 2024.
To learn more about what health system strategists are prioritizing in 2024, read our recent survey findings.
Also, check out our resources on external partnerships and cost-saving strategies:
During the conference, MA insurers reported seeing a spike in utilization driven by increased doctor’s visits and elective surgeries.
These increased medical expenses are putting more pressure on MA insurers’ margins, which are already facing headwinds due to CMS changes in MA risk-adjustment and Star Ratings calculations.
However, this increased utilization isn’t all bad news for insurers. Part of the increased utilization among seniors can be attributed to more preventive care, such as an uptick in RSV vaccinations.
In UnitedHealth Group‘s* Q4 earnings call, CFO John Rex noted that, “Interest in getting the shot, especially among the senior population, got some people into the doctor’s office when they hadn’t visited in a while,” which led to primary care physicians addressing other care needs. As seniors are referred to specialty care to address these needs, plans need to have strategies in place to better manage their specialist spend.
The lawsuit filed in federal court seeks to represent thousands of other UPMC employees.
Dive Brief:
A nurse is suing the University of Pittsburgh Medical Center for allegedly leveraging its monopoly control over the employment market in Pennsylvania to keep wages down and prevent workers from leaving for competitors, all while increasing their workload.
The lawsuit, filed late last week in a federal court, seeks class action status to represent other staff at the nonprofit health system. Plaintiff Victoria Ross, who worked as a nurse at UPMC Hamot in Erie, Pennsylvania, seeks damages and is asking the judge to enjoin UPMC from continuing its unfair business practices.
If granted class action status, the lawsuit could represent thousands of current and former UPMC workers, including registered nurses, medical assistants and orderlies. UPMC has denied the allegations in statements to other outlets but did not respond to a request for comment by time of publication.
Dive Insight:
UPMC has grown steadily over the past few decades into the largest private employer in Pennsylvania, employing 95,000 workers overall.
From 1996 to 2018, the system acquired 28 competing healthcare providers, greatly expanding its market power, according to the lawsuit. The acquisitions also shrunk the availability of healthcare services. Over the same period, UPMC closed four hospitals and downsized operations in three other facilities, eliminating 1,800 full- and part-time jobs, the lawsuit said.
UPMC relied on “draconian” mobility restrictions and labor law violations to lock employees into lower pay and subcompetitive working conditions, according to the 44-page complaint.
Specifically, the system enacted restraints like noncompete clauses and “do-not-rehire blacklists” to stop workers from leaving. Meanwhile, UPMC allegedly suppressed workers’ labor law rights to prevent them from unionizing.
“Each of these restraints alone is anticompetitive, but combined, their effects are magnified.UPMC wielded these restraints together as a systemic strategy to suppress worker bargaining power and wages,” the lawsuit said. “As a result, UPMC’s skilled healthcare workers were required to do more while earning less — while they were also subjected to increasingly unfair and coercive workplace conditions.”
According to the complaint, UPMC has faced 133 unfair labor practice charges since 2012, and 159 separate allegations. Roughly 74% of the violations were related to workers’ efforts to unionize, the lawsuit said.
Meanwhile, UPMC workers’ wages have fallen at a rate of 30 to 57 cents per hour on average compared to other hospital workers for every 10% increase in UPMC’s market share, said the lawsuit, citing a consultant’s economic analysis.
The lawsuit also noted that UPMC’s staffing ratios have been decreasing, even as staffing ratios on average have increased at other Pennsylvania hospitals.
The alleged labor abuses and UPMC’s market power are linked, according to the complaint.
“Had UPMC been subject to competitive market forces, it would have had to raise wages to attract more workers and provide higher staffing levels in order to avoid degrading the care it provided to its patients, and in order to prevent losing patients to competitors who could provide better quality care,” the lawsuit said.
UPMC is facing similar labor allegations. In May, two unions filed a complaint asking the Department of Justice to investigate labor abuses at the nonprofit.
Hospitals were plagued by staffing shortages during the COVID-19 pandemic. Many facilities still bemoan the difficulty of hiring and retaining full-time workers, and point to shortages (of nurses in particular) as the reason for overworked employees and poor staffing ratios.
Yet some studies suggest that’s not the case. One recent analysis of Bureau of Labor Statistics data found employment in hospitals — including registered nurses — is now slightly higher than it was at the start of the pandemic.
Despite the controversy, UPMC — which now operates 40 hospitals with annual revenue of $26 billion — continues to try and expand its market share. Late last year, the system signed a definitive agreement to acquire Washington Health Care Services, a Pennsylvania system with more than 2,000 employees and two hospitals. The deal faces pushback from local unions.
Nearly 50% of U.S. adults report struggling to keep up with the cost of healthcare, with four in ten ringing in the new year with medical debt. Medical debt is a major burden that often forces people to delay–and sometimes forgo–access to care. Not only do outstanding medical bills undermine health, but they also represent the most common type of collections, with estimates ranging anywhere from $81 to $140 billion.
With problematic hospital practices gaining national media attention – including rejecting appointments for patients with outstanding medical bills and going so far as to sue such patients – the issue of medical debt is front and center for many Americans.
A glimpse into the state of hospital billing practices
Hospital watchdogs have started collecting valuable data on hospital billing practices to inform patients about these practices and potentially put pressure on hospitals to improve.
In an effort to capture the varied nature of hospital billing and collection practices, the Lown Institute is building a database of financial assistance policies and billing and collection practices across 2,500 hospitals with the support of Arnold Ventures. Initial results are expected to be available in mid-2024 with a full report issued in 2025.
Also interested in evaluating the current state of hospital’s financial practices, in 2021, the Leapfrog Group added questions to their hospital survey around billing and collections. Researchers from the Leapfrog Group, Northwestern University Feinberg School of Medicine, and Johns Hopkins University School of Medicine published a recent analysis of this data in JAMAwhere they found that many hospitals are still falling short when it comes to billing ethics. Although the data set of 2,270 hospitals was not nationally representative, it provides an interesting glimpse into the billing practices of some U.S. hospitals.
Here are the key takeaways:
754 hospitals (33.2%) reported that they “take legal action against patients for late payment or insufficient payment of a medical bill.” Rural hospitals were 38% more likely than urban hospitals to take legal action against patients.
1,020 (44.9%) hospitals did not routinely send patients itemized bills within 30 days of final claims adjudication or date of service for patients without insurance.
125 (5.5%) hospitals did not provide access to billing representatives capable of investigating billing errors, offering price adjustment, and establishing payment plans.
Ultimately, only 38% of surveyed hospitals reported meeting all three proposed billing quality standards. Interestingly, hospitals with worse Leapfrog safety grades were less likely to meet all three billing standards compared to hospitals with better grades. It’s not clear what’s behind this pattern, but it could be an issue of capacity (hospitals with more resources and staff have an easier time abiding by safety protocol and billing standards), or potentially profiteering (hospitals more concerned with making money may be both understaffing hospitals and suing patients).
So, how can we encourage better billing practices and reduce harm caused by medical debt?
The JAMA study authors recommend standardizing measurement and reporting of hospital billing practices to “increase accountability, reduce variation in billing practices, and reduce barriers in access to care in the US.”
Some states are taking these recommendations to the policy-level, working to make healthcare more affordable for patients. To date, eight states limit medical debt interest and two states restrict credit reporting of medical debt. Current policy proposals on the docket include New York’s Senate Bill S5909B, which seeks to ban hospitals from suing patients making less than 400% of the federal poverty level (FPL).
This research is important to not only provide further insight into how hospitals financially support, or undermine, their patients, but also inform policy efforts to improve healthcare affordability and hospital accountability moving forward.
We’ve been getting more and more questions about our Fair Share Spending work that assesses whether hospitals are giving back enough in financial assistance and community health investments to justify their generous tax breaks. Two new reports—one from a United States Senate committee and one from the American Hospitals Association—delve into this space and provide very different views. Here’s what you need to know.
Sanders report calls out hospitals
Nonprofit hospitals receive an estimated $28 billion in total tax breaks each year, but give back far less in meaningful community benefits. A Lown Institute report found that nonprofit hospitals received $14 billion more in tax breaks than they spent on financial assistance and community health programs in 2020, what we call a Fair Share Deficit. About three quarters of hospitals failed to give back to their communities in amounts commensurate with their tax exemption.
In August, four US Senators sent letters to the IRS asking for clarification on how hospitals are complying with the community benefit standard. And this week majority staff of the Senate Health, Education, Labor, and Pensions (HELP) Committee, chaired by Senator Bernie Sanders, released a report showing how some large hospital systems spend little on financial assistance, despite paying their CEOs whopping 8-figure salaries.
The Sanders report highlights examples of nonprofit hospitals engaging in aggressive billing activities such as sending patients’ medical debt to collections and denying care to patients with outstanding medical debt. The report also adds a new analysis of how much the 16 largest nonprofit hospital systems spend on financial assistance (free and discounted care for patients who can’t afford to pay). They find that 12 of these systems spent less than $0.02 for each dollar in revenue on financial assistance, and six gave less than $0.01.
The report also called attention to “massive salaries” for some system CEOs, like Commonspirit whichpaid their CEO $35 million in 2021. Lown Institute data shows vast inequities at some hospitals, with some CEOs making up to 60 times what other hospital workers make.
This underinvestment in financial assistance causes real harm to patients. When hospitals charge patients for care they can’t afford, patients go into debt and often sacrifice basic needs and avoid additional care. An estimated 100 million Americans are in medical debt, and most owe at least some to hospitals.If hospitals paid off their $14 billion fair share deficit, it would be enough to erase the debt of 18 million Americans, which would be a huge step forward for fairness in the country.
AHA provides opposing view
The American Hospitals Association just published their analysis of hospital community benefit spending, finding that hospitals spent $130 billion in 2020, amounting to 15.5% of hospital expenses. That’s far more than other studiesestimate.
How can the AHA estimate be so different? The answer depends on what’s being counted as a “community benefit.” When you imagine programs to improve community health, you might think of free immunizations, health fairs and educational classes, food pantries and other nutritional assistance, investments in affordable housing, healthcare for the homeless, etc. However, spending on those types of programs made up only 1.8% of hospital expenses in 2020, according to the AHA’s report.
Financial assistance, free or discounted care for eligible patients, is another important category of community benefit spending. But the AHA report doesn’t break out this amount on its own; instead, they lump it in together with Medicaid shortfall and other unreimbursed costs of government programs.
While it’s important that hospitals care for patients with Medicaid, the “shortfall” they report does not go towards tangible community programs or into the pockets of patients. Instead, this is an accounting item related to the discounted prices in Medicaid. Hospitals offer discounts on care to insurers all the time, but these aren’t considered community benefits–why should Medicaid discounts be any different? Most hospitals already make up this shortfall from public insurers by charging private insurers more than their costs of care. The same goes for Medicare shortfall, which the AHA report also includes in their total, despite this not even being considered a “community benefit” by the IRS.
The AHA report also includes bad debt, which is money the hospital expected to get from patients but never received. The AHA argues this spending is a benefit to the community because many patients who don’t pay would have qualified for financial assistance. However, in the real world, policies on financial assistance vary widely and getting access to it can be easy or hard. If a hospital goes to great lengths to make their financial assistance application simple and accessible, and give more in assistance as a result, that should be rewarded. On the other hand, if hospitals make getting assistance hard and hound low-income patients to pay their bills or send their debt to collection agencies, that hardly seems like a “community benefit.”
What can policymakers do?
The Sanders report adds to existing evidence that nonprofit hospitals could do much more to improve community health and earn their tax-exempt status. How can federal policymakers improve transparency and incentives around the community benefit standard? See some of our key recommendations for Congress on this issue.
Private equity (PE) acquisitions in healthcare have exploded in the past decade. The number of private equity buyouts of physician practices increased six-fold from 2012-2021. At least 386 hospitals are now owned by private equity firms, comprising 30% of for-profit hospitals in the U.S.
Emerging evidence shows that the influence of private equity in healthcare demands attention. Here’s what’s in the latest research.
What is private equity?
There are a few key characteristics that differentiate private equity firms from other for-profit companies. At a 2023 event hosted by the NIHCM Foundation, Assistant Professor of Health Care Management at The Wharton School at the University of Pennsylvania Dr. Atul Gupta explained these factors:
Financial engineering. PE firms primarily use debt to finance acquisitions (that’s why they’re often known as “leveraged buyouts”). But unlike in other acquisitions, this debt is placed on the balance sheet of the the target company (ie. the physician practice or hospital).
Short-term goals. PE firms make the majority of their profits when they sell, and they look to exit within 5-8 years. That means they generally look for ways to cut costs quickly, like reducing staff or selling real estate.
Moral hazard. PE companies can make a big profit even if their target firm goes bankrupt. This is different from most investments where the success of the investor depends on how well the target company does.
The nature of private equity itself has serious implications for healthcare, in which the health of communities depends on the long-term sustainability and quality improvement of hospitals and physician practices. But are these concerns borne out in the real world?
PE acquisition and adverse events
A recent study in JAMA from researchers at Harvard Medical School and the University of Chicago analyzed patient mortality and the prevalence of adverse events at hospitals acquired by private equity compared to non-acquired hospitals. The study used Medicare claims from more than 4 million hospitalizations from 2009-2019, comparing claims at 51 PE-acquired hospitals and 249 non-acquired hospitals to serve as controls.
In-hospital mortality decreased slightly at PE-acquired hospitals compared to controls, but not 30-day mortality. This may be because the patient mix at PE-acquired hospitals shifted more toward a lower-risk group, and transfers to other acute care hospitals increased.
However, there were concerning results for patient safety. The rate of adverse events at PE-acquired hospitals compared to control hospitals increased by 25%, including a 27% increase in falls, 38% increase in central line-associated bloodstream infections (CLABSI), and double the rate of surgical site infections. The authors found the rates of CLABSI and surgical site infections at PE-acquired hospitals alarming because overall surgical volume and central line placements actually decreased.
What could be behind these higher rates of adverse events after PE acquisition? In a Washington Post op-ed, Dr. Ashish Jha, dean of the School of Public Health at Brown University, writes that it’s down to two things: staffing levels and adherence to patient safety protocols. “Both cost money, and it is not a stretch to connect cuts in staffing and a reduced focus on patient safety with an increased risk of harm for patients,” he writes.
Social responsibility impact
Private equity acquisitions may have a negative effect on patient safety, but what about social responsibility? In a recent report from PE Stakeholder on the impact of Apollo Global Management’s reach into healthcare, the authors use the Lown Institute Hospitals Index to understand hospitals owned by Apollo perform on social responsibility. Lifepoint Health, a health system owned by Apollo, was ranked 222 out of 296 systems on social responsibility nationwide. And in Virginia, North Carolina, and Arizona, some of the worst-ranked hospitals in the state for social responsibility are those owned by Lifepoint Health, the PE Stakeholder report shows.
Apollo Global Management is the second largest private equity firm in the United States, with $598 billion total assets under management, according to thereport. The PE stakeholder report outlines concerning practices by Apollo, including putting high levels of debt that lowers hospitals’ credit ratings and increases their interest rates, cutting staff and essential healthcare services, and selling off real estate for a quick buck. If we care about hospital social responsibility we should clearly be concerned about private equity acquisitions.
The bigger picture
Private equity buyouts did not come from out of nowhere, so what does this trend tell us about our healthcare system? PE acquisitions are in many ways a symptom of larger issues in healthcare, such as increasing administrative burden, tight margins, and lack of regulation on consolidation. For owners of private physician practices that face a lot of administrative work, deciding to sell to a PE firm to reduce this workload and focus on patient care (not to mention, getting a hefty payout) is a tempting proposal.
In the Washington Post, Ashish Jha describes what made his colleague decide to sell his practice to a PE firm: “The price he was getting was very good, and he was happy to outsource the headache of running the business (managing billing, making sure there was adequate coverage for nights and weekends, etc.).”
“In many ways, private equity is both a response to and an accelerator of broader health system trends – one in which consolidation is happening quickly, care is being delivered by larger and larger entities, and corporate influence is growing.”Jane M. Zhu, MD, MPP, MSHP, Associate Professor of Medicine at Oregon Health & Science University, at NIHCM Foundation Event
PE buyouts are also indicative of a larger trend, what some researchers call the “financialization” of health. As Dr. Joseph Bruch at the University of Chicago and colleagues describe in the New England Journal of Medicine, financialization refers to the “transformation of public, private, and corporate health care entities into salable and tradable assets from which the financial sector may accumulate capital.”
Financialization is a sort of merging of the financial and healthcare sectors; not only are financial actors like private equity buying up healthcare providers, but healthcare institutions are also acting like financial firms. For example, 22 health systems have investment arms, including nonprofit system Ascension, which has its own private equity operation worth $1 billion. The financialization of healthcare is also reflected in the boards of nonprofit hospitals. A 2023 study of US News top-ranked hospitals found that a plurality of their board members (44%) were from the financial sector.
What we can do about it?
What can we do to mitigate harms caused by PE acquisitions? In Health Affairs Forefront, executive director of Community Catalyst Emily Stewart and executive director of the Private Equity Stakeholder Project Jim Baker provide some policy ideas to stop the “metastasizing disease” of private equity:
Joint Liability. Currently PE firms can put all of their debt on the balance sheet of the firm they acquire, letting them off the hook for this debt and making it harder for the acquired company to succeed. “Requiring private equity firms to share in the responsibility of the debt…would prevent them from making huge profits while they are saddling hospitals and nursing homes with debts that ultimately impact worker pay and cut off care to patients,” write Stewart and Baker.
Regulate mergers. Private equity acquisitions often go under the radar because the acquisitions are small enough to not be reported to authorities. But the U.S. Federal Trade Commission could be more aggressive in evaluating mergers and buyouts by PE, as they have done recently in Texas, where a PE firm has been buying up numerous anesthesia practices.
Transparency of PE ownership. It can be hard to know when hospitals are bought by a PE firm. The Department of Health and Human Services could require disclosure of PE ownership for hospitals as they have done for nursing homes.
Remove tax loopholes. The carried interest loophole allows PE management fees to be taxed at as capital gains, which is a lower rate than corporate income. Closing this loophole would remove a big incentive that makes PE buyouts so attractive for firms.
“It is clear that the problem is not the lack of solutions but rather the lack of political will to take on private equity,” write Steward and Baker.
We need not to not only stem the tide of PE acquisitions sweeping through healthcare, but address the financialization of healthcare more broadly, to put patients back at the center of our health system.
HENRY KOTULA 