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.
Last week we met the CEO of the flagship hospital of a large academic health system. Like nearly every hospital, they are challenged in finding the staff they need to keep the hospital running at full capacity. Keeping all the hospital’s units open has been critical: “Over the past three months, we have been busting at the seams…more patients, and they’re sicker. And we’re not even really into flu season yet.” We asked what had changed, given that summer usually is lighter than other seasons for hospital admissions.
His diagnosis: local community hospitals, also strapped for staff, had begun to regularly shut down units to keep premium labor spend in check. “If they’re not running at full capacity, the patients still have to go somewhere. Given that we’re both the quaternary care provider and the community’s safety net, they’re coming downtown to us. We don’t have the luxury to shut down.” The system had to ramp up agency nursing to accommodate the demand, leading to a sharp rise in labor costs.
This CEO wasn’t backing away from the system’s mission, and vowed to expand capacity as much as they could, but felt that policymakers and payers needed to understand the dynamics in the market: “We’re getting criticized for not being able to control our costs, despite the fact that we’re absorbing what other hospitals can’t handle.” As we head into winter, flu will surely spike, and another COVID surge is possible—the hospitals at the top of the “care chain” will become even more strained in their mission to accommodate their communities’ needs.
Citi, The American Hospital Association (AHA) and the Healthcare Financial Management Association (HFMA) recently hosted the 22nd annual Not-for-Profit Healthcare Investor Conference. The event was in person, after being virtual in 2021 and canceled in 2020 due to the pandemic. Leaders from over 25 diverse health systems, as well as private equity and fund managers, presented in panel discussions and traditional formats. The following summary attempts to synthesize key themes and particularly interesting work by leading health systems. The conference title was “Refining the Now, Reshaping What’s Next.”
Is Healthcare Headed for Best of Times or Worst of Times?
Clearly the pandemic showed how essential and adaptive the US healthcare industry is, and especially how incredible healthcare workers continue to be. It also exposed and accelerated many underlying dynamics, such as impact of disparities, clinical labor shortages and supply chain challenges. On balance, at this year’s conference presenters remained quite optimistic about the future, and felt that despite enormous pain, the pandemic has helped to accelerate positive transformation across healthcare.
At the same time, almost all presenters referenced future headwinds from labor and supply inflation, concerns about increasing payment pressures, and the continued need to address disparities and social justice. That being said, there was not much disclosure at the conference about just how bad things could get in the future given accelerated operational and financial risks.
As usual at such a conference, there was much passion, creativity, sharing and celebration. While each organization and market differ somewhat, the following are common themes discussed.
Key Themes
Enormous Workforce Challenges – Every speaker referenced workforce as being THE key issue they are facing, specifically retirement, recruitment, retention, well-being and cost. We have talked for years about a future caregiver shortage, but this reality was accelerated by the pandemic. The majority of health systems saw single-digit turnover rates grow to 20-30%, and the cost of temporary labor such as traveling nurses, decimate operating margins. The many strategies discussed at the conference went beyond simply paying more to attract and retain staff. A key question is whether organization-specific strategies will be enough, or whether we need a broader societal and industry-wide collaborative effort to dramatically increase training slots for nurses and other allied health professionals.
Pandemic Stressed Organizations and Accelerated Transformation – At the 2021 virtual Citi/AHA/HFMA conference, many posited that the country was past the worst of the pandemic. (In fact this author’s summary of last year’s conference was titled “Sunrise After the Storm”). That was before the Omicron wave hit hard in Q1 2022. First-quarter 2022 operating margins were negative for most but not all healthcare systems due to cumulative impact of Omicron, temporary labor and supply costs, especially since the governmental support that partially offset those costs in 2020 ended. Organizations and their teams remain resilient, but highly stressed. Risks and challenges associated with future waves continue, as well as high reliance on foreign drug and supply manufacturing. While highly distracting and painful, many organizations discussed how the pandemic actually accelerated the pace of transformation. Necessity drives required action, and at least temporarily overcomes political and cultural barriers to change.
Growing Pursuit of Scale, Including through M&A and Partnerships – All health systems continue to be highly complex with multiple competing “big-dot” priorities. Multiple systems described their current M&A and growth strategies, pursuit of scale, as well as how these strategies were impacted by the pandemic. While the provider community remains highly unconsolidated on a national basis, mergers are more frequent, including between non-contiguous markets. Systems said that larger size, coupled with disciplined management, can reduce cost structure and improve quality and patient experience. While some pursue scale through organic growth initiatives or M&A, others described success in creating scale by leveraging partnerships with “best-in-class” niche organizations and other outside expertise.
Health Equity, Diversity and ESG as Core to Mission – Consistent with last year, most speakers discussed their efforts to address health equity, social justice, diversity, and Social Determinants of Health. Many health systems have developed robust strategies quickly as the pandemic spotlighted the impact of existing disparities. There is increasing interest in Environment, Social and Governance (ESG) initiatives, including environmental stewardship to improve the health of their communities and the world by reducing their carbon footprint and medical waste.
Patient-Centric Care Transformation Continues as a Priority – The pandemic significantly accelerated the shift to telehealth and virtual care. Many health systems are increasing their efforts to design care around the patient instead of the traditional provider centric focus. While the need for inpatient care will always continue, more care is taking place in settings closer to or at home, with digital enablement. Expansion of personalized medicine, genetic testing and therapies, and drug discovery are transforming how healthcare is provided.
Affordability and Value-Based Care – US healthcare costs as a percentage of GDP increased from 18% in 2019 to almost 20% in 2020, mainly driven by the pandemic. There remains a dichotomy between reliance on fee-for-service payment and commitment to value-based care. Although only 11% of commercial payment is currently through two-sided risk arrangements, almost all presenting health systems discussed their strategies to continue moving to value-based care and to improve affordability. Some systems are leveraging their integrated health plans and/or expanding risk-based contracts. Many are trying to reduce unnecessary care through adoption of evidence-based models and to shift care to less costly settings.
Inflation and Accelerating Financial Pressures – Health systems are facing unprecedented increases in labor and supply costs, that are likely to continue into the foreseeable future. At the same time, commercial payment rate adjustments are “sticky low” as insurers and employers push back on rate increases. Governmental payment rate increases are less than cost inflation. In addition to current cuts like the re-implementation of sequestration, longer-term cuts to provider assessment programs, provider-based billing, disproportionate share and Medicaid expansion may severely impact many organizations over time. Benefits like 340b discounts are also experiencing pressure. Post-pandemic clinical-volume trends remain unclear, and additional governmental support associated with future pandemic waves is unlikely. Adding to these challenges, declines in stock and bond prices are negatively impacting currently strong balance sheets.
Conclusion: Best or Worst of Times in Healthcare?
Time will tell, in retrospect, if the next five years will be the best of times, worst of times, or both in healthcare. Optimists point to the resiliency of healthcare organizations; enormous opportunity to reduce unnecessary cost through adoption of evidence-based care and scale; pipeline of new cures and technology; and opportunities to address social and health equity. Pessimists point to likely unprecedented financial pressures and operational challenges due to endemic labor and supply shortages; high-cost inflation vs. constrained payment rates; and future uncertainty about the pandemic, the economy and investment markets.
The situation will undoubtedly vary by market and organization as reflected in conference presentations, but all systems will likely face substantial pressure. As one speaker noted “humans have a great ability to respond to pain,” so this may be the inflection point where more healthcare systems radically accelerate necessary change to improve health, make healthcare more equitable and affordable, with higher quality and better outcomes. Some health systems are clearly doing that, with pace, nimbleness and passion. Can the industry as a whole accomplish it successfully?
Tampa, Fla.-based Shriners Hospitals for Children is transitioning its Springfield, Mass., campus into an outpatient clinic model, NBC/CW affiliate WWLP reported April 20.
Current outpatient services won’t be affected, except that ambulatory surgery will end.
The hospital gave the Massachusetts Department of Public Health a 120-day notice of the plan on March 31, Western Mass News reported April 20.
“The advancement of surgical procedures has resulted in very few patients requiring admission for inpatient pediatric services, which are the cornerstone of a hospital facility,” Shriners said in a letter obtained by Western Mass News. “Accordingly, after evaluating the needs of our patients, we have determined that Shriners Hospitals for Children may best serve our patients and fulfill our charitable mission by transitioning this location from a hospital to an outpatient clinic model.”
A group of 117 employees is suing Houston Methodist over its COVID-19 vaccination mandate for workers, ABC News reported May 29.
Houston Methodist, which comprises an academic medical center and six community hospitals, rolled out its mandatory vaccination policy March 31, setting an April 15 deadline for managers to receive at least one dose or get an exemption. More than 99 percent of the management team complied by the deadline. By June 7, all about 26,000 employees are required to be vaccinated. However, employees can receive medical or religious exemptions or a deferral if they are pregnant.
Now, 117 Houston Methodist employees have filed a lawsuit, claiming that the mandate is illegal.
The lawsuit, filed May 28 in Montgomery County District Court in Texas, alleges the hospital is “illegally requiring its employees to be injected with an experimental vaccine as a condition of employment,” according to ABC News. It specifically cites that the COVID-19 vaccines are authorized for emergency use by the FDA but have not been fully approved.
The employees allege that Houston Methodist is violating Texas public policy and the Nuremberg Code, a medical ethics code for human experimentation drafted in 1947 because of the Nuremberg trials at the end of World War II, according to the report.
The plaintiffs’ attorney, Jared Woodfill, told ABC News the health system’s mandate is meant “to promote its business and increase profits at the expense of other healthcare providers and their employees’ health. Defendants advertise to the public that they ‘require all employees and employed physicians to get a COVID-19 vaccine.’ More clearly, defendants’ employees are being forced to serve as human ‘guinea pigs’ to increase defendants’ profits.”
Houston Methodist said earlier this year that employees who do not comply with the vaccination mandate initially will have a discussion with their supervisor, then could face suspension followed by termination. The lawsuit seeks to prevent the health system from terminating unvaccinated workers.
Houston Methodist President and CEO Marc Boom, MD, shared a statement about the lawsuit with Becker’s. As of May 28, he said 99 percent of Houston Methodist’s employees have met the requirements for the vaccination mandate.
“We are extremely proud of our employees for doing the right thing and protecting our patients from this deadly virus,” Dr. Boom said. “As healthcare workers, it is our sacred obligation to do whatever we can to protect our patients, who are the most vulnerable in our community. It is our duty and our privilege.
“It is unfortunate that the few remaining employees who refuse to get vaccinated and put our patients first are responding in this way. It is legal for healthcare institutions to mandate vaccines, as we have done with the flu vaccine since 2009. The COVID-19 vaccines have proven through rigorous trials to be very safe and very effective and are not experimental. More than 165 million people in the U.S. alone have received vaccines against COVID-19,and this has resulted in the lowest numbers of infections in our country and in the Houston region in more than a year. We proudly stand by our employees and our mission to protect our patients.”
HENRY KOTULA 