Healthcare added almost 45,000 jobs in November, but many hospitals and health systems will continue to struggle to meet staffing needs, retain top executives and providers, and foster long-term pipelines for talent, Ted Chien, president and CEO of independent consulting firm SullivanCotter, wrote in a Dec. 15 article for Nasdaq.
Hospitals and health systems are living “paycheck to paycheck” and unable to make long-term investments at the height of the current workforce crisis, Mr. Chien said.
The challenge boils down to a healthcare delivery problem, not a demand problem.
Baby Boomers are the greatest source of care demand on the healthcare system, but are unable to contribute to the provider workforce in the numbers needed to achieve balance, according to Mr. Chien. To compound that issue, burnout is a major factor why “too many” frontline workers have left or plan to exit healthcare, he said.
Last year, an estimated 333,942 healthcare providers dropped out of the workforce, including about 53,000 nurse practitioners, which has led hospitals to spend more on contract labor and feeling more pressure to consolidate, according to an October report published by Definitive Healthcare.
Long term, a continued lack of healthcare workers would force hospitals to operate in a heightened crisis mode, according to Mr. Chien, depriving non-critical patients of sufficient health prevention and demanding too much of providers who are already overly taxed.
Mr. Chien highlighted three key areas to tackle the workforce crisis: smarter technology, resilient teams and excellent leadership.
Technologies that alleviate providers’ administrative burdens will be critical to reduce burnout and keep caregivers focused on patient care, while smarter tech can also forge pipelines for future providers by streamlining clinical experience operations and aligning student placements with existing opportunities.
Building resilient teams begins with competitive pay and robust benefit packages, which fosters trust and demonstrates that a hospital values its staff, according to Mr. Chen. Supporting career growth, including upskilling and redeploying staff when appropriate, empowers employees.
Lastly, capable executive leadership teams, under intense scrutiny from industry stakeholders, must clearly outline their hospital or health system’s strategy and provide the change needed to support their staff. Lack of trust in leaders drives staff out of healthcare, so it is crucial to recruit and retain “modern, strategic thinkers with depth of experience who are prepared to lead,” Mr. Chien wrote.
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 Westhead, Colin 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.
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.
Radio Advisory’s Rachel Woods sat down with Optum EVP Dr. Jim Bonnette to discuss the sustainability of modern-day hospitals and why scaling down might be the best strategy for a stable future.
Rachel Woods:When I talk about hospitals of the future, I think it’s very easy for folks to think about something that feels very futuristic, the Jetsons, Star Trek, pick your example here. But you have a very different take when it comes to the hospital, the future, and it’s one that’s perhaps a lot more streamlined than even the hospitals that we have today. Why is that your take?
Jim Bonnette: My concern about hospital future is that when people think about the technology side of it, they forget that there’s no technology that I can name that has lowered health care costs that’s been implemented in a hospital. Everything I can think of has increased costs and I don’t think that’s sustainable for the future.
And so looking at how hospitals have to function, I think the things that hospitals do that should no longer be in the hospital need to move out and they need to move out now. I think that there are a large number of procedures that could safely and easily be done in a lower cost setting, in an ASC for example, that is still done in hospitals because we still pay for them that way. I’m not sure that’s going to continue.
Woods: And to be honest, we’ve talked about that shift, I think about the outpatient shift. We’ve been talking about that for several years but you just said the change needs to happen now. Why is the impetus for this change very different today than maybe it was two, three, four, five years ago? Why is this change going to be frankly forced upon hospitals in the very near future, if not already?
Bonnette: Part of the explanation is regarding the issues that have been pushed regarding price transparency. So if employers can see the difference between the charges for an ASC and an HOPD department, which are often quite dramatic, they’re going to be looking to say to their brokers, “Well, what’s the network that involves ASCs and not hospitals?” And that data hasn’t been so easily available in the past, and I think economic times are different now.
We’re not in a hyper growth phase, we’re not where the economy’s performing super at the moment and if interest rates keep going up, things are going to slow down more. So I think employers are going to become more sensitized to prices that they haven’t been in the past. Regardless of the requirements under the Consolidated Appropriations Act, which require employers to know the costs, which they didn’t have to know before. They’re just going to more sensitive to price.
Woods: I completely agree with you by the way, that employers are a key catalyst here and we’ve certainly seen a few very active employers and some that are very passive and I too am interested to see what role they play or do they all take much more of an active role.
And I think some people would be surprised that it’s not necessarily consumers themselves that are the big catalyst for change on where they’re going to get care, how they want to receive care. It’s the employers that are going to be making those decisions as purchasers themselves.
Bonnette: I agree and they’re the ultimate payers. For most commercial insurance employers are the ultimate payers, not the insurance companies. And it’s a cost of care share for patients, but the majority of the money comes from the employers. So it’s basically cutting into their profits.
Woods: We are on the same page, but I’m going to be honest, I’m not sure that all of our listeners are right. We’re talking about why these changes could happen soon, but when I have conversations with folks, they still think about a future of a more consolidated hospital, a more outpatient focused practice is something that is coming but is still far enough in the future that there’s some time to prepare for.
I guess my question is what do you say to that pushback? And are there any inflection points that you’re watching for that would really need to hit for this kind of change to hit all hospitals, to be something that we see across the industry?
Bonnette: So when I look at hospitals in general, I don’t see them as much different than they were 20 years ago. We have talked about this movement for a long time, but hospitals are dragging their feet and realistically it’s because they still get paid the same way until we start thinking about how we pay differently or refuse to pay for certain kinds of things in a hospital setting, the inertia is such that they’re going to keep doing it.
Again, I think the push from employers and most likely the brokers are going to force this change sooner rather than later, but that’s still probably between three and five years because there’s so much inertia in health care.
On the other hand, we are hitting sort of an unsustainable phase of cost. The other thing that people don’t talk about very much that I think is important is there’s only so many dollars that are going to health care.
And if you look at the last 10 years, the growth in pharmaceutical spend has to eat into the dollars available for everybody else. So a pharmaceutical spend is growing much faster than anything else, the dollars are going to come out of somebody’s hide and then next logical target is the hospital.
Woods: And we talked last week about how slim hospital margins are, how many of them are actually negative. And what we didn’t mention that is top of mind for me after we just come out of this election is that there’s actually not a lot of appetite for the government to step in and shore up hospitals.
There’s a lot of feeling that they’ve done their due diligence, they stepped in when they needed to at the beginning of the Covid crisis and they shouldn’t need to again. That kind of savior is probably not their outside of very specific circumstances.
Bonnette: I agree. I think it’s highly unlikely that the government is going to step in to rescue hospitals. And part of that comes from the perception about pricing, which I’m sure Congress gets lots of complaints about the prices from hospitals.
And in addition, you’ll notice that the for-profit hospitals don’t have negative margins. They may not be quite as good as they were before, but they’re not negative, which tells me there’s an operational inefficiency in the not for-profit hospitals that doesn’t exist in the for-profits.
Woods: This is where I wanted to go next. So let’s say that a hospital, a health system decides the new path forward is to become smaller, to become cheaper, to become more streamlined, and to decide what specifically needs to happen in the hospital versus elsewhere in our organization.
Maybe I know where you’re going next, but do you have an example of an organization who has had this success already that we can learn from?
Bonnette: Not in the not-for-profit section, no. In the for-profits, yes, because they have already started moving into ambulatory surgery centers. So Tenet has a huge practice of ambulatory surgery centers. It generates high margins.
So, I used to run ambulatory surgery centers in a for-profit system. And so think about ASCs get paid half as much as a hospital for a procedure, and my margin on that business in those ASCs was 40% to 50%. Whereas in the hospital the margin was about 7% and so even though the total dollars were less, my margin was higher because it’s so much more efficient. And the for-profits already recognize this.
Woods: And I’m guessing you’re going to tell me you want to see not-for-profit hospitals make these moves too? Or is there a different move that they should be making?
Bonnette: No, I think they have to. I think there are things beyond just ASCs though, for example, medical patients who can be treated at home should not be in the hospital. Most not-for-profits lose money on every medical admission.
Now, when I worked for a for-profit, I didn’t lose money on every Medicare patient that was a medical patient. We had a 7% margin so it’s doable. Again, it’s efficiency of care delivery and it’s attention to detail, which sometimes in a not-for-profit friends, that just doesn’t happen.
Since the early days of the pandemic, the healthcare industry has faced seemingly insurmountable challenges to ensure access to high-quality care. While healthcare providers have performed admirably in the face of these challenges, patients are still seeing access challenges that are impacting their behaviors — which can lead to challenges in the long run.
In the 2022 BDO Patient Experience Survey, they sought to learn how patients feel about their providers and healthcare experience — from making appointments and interacting with care providers, to how patients access health insurance and who patients turn to for routine care.
From the survey of over 3,000 U.S. adults, they came across a few key takeaways:
1. Delaying routine care is the new norm
Americans face a troubling dilemma: While 92% have health insurance and 91% have a regular care provider, 58% admit to delaying routine medical care in the past 12 months.
For routine (non-emergency) care, 69% of respondents report seeing a primary care physician and 12% routinely visit primary care nurse/nurse practitioner or physician assistant. Just 9% do not have a provider for routine medical care. Our survey found that Americans use a wide variety of health insurance options with employer-sponsored insurance (32%) being the most popular, followed by Medicare (28%), Medicaid (14%) and individual private insurance (7%). While 8% report having no health insurance, even those with insurance faced significant barriers to care.
Of those who delayed seeking medical care in the past 12 months, 30% cite unaffordability due to high out-of-pocket costs and 19% say they could not afford to seek care due to a lack of insurance. In addition to the high costs of medical care, many Americans struggle with a lack of cost transparency.
2. Cost transparency is a continuing problem
Nearly a third of Americans (31%) have never tried to obtain cost estimates for medical care. When patients do not know what healthcare will cost, many avoid seeking necessary care. A critical way we can improve patient access to healthcare is to understand how patients like to obtain cost estimates.
Of patients surveyed who have sought cost estimates, most prefer to reach out to a person, with 38% preferring to contact their insurance provider and 37% opting to ask the healthcare provider’s administrative staff. On the digital side, 31% say they obtained cost estimates by looking at online patient portals and 27% look to health provider or medical facility websites.
3. Most patients experience frustration when seeking and receiving care
We know that long appointments lead times and high costs cause patients to put off care — but how do patients feel about the actual care they receive? 69% of Americans experience frustration during routine medical appointments, with having to wait for a late provider (29%), not getting enough time with the provider (22%) and having too much paperwork to fill out (21%) being the most common frustrations.
When providers make it easier for patients to receive care, their efforts are noticed. Patients say providers make care more accessible by offering telehealth appointments (32%), reaching out to proactively schedule appointments (29%), offering walk-in appointments (27%) and implementing online/self-service scheduling (23%).
Patients are facing a challenging care environment — and so are providers. Fortunately, there are ways that providers can improve access and the care experience for their patients without breaking their budgets.
Hospitals across the country are being hit with a spike in respiratory syncytial virus (RSV) and influenza cases, while still dealing with a steady flow of COVID admissions, in what’s been dubbed a “tripledemic”. The graphic above uses hospitalization data from the Centers for Disease Control and Prevention (CDC) to show that each disease has been sending similar shares of the population to hospitals across late fall, with flu hospitalizations having just overtaken COVID admissions after Thanksgiving.
These numbers reflect that we’re experiencing the worst RSV season in at least five years, and we’re set to endure the worst flu season since 2009-10.As RSV is most severe in very young children, its recent surge has revealed another capacity shortage in our nation’s hospitals: pediatric beds. From 2008 to 2018, pediatric inpatient bed counts fell by 19 percent, as hospitals shifted resources to higher revenue services.
This strategy has now come to a head in many parts of the country, as RSV has driven pediatric bed usage rates to a recent high. (The Department of Health and Human Services’ pediatric capacity data only dates back to August 2020.) With three straight weeks of declining RSV hospitalizations, there is reason to hope that pediatric care units will soon feel a reprieve. However, flu season has yet to reach its peak, prompting calls for a return to widespread mask-wearing and a renewed emphasis on flu shots, given that more than half of Americans have not yet gotten vaccinated this season.
It’s been a difficult year for the hospital workforce, both here and around the world, as the effects of the pandemic, the economy, and the legacy of lean staffing models have combined to drive up vacancy rates and threaten the sustainability of hospital operations.
Everywhere we’ve gone in the past six months, workforce issues have overshadowed every other topic: how can hospitals attract and retain staff given the environment, how can they stabilize finances in the face of 15-20 percent increases in labor costs, how can they safeguard patient care with intense turbulence in the clinical workforce?
This week we heard yet another wrinkle to this problem, one that had not occurred to us but in retrospect is obvious. A system CFO was lamenting the fact that even with big salary increases, the hospital workforce remains unstable. “It’s like we’re not even getting credit for raising base salary 15 percent across the board and giving big retention bonuses.”
As to why—it’s a timing issue. Her system, like many, delivered pay raises back in the late winter and early spring, when staff were still recovering from the Omicron surge and the urgency of reducing reliance on expensive agency labor became clear. But economy-wide inflation had only then begun to spike, and has since continued to be stuck at high levels.
Staff don’t view the earlier salary increases as a response to inflation, but as predating it—and they’re asking for still more, to offset rising prices for food, transportation and housing. “I wish we’d waited to give the pay bump,” the CFO told us. “Even though our wage increases have outpaced inflation this year, the timing of events didn’t help us at all.”
With the hospitals operating near capacity, and a severe flu season impacting both patient volumes and staff availability, her sense is that the system is back to square one on staffing—and more difficult financial decisions lie ahead.
The latest piece in the New York Times ’“Profits over Patients” series focuses on the staffing policies of Ascension, one of the nation’s largest nonprofit health systems, drawing a straight line from its cost-cutting practices over the last decade to its current staffing woes. Like previous articles in the series, the piece hones in on Ascension’s profit-seeking motives, pairing pre-pandemic accounts of Ascension executives boasting about savings from slashed labor costs with story after story of its frontline clinicians struggling to provide adequate patient care once COVID hit.
In responses included in the article, an Ascension spokesperson rejected the idea that the system’s workforce policies were responsible for its current staffing crisis, claiming that Ascension has maintained better staff-to-patient ratios than many of its peers.
The Gist: Yet again, the New York Times is shining a harsh light on a health system that has been engaged in management practices common across the industry.
While the piece omits some relevant information, such as the recent spike in labor costs, it’s useful to point out that many hospitals were so thinly staffed prior to COVID that they had virtually no slack in their labor pools, hindering their response to the crisis.
In our experience, the reasons for this have less to do with lining executives’ pockets, and more to do with the realities of dealing with a worsening payer mix and rising input costs. While future hospital workforce strategy is going to have to focus on reducing dependency on nurses—especially in the inpatient setting—any effort to that end must augment nurses with team-based care models and technology solutions, rather than pushing further on already-tight nurse-to-patient ratios.
Ann Arbor, MI-based University of Michigan Health (UM Health), part of Michigan Medicine, announced last Thursday that it will acquire Lansing, MI-based Sparrow Health System, forming a $7B health system with over 200 care sites across southeast and mid-Michigan. The acquisition will connect Sparrow’s six hospitals to UM Health’s flagship academic medical center (AMC) and sole hospital, while extending the reach of Sparrow’s 70K-member health plan, in which UM Health had previously invested. Pending regulatory approvals, the deal is expected to be completed in the first half of 2023.
The Gist: Given Sparrow’s recent financial struggles—the system announced hundreds of layoffs in September after posting a $90M loss in the first half of 2022—this was a sensible pickup for UM Health, extending its reachinto lower-cost community healthcare adjacent to its current market. Other AMCs have made similar moves in recent years, as the differentiated services of an AMC and the local patient reach of community hospitals make for a strong pairing—and this deal will go far toward advancing UM as a truly regional system.
But even if UM Health got a good deal on the acquisition, the current status of Sparrow’s infrastructure and workforce will require considerable investment (UM Health has already committed $800M in the deal’s announcement).
Recent reports have raised concerns about the financial stability of hospitals amidst disruptions caused by the COVID-19 pandemic and the looming prospect of an economic recession.
Large amounts of government relief helped prop up hospital margins in 2020 and 2021. However, industry reports suggest that the outlook for hospitals and health systems has deteriorated in 2022 due to the ongoing effects of the pandemic (such as labor shortages), decreases in government relief, and broader economic trends that have led to rising prices and investment losses. According to at least one account, 2022 may be the worst financial year for hospitals in decades. These challenges could force hospitals to take steps to increase efficiency but may also result in price increases or cost-cutting measures that impair patient access or care quality. Against this backdrop,industrystakeholders have asked Congress to provide additional fiscal relief to hospitals and to stop scheduled Medicare payment reductions.
To provide context for these policy discussions, we evaluated the financial performance of the three largest for-profit health systems in the country—HCA Healthcare (“HCA”), Tenet Healthcare Corporation (“Tenet”), and Community Health Systems (CHS)—which collectively accounted for about 8 percent of community hospital beds in the US in 2020.1 These three systems are publicly traded, meaning that we were able to acquire timely financial data about these systems through their reports to the Securities and Exchange Commission (SEC), as well as data on their stock prices (see Methods for additional details).
Operating margins among all three large health systems were positive and exceeded pre-pandemic levels for the majority of the pandemic, including most recently in the third quarter of 2022.
Operating margins reflect the profit margins earned on patient care and other operations of a given health system—such as from gift shops, parking, and cafeterias—and incorporate government COVID-19 relief funds.2 Our definition of operating margins excludes income taxes and nonrecurring revenues and expenses, such as from the sale of facilities. HCA and Tenet had positive operating margins throughout the pandemic, and CHS had positive operating margins in all but two quarters of the pandemic (with one of those quarters being at the very beginning of the pandemic). HCA has had operating margins of at least 10 percent during the majority of the pandemic (9 out of 11 quarters). In other words, HCA’s revenue from patient care and other operations exceeded operating expenses by at least 10 percent for most of the pandemic. Tenet has had operating margins of at least 5 percent for the majority of the pandemic (9 out of 11 quarters), while CHS’s operating margins have been lower (less than 5% for 9 out of 11 quarters). CHS had lower margins than the other systems before the pandemic as well.
For all three systems, operating margins have exceeded pre-pandemic (2019) levels for most of the pandemic (9 out of 11 quarters), including the last quarter of our analysis (the third quarter of 2022), despite recent decreases in operating margins. HCA and Tenet dipped below their 2019 operating margins during two quarters of 2020, and CHS fell below their 2019 operating margins during the first quarter of 2020 and the second quarter of 2022 before increasing again. As of the third quarter of 2022, operating margins were 11.4 percent for HCA, 8.4 percent for Tenet, and 1.2 percent for CHS.
Stock prices increased and then decreased during the pandemic; HCA and Tenet stock prices have increased overall since January 2020 while CHS stock prices have decreased.
Stock prices generally reflect investors’ evaluation of the future earnings potential of a given company. Stock prices increased dramatically during the first 1.5 to 2 years of the pandemic. At their heights, HCA stock prices had increased by 87.9 percent, Tenet stock prices had increased by 153.8 percent, and CHS stock prices had increased by 383.1 percent relative to January 2020.
Stock prices have also decreased substantially in 2022—in line with broader economic trends—and especially so among Tenet and CHS. As of November 8, 2022, HCA and Tenet stock prices have increased overall relative to January 2020 (by 44.6% and 12.6%, respectively).3 CHS stock prices have decreased by 11.5% since January 2020, though CHS has also experienced longstanding financial challenges thatpredate the pandemic. For purposes of comparison, HCA stock prices increased by a much greater amount than the S&P 500 during this period (44.6% versus 16.8%), while the S&P 500 slightly outperformed Tenet stock (16.8% versus 12.6%) and significantly outperformed CHS stock (16.8% versus -11.5%).
As of December 2, 2022, the majority of market analysts followed by MarketWatch were bullish on HCA and Tenet stock (with 18 buy, 3 overweight, and 5 hold recommendations for HCA stock and 14 buy, 2 overweight, and 4 hold recommendations for Tenet stock) and neutral about CHS stock (with 8 hold and 4 buy recommendations); none of the analysts rated these stocks as “sell” or “underweight.”
Discussion
Industry reports have suggested that hospitals had high margins in 2020 and 2021 but have faced significant financial challenges in 2022. Our analysis adds nuance to this discussion. So far this year, operating margins among the three largest for-profit health systems in the country have met or exceeded pre-pandemic levels. HCA and Tenet in particular have had high operating margins. CHS had negative operating margins in the second quarter of 2022, and its stock prices decreased overall from January 2020 to November 2022, but its financial challenges precede the pandemic. While some hospitals are struggling in the current environment—with high inflation and the ongoing burdens posed by COVID-19, flu, and respiratory syncytial virus (RSV)—our results indicate that the largest for-profit systems have had operating margins that exceed pre-pandemic levels.
Charlotte, NC-based Atrium Health and Downers Grove, IL- and Milwaukee, WI-based Advocate Aurora Health have formally combined to become the nation’s fifth-largest nonprofit health system. Taking the name Advocate Health, the $27B system will control 67 hospitals across six states in the Midwest and Southeast. The merger, announced in May of this year, unites the systems on even footing, with equal representation on a new board of directors, and a co-CEO arrangement for the first 18 months. The Atrium, Advocate, and Aurora brands will continue to be used in their respective local markets.
The Gist: Structuring Advocate Health as a joint operating agreement, and creating a new superstructure atop the two legacy systems, should allow the combined entity more flexibility in local decision-making, while still potentially generating cost savings from back-office efficiencies.
While we expect these kinds of mega-mergers between large regional systems to continue, it remains to be seen whether the newly combined systems can successfully create value by building larger “platforms” of care to win consumer loyalty, deploying digital capabilities, attracting talent, and becoming more desirable partners for nontraditional players.
HENRY KOTULA 