Since 2022, S&P Global Ratings has tracked an increase in violations of debt agreements as macro economic pressures and low operating margins challenge providers.
Dive Brief:
The number of nonprofit health systems violating their financial agreements with lenders or investors has increased since 2022 as providers struggle to meet debt obligations amid challenging operating conditions, according to a new report from credit agency S&P Global Ratings.
This year, nonprofits will continue to be at heightened risk of violating covenant agreements, or conditions of debt that are put in place by lenders. Recently, the most common violations among nonprofits have been debt service coverage — the amount of days-cash-on-hand to debt ratios — as the sector continues to weather high expenses and weak revenues.
Most nonprofits have recently received extra time to remedy finances in the form of waivers or forbearance agreements, but other systems have merged with more financially stable organizations to meet lending agreements, according to the report.
Dive Insight:
Financial covenant violations among nonprofits began to increase at the onset of the COVID-19 pandemic.
In the early stages of the pandemic, violations were often tied to one-time pressures on operating income, such as mandatory stoppages of services.
However, violations have since evolved and now reflect nonprofits’ struggles with ongoing labor shortages and inflationary pressures, according to the report.
Providers in the speculative rating category were more likely to have violated financial covenants over the past two years and accounted for 60% of violations in S&P’s rated universe.
UPMC is laying off about 1,000 employees in a “realignment” the nonprofit said will help it face “the realities of a still-evolving, post-pandemic marketplace.”
The layoffs reflect about 1% of UPMC’s total workforce of over 100,000 people and are primarily among nonclinical and administrative staff, Vice President and Chief Communications Officer Paul Wood said in an emailed statement. He said the system will be offering those impacted “enhanced severance pay and benefits coverage.”
The “limited reductions” will also involve the closing of open positions, the elimination of redundancies and “other actions,” Wood said.
“This realignment will not alter UPMC’s investments in our communities, facilities, commitment to clinical care and research, strategic growth or to offering those throughout our workforce industry-leading benefits,” Wood wrote in the statement.
Pittsburgh-based UPMC is an integrated health system and one of Pennsylvania’s largest employers. Its provider, insurance and other business arms logged $27.7 billion of revenue across 2023 as volumes rose and insurance membership grew.
However, the nonprofit reported a $198.3 million operating loss (-0.7% operating margin) last year as insurance claims expenses jumped 13.6% and labor costs rose 6.4%. It had posted a $162 million operating gain (0.6% operating margin) the year before.
The system did narrow its 2023 bottom line loss to $31 million thanks to its investment returns, though it had logged roughly a billion in net losses during the 2022 fiscal year.
In its year-end financial report, UPMC’s management wrote that “even with increased expenses to deliver high-quality care as a result of various economic factors, in 2023 UPMC continued to forge ahead with investments to grow access to world-class clinical care … advance healthcare excellence through quality and innovation, care for our communities, grow our insurance services and invest in our future workforce.”
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.”
Health systems are recovering from the worst financial year in recent history. We surveyed strategic planners to find out their top priorities for 2024 and where they are focusing their energy to achieve growth and sustainability. Read on to explore the top six findings from this year’s survey.
Research questions
With this survey, we sought the answers to five key questions:
How do health system margins, volumes, capital spending, and FTEs compare to 2022 levels?
How will rebounding demand impact financial performance?
How will strategic priorities change in 2024?
How will capital spending priorities change next year?
Bigger is Better for Financial Recovery
What did we find?
Hospitals are beginning to recover from the lowest financial points of 2022, where they experienced persistently negative operating margins. In 2023, the majority of respondents to our survey expected positive changes in operating margins, total margins, and capital spending. However, less than half of the sample expected increases in full-time employee (FTE) count. Even as many organizations reported progress in 2023, challenges to workforce recovery persisted.
40%
Of respondents are experiencing margins below 2022 levels
Importantly, the sample was relatively split between those who are improving financial performance and those who aren’t. While 53% of respondents projected a positive change to operating margins in 2023, 40% expected negative changes to margin.
One exception to this split is large health systems. Large health systems projected above-average recovery of FTE counts, volume, and operating margins. This will give them a higher-than-average capital spending budget.
Why does this matter?
These findings echo an industry-wide consensus on improved financial performance in 2023. However, zooming in on the data revealed that the rising tide isn’t lifting all boats. Unequal financial recovery, especially between large and small health systems, can impact the balance of independent, community, and smaller providers in a market in a few ways. Big organizations can get bigger by leveraging their financial position to acquire less resourced health systems, hospitals, or provider groups. This can be a lifeline for some providers if the larger organization has the resources to keep services running. But it can be a critical threat to other providers that cannot keep up with the increasing scale of competitors.
Variation in financial performance can also exacerbate existing inequities by widening gaps in access. A key stakeholder here is rural providers. Rural providers are particularly vulnerable to financial pressures and have faced higher rates of closure than urban hospitals. Closures and consolidation among these providers will widen healthcare deserts. Closures also have the potential to alter payer and case mix (and pressure capacity) at nearby hospitals.
Volumes are decoupled from margins
What did we find?
Positive changes to FTE counts, reduced contract labor costs, and returning demand led the majority of respondents in our survey to project organizational-wide volume growth in 2023. However, a significant portion of the sample is not successfully translating volume growth to margin recovery.
44%
Of respondents who project volume increases also predict declining margins
On one hand, 84% of our sample expected to achieve volume growth in 2023. And 38% of respondents expected 2023 volume to exceed 2022 volume by over 5%. But only 53% of respondents expected their 2023 operating margins to grow — and most of those expected that the growth would be under 5%. Over 40% of respondents that reported increases in volume simultaneously projected declining margins.
Why does this matter?
Health systems struggled to generate sufficient revenue during the pandemic because of reduced demand for profitable elective procedures. It is troubling that despite significant projected returns to inpatient and outpatient volumes, these volumes are failing to pull their weight in margin contribution. This is happening in the backdrop of continued outpatient migration that is placing downward pressure on profitable inpatient volumes.
There are a variety of factors contributing to this phenomenon. Significant inflationary pressures on supplies and drugs have driven up the cost of providing care. Delays in patient discharge to post-acute settings further exacerbate this issue, despite shrinking contract labor costs. Reimbursements have not yet caught up to these costs, and several systems report facing increased denials and delays in reimbursement for care. However, there are also internal factors to consider. Strategists from our study believe there are outsized opportunities to make improvements in clinical operational efficiency — especially in care variation reduction, operating room scheduling, and inpatient management for complex patients.
Strategists look to technology to stretch capital budgets
What did we find?
Capital budgets will improve in 2024, albeit modestly. Sixty-three percent of respondents expect to increase expenditures, but only a quarter anticipate an increase of 6% or more. With smaller budget increases, only some priorities will get funded, and strategists will have to pick and choose.
Respondents were consistent on their top priority. Investments in IT and digital health remained the number one priority in both 2022 and 2023. Other priorities shifted. Spending on areas core to operations, like facility maintenance and medical equipment, increased in importance. Interest in funding for new ambulatory facilities saw the biggest change, falling down two places.
Why does this matter?
Capital budgets for health systems may be increasing, but not enough. With the high cost of borrowing and continued uncertainty, health systems still face a constrained environment. Strategists are looking to get the biggest bang for their buck. Technology investments are a way to do that. Digital solutions promise high impact without the expense or risk of other moves, like building new facilities, which is why strategists continue to prioritize spending on technology.
The value proposition of investing in technology has changed with recent advances in artificial intelligence (AI), and our respondents expressed a high level of interest in AI solutions. New applications of AI in healthcare offer greater efficiencies across workforce, clinical and administrative operations, and patient engagement — all areas of key concern for any health system today.
Building is reserved for those with the largest budgets
What did we find?
Another way to stretch capital budgets is investing in facility improvements rather than new buildings. This allows health systems to minimize investment size and risk. Our survey found that, in general, strategists are prioritizing capital spending on repairs and renovation while deprioritizing building new ambulatory facilities.
When the responses to our survey are broken out by organization type, a different story emerges. The largest health systems are spending in ways other systems are not. Systems with six or more hospitals are increasing their overall capital expenditures and are planning to invest in new facilities. In contrast, other systems are not increasing their overall budgets and decreasing investments in new facilities.
AMCs are the only exception. While they are decreasing their overall budget, they are increasing their spending on new inpatient facilities.
Why does this matter?
Health systems seek to attract patients with new facilities — but only the biggest systems can invest in building outpatient and inpatient facilities. The high ranking of repairs in overall capital expenditure priorities suggests that all systems are trying to compete by maintaining or improving their current facilities. Will renovations be enough in the face of expanded building from better financed systems? The urgency to respond to the pandemic-accelerated outpatient shift means that building decisions made today, especially in outpatient facilities, could affect competition for years to come. And our survey responses suggest that only the largest health system will get the important first-mover advantage in this space.
AMCs are taking a different tack in the face of tight budgets and increased competition. Instead of trying to compete across the board, AMCs are marshaling resources for redeployment toward inpatient facilities. This aligns with their core identity as a higher acuity and specialty care providers.
Partnerships and affiliations offer potential solutions for health systems that lack the resources for building new facilities. Health systems use partnerships to trade volumes based on complexity. Partnerships can help some health systems to protect local volumes while still offering appropriate acute care at their partner organization. In addition, partnerships help health systems capture more of the patient journey through shared referrals. In both of these cases, partnerships or affiliations mitigate the need to build new inpatient or outpatient facilities to keep patients.
Eighty percent of respondents to our survey continued to lose patient volumes in 2023. Despite this threat to traditional revenue, health systems are turning from revenue diversification practices. Respondents were less likely to operate an innovation center or invest in early-stage companies in 2023. Strategists also reported notably less participation in downside risk arrangements, with a 27% decline from 2022 to 2023.
Why does this matter?
The retreat from revenue diversification and risk arrangements suggests that health systems have little appetite for financial uncertainty. Health systems are focusing on financial stabilization in the short term and forgoing practices that could benefit them, and their patients, in the long term.
Strategists should be cautious of this approach. Retrenchment on innovation and value-based care will hold health systems back as they confront ongoing disruption. New models of care, patient engagement, and payment will be necessary to stabilize operations and finances. Turning from these programs to save money now risks costing health systems in the future.
Market intelligence and strategic planning are essential for health systems as they navigate these decisions. Holding back on initiatives or pursuing them in resource-constrained environments is easier when you have a clear course for the future and can limit reactionary cuts.
Advisory Board’s long-standing research on developing strategy suggests five principles for focused strategy development:
Strategic plans should confront complexity. Sift through potential future market disruptions and opportunities to establish a handful of governing market assumptions to guide strategy.
Ground strategy development in answers to a handful of questions regarding future competitive advantage. Ask yourself: What will it take to become the provider of choice?
Communicate overarching strategy with a clear, coherent statement that communicates your overall health system identity.
A strategic vision should be supported by a limited number of directly relevant priorities. Resist the temptation to fill out “pro forma” strategic plan.
Pair strategic priorities with detailed execution plans, including initiative roadmaps and clear lines of accountability.
Strategists align on a strategic vision to go back to basics
What did we find?
Despite uneven recovery, health systems widely agree on which strategic initiatives they will focus more on, and which they will focus less on. Health system leaders are focusing their attention on core operations — margins, quality, and workforce — the basics of system success. They aim to achieve this mandate in three ways. First, through improving efficiency in care delivery and supply chain. Second, by transforming key elements of the care delivery system. And lastly, through leveraging technology and the virtual environment to expand job flexibility and reduce administrative burden.
Health systems in our survey are least likely to take drastic steps like cutting pay or expensive steps like making acquisitions. But they’re also not looking to downsize; divesting and merging is off the table for most organizations going into 2024.
Why does this matter?
The strategic priorities healthcare leaders are working toward are necessary but certainly not easy. These priorities reflect the key challenges for a health system — margins, quality, and workforce. Luckily, most of strategists’ top priorities hold promise for addressing all three areas.
This triple mandate of improving margins, quality, and workforce seems simple in theory but is hard to get right in practice. Integrating all three core dimensions into the rollout of a strategic initiative will amplify that initiative’s success. But, neglecting one dimension can diminish returns. For example, focusing on operational efficiency to increase margins is important, but it’ll be even more effective if efforts also seek to improve quality. It may be less effective if you fail to consider clinicians’ workflow.
Health systems that can return to the basics, and master them, are setting a strong foundation for future growth. This growth will be much more difficult to attain without getting your house in order first.
Vendors and other health system partners should understand that systems are looking to ace the basics, not reinvent the wheel. Vendors should ensure their products have a clear and provable return on investment and can map to health systems’ strategic priorities. Some key solutions health systems will be looking for to meet these priorities are enhanced, easy-to-follow data tools for clinical operations, supply chain and logistics, and quality. Health systems will also be interested in tools that easily integrate into provider workflow, like SDOH screening and resources or ambient listening scribes.
Going back to basics
Craft your strategy
1. Rebuild your workforce.
One important link to recovery of volume is FTE count. Systems that expect positive changes in FTEs overwhelmingly project positive changes in volume. But, on average, less than half of systems expected FTE growth in 2023. Meanwhile, high turnover, churn, and early retirement has contributed to poor care team communication and a growing experience-complexity gap. Prioritize rebuilding your workforce with these steps:
Recover: Ensure staff recover from pandemic-era experiences by investing in workforce well-being. Audit existing wellness initiatives to maximize programs that work well, and rethink those that aren’t heavily utilized.
Recruit: Compete by addressing what the next generation of clinicians want from employment: autonomy, flexibility, benefits, and diversity, equity, and inclusion (DEI). Keep up to date with workforce trends for key roles such as advance practice providers, nurses, and physicians in your market to avoid blind spots.
Retain: Support young and entry-level staff early and often while ensuring tenured staff feel valued and are given priority access to new workforce arrangements like hybrid and gig work. Utilize virtual inpatient nurses and virtual hubs to maintain experienced staff who may otherwise retire. Prioritize technologies that reduce the burden on staff, rather than creating another box to check, like ambient listening or asynchronous questionnaires.
2. Become the provider of choice with patient-centric care.
Becoming the provider of choice is crucial not only for returning to financial stability, but also for sustained growth. To become the provider of choice in 2024, systems must address faltering consumer perspectives with a patient-centric approach. Keep in mind that our first set of recommendations around workforce recovery are precursors to improving patient-centered care. Here are two key areas to focus on:
Front door: Ensure a multimodal front door strategy. This could be accomplished through partnership or ownership but should include assets like urgent care/extended hour appointments, community education and engagement, and a good digital experience.
Social determinants of health: A key aspect of patient-centered care is addressing the social needs of patients. Our survey found that addressing SDOH was the second highest strategic priority in 2023. Set up a plan to integrate SDOH screenings early on in patient contact. Then, work with local organizations and/or build out key services within your system to address social needs that appear most frequently in your population. Finally, your workforce DEI strategy should focus on diversity in clinical and leadership staff, as well as teaching clinicians how to practice with cultural humility.
3. Recouple volume and margins.
The increasingly decoupled relationship between volume and margins should be a concern for all strategists. There are three parts to improving volume related margins: increasing volume for high-revenue procedures, managing costs, and improving clinical operational efficiency.
Revenue growth: Craft a response to out-of-market travel for surgery. In many markets, the pool of lucrative inpatient surgical volumes is shrinking. Health systems are looking to new markets to attract patients who are willing to travel for greater access and quality. Read our findings to learn more about what you need to attract and/or defend patient volumes from out-of-market travel.
Cost reduction: Although there are many paths health systems can take to manage costs, focusing on tactics which are the most likely to result in fast returns and higher, more sustainable savings, will be key. Some tactics health systems can deploy include preventing unnecessary surgical supply waste, making employees accountable for their health costs, and reinforcing nurse-led sepsis protocols.
Clinical operational efficiency: The number one strategic priority in 2023, according to our survey, was clinical operational efficiency, no doubt in response to faltering margins. Within this area, the top place for improvement was care variation reduction (CVR). Ensure you’re making the most out of CVR efforts by effectively prioritizing where to spend your time. Improve operational efficiency outside of CVR by improving OR efficiency and developing protocols for complex inpatient management.
The nation’s largest for-profit hospital systems by revenue — HCA Healthcare, Community Health Systems, Tenet Healthcare and Universal Health Services —reported mixed results during the third quarter of 2023, despite announcing strong demand for patient services.
With the exception of HCA, each operator reported lower profits in the third quarter compared with the same period last year. Health systems CHS and HCA reported earnings that fell short of Wall Street expectations for revenue.
Major operators posted declining profits in the third quarter compared to the same period in 2022
Q3 net income in millions, by operator
Health System
Profit
Percent Change YOY
Community Health Systems
$−91
−117%
HCA Healthcare
$1,800
59%
Tenet Healthcare
$101
−23%
Universal Health Services
$167
−9%
Admissions rose across the board compared to the same period last year: Same facility equivalent admissions rose4.1% at HCA , 3.7% at CHS and 0.6% at Tenet,and adjusted admissions at acute hospitals rose 6.8% at UHS.
Although the for-profit operators began cost containment strategies earlier this year — recognizing that rising expenses, including costs of salary and wages, were pressuring hospital profitability post-pandemic — expenses also rose, with growth in salaries and benefit costs once again pressuring most operators’ revenue.
Hospital operators faced new challenges this quarter, executives said, including increased physician staffing fees and what hospital executives characterizedas aggressive behavior from payers.
Hospitals highlight rising physician fees
Rising physician fees were a topic of concern on earnings calls this quarter, with executives reporting fees that were 15% to 40% higher compared with the same period last year.
Third-party staffing firms charge hospitals physician fees, a percentage of physicians’ salaries, on top of the salaries themselves. Physician fees are separate but related to contract labor costs, which plagued hospitals during the COVID-19 pandemic as they attempted to stem staffing shortages.
Hospitals typically contract specialty hospitalist roles — like anesthesiologists, radiologists and emergency department physicians — and incur associated staffing costs.
Physician fees at HCA, the country’s largest hospital chain, grew 20% year over year in the third quarter, according to CFO Bill Rutherford.
Physician fees were up by as much as 40% at UHS — making up 7.6% of totaloperating expenses this quarter and surpassing the company’s initial projections for the year,CEOMarc Miller said during an earnings call. Historically, physician fees accounted for about 6% of UHS’ total expenses.
Likewise, Franklin, Tennessee-based CHS attributed some of its third-quarter losses to “increased rates for outsourced medical specialists,” according to a release on the operator’s earnings.
Tenet CEO Saum Sutaria noted that physician fee expenses were up 15% year over year, but said on an earnings call that the operator had spied rising physician fees during the pandemic, and had begun efforts to contain costs — including restructuring staffing contracts and in-sourcing critical physician services.
As a result, physician fee costs at Tenet had remained “relatively flat” from the second quarter to the third quarter this year, according to the Sutaria.
Physician fee increases may be a delayed consequence of the No Surprises Act, which went into effect in January of last year, experts say.
On an earnings call, UHS CFO Steve Filton said “the industry has largely had to reset itself” in wake of the law. Tenet and CHS executives echoed the sentiment, noting that the law had disrupted staffing firms’ business models and complicated payment processes.
The No Surprises Act prevents patients who unknowingly receive out-of-network care at an in-network facility from being stuck with unexpectedbills. However, the act has had unintended ripple effects, experts say.
Staffing firms and hospitals allege that the arbitration process created to resolve disputes between providers and insurers is unbalanced and incentivizes insurers to withhold reimbursement for care. In an August survey, over half of doctors reported insurers have either ignored decisions made by arbitrators or declined to pay claims in full.
In other cases, a backlog prevents claims from being adjudicated at all. Last year, the CMS found the federal arbitration process had only reached a payment determination in 15% of cases. Federal regulators have been forced to pause and restart the arbitration process multiple times in the wake of federal court decisions challenging arbitration methodology.
Although the act went into effect more than a year ago, many hospitals are just now feeling the strain, saidLoren Adler, associate director at the Brookings Institute’s Schaeffer Initiative on Health Policy.
That’s because most insurers, hospitals and medical groups operate on three-year contracts, according to Adler. Staffing firms, which have struggled since the No Surprises Act was enacted, have passed on costs to hospitals as contracts come up for negotiation and insurers charge firms higher rates.
In the face of rising costs, some hospitals may opt to follow Tenet and CHS and in-source physicians — either to retain contracts with physicians who worked with firms that have folded or because the passing of the No Surprises Act makes outsourcing less attractive.
CHS hired 500 physicians from staffing firm American Physician Partners after the company collapsed in July. CFO Kevin Hammons said on an earnings call that hiring the physicians had saved CHS “approximately $4 million sequentially compared to the subsidy payments previously paid” to the staffing firm.
However, in-sourcing may not be an effective cost containment strategy for all operators. HCA reported it was hemorrhaging money following its first-quarter majority stake purchase of staffing firm Valesco, which brought about 5,000 physicians onto its payroll. HCA CEO Sam Hazen said the system expects to lose $50 million per quarter on the venture through 2024, citing low payments as the primary issue.
Payer problems
Hospital executives also tied quarterly losses to aggressive behavior from insurers during third-quarter earnings calls.
UHS executives said payers were improperly denying high volumes of claims and disrupting payments to its hospitals, with UHS’ Miller characterizing insurers as “increasingly aggressive” during the third quarter. Though insurers had reduced their number of claims audits, denials and patient status changes during the early stages of the pandemic, payers were increasing denials and reviews, according to UHS’ Filton.
Tenet’s Sutaria said that claims denials were “excessive and inappropriate” during a third-quarter earnings call, adding that the hospital system was working to push back on the volume of claims denials.
Their number one strategy is to provide “excellent documentation” to refute denials quickly, Sutaria said.
Still, excessive claims denials can drive up administrative costs for hospitals, according to Matthew Bates, managing director at Kaufman Hall.
“That denial creates a lot more work, because now I have to deal with that bill two, three, four times to get through the denial process,” Bates said. “It starts to rapidly eat into the operating margins… [becoming] both a cashflow problem and an administrative costs burden.”
Executives across the four for-profit operators said they planned to negotiate with insurers to receive more favorable rates and limit the number of denials in subsequent quarters.
HCA’s Hazen said that it was important for HCA to maintain its in-network status with insurers “to avoid the surprise billing and that [independent dispute resolution] process,” but that it would work with its payers to get “reasonable rates” going forward.
West Reading, Pa.-based Tower Health continues to make progress on its performance improvement plan as its operating margin for the three months ended Sept. 30 rose to -4.2% from -8% during the same period in 2022. Its operating cash flow margin also increased from -0.9% to 2.3%.
During the first quarter of fiscal 2024, the three months ending Sept. 30, revenue decreased 2.9% year over year to $457.4 million. Expenses decreased 6.4% to $476.5 million.
Tower’s operating loss for the period was $19.1 million, compared with a loss of $37.6 million for the prior-year period.
As of Sept. 30, total balance sheet unrestricted cash and board-designated investment funds for capital improvements totalled $154 million — a decrease of $54 million from June 30, 2023. The main factors for the decrease were $15 million of debt service payments, physician incentive compensation payments of $9 million, capital expenditures of $6 million, negative changes in working capital of $32 million, partially offset by EBITDA of $10 million.
Total days of cash on hand for the system was 30 on Sept. 30.
After including the performance of its investment portfolio and other nonoperating items, the health system ended the three-month period with a net loss of $20.9 million, compared with a net loss of $37.6 million for the same period in 2022.
Health systems are increasingly focused on their regional structures, reorganizing leadership to provide oversight most effectively. On Oct. 23, those changes hit the corner office.
Providence is phasing out the CEO role at two of its California hospitals, the Renton, Wash.-based system confirmed to Becker’s. One year ago, Providence’s Northern and Southern California regions came together to create a sole South Division. Now, a single chief executive — Garry Olney, DNP, RN — will oversee operations in the Northern California service area, replacing the CEOs of Napa-based Queen of the Valley Medical Center and Santa Rosa (Calif.) Memorial Hospital.
“This was part of a systemwide restructuring to streamline executive roles so we could preserve more resources for front-line caregivers and become nimbler and more responsive to the times,” the system said in a statement.
Providence isn’t alone in its desire to streamline leadership. Corewell Health East — part of Corewell Health, which has dual headquarters in Grand Rapids and Southfield, Mich. — made seven executive changes within the region, the system confirmed to Becker’s on Oct. 23. The senior vice president of medical group operations was let go, along with two hospital presidents. The region’s COO of acute and post-acute care, Nancy Susick, RN, will take over one hospital in addition to her current duties; the second hospital will be overseen in a dual capacity by Derk Pronger, who already helms another hospital in the region.
The word “streamline” was also used by Chicago-based CommonSpirit, which recently shared plans to lighten its regional load.
“We are also making further changes to streamline the organization, including the consolidation of our operating divisions into five regions from eight, clearly define our market-based focus and strategies and continue to refine our operating model,” CFO Dan Morissette said on an Oct. 12 investor call.
Regional revamps don’t always lead to cuts or “consolidation.” In some cases, they lead to the creation of new roles. Atlanta-based Emory Healthcare recently split its 10 hospitals into two divisions — one for regional hospitals, one for university hospitals — and tapped a president to helm each. Plus, Tampa (Fla.) General Hospital named eight new executives in a C-suite overhaul following the adoption of three Bravera Health hospitals into TGH North.
If the healthcare leaders plan to confront looming challenges, they need to be comfortable with “innovating and disrupting [themselves],” John Couris, president and CEO of Tampa General, told Becker’s.
“The way I would describe this is the last five years was all about foundational work,” Mr. Couris said. “The next five years and beyond is all about transformational work. So we’re shifting from the foundational activity to the transformational activity, and we need an organizational structure and a leadership team that reflects that journey. That’s why we made the changes.”
Hospitals and health systems are seeing some signs of stabilization in 2023 following an extremely difficult year in 2022. Workforce-related challenges persist, however, keeping costs high and contributing to issues with patient access to care. The percentage of respondents who report that they have run at less than full capacity at some time over the past year because of staffing shortages, for example, remains at 66%, unchanged from last year’s State of Healthcare Performance Improvement report. A solid majority of respondents (63%) are struggling to meet demand within their physician enterprise, with patient concerns or complaints about access to physician clinics increasing at approximately one-third (32%) of respondent organizations.
Most organizations are pursuing multiple strategies to recruit and retain staff. They recognize, however, that this is an issue that will take years to resolve—especially with respect to nursing staff—as an older generation of talent moves toward retirement and current educational pipelines fail to generate an adequate flow of new talent. One bright spot is utilization of contract labor, which is decreasing at almost two-thirds (60%) of respondent organizations.
Many of the organizations we interviewed have recovered from a year of negative or breakeven operating margins. But most foresee a slow climb back to the 3% to 4% operating margins that help ensure long-term sustainability, with adequate resources to make needed investments for the future. Difficulties with financial performance are reflected in the relatively high percentage of respondents (24%) who report that their organization has faced challenges with respect to debt covenants over the past year, and the even higher percentage (34%) who foresee challenges over the coming year. Interviews confirmed that some of these challenges were “near misses,” not an actual breach of covenants, but hitting key metrics such as days cash on hand and debt service coverage ratios remains a concern.
As in last year’s survey, an increased rate of claims denials has had the most significant impact on revenue cycle over the past year. Interviewees confirm that this is an issue across health plans, but it seems particularly acute in markets with a higher penetration of Medicare Advantage plans. A significant percentage of respondents also report a lower percentage of commercially insured patients (52%), an increase in bad debt and uncompensated care (50%), and a higher percentage of Medicaid patients (47%).
Supply chain issues are concentrated largely in distribution delays and raw product and sourcing availability. These issues are sometimes connected when difficulties sourcing raw materials result in distribution delays. The most common measures organizations are taking to mitigate these issues are defining approved vendor product substitutes (82%) and increasing inventory levels (57%). Also, as care delivery continues to migrate to outpatient settings, organizations are working to standardize supplies across their non-acute settings and align acute and non-acute ordering to the extent possible to secure volume discounts.
Survey Highlights
98% of respondents are pursuing one or more recruitment and retention strategies
90%have raised starting salaries or the minimum wage
73%report an increased rate of claims denials
71% are encountering distribution delays in their supply chain
70%are boarding patients in the emergency department or post-anesthesia care unit because of a lack of staffing or bed capacity
66% report that staffing shortages have required their organization to run at less than full capacity at some time over the past year
63% are struggling to meet demand for patient access to their physician enterprise
60% see decreasing utilization of contract labor at their organization
44%report that inpatient volumes remain below pre-pandemic levels
32% say that patients concerns or complaints about access to their physician enterprise are increasing
24%have encountered debt covenant challenges during the past 12 months
None of our respondents believe that their organization has fully optimized its use of the automation technologies in which it has already invested
While hospital operating margins remain below historical levels, overall conditions have stabilized in 2023. The median Kaufman Hall Calendar Year-To-Date Operating Margin Index reflecting actual margins was 1.1% in August.
The September issue of the National Hospital Flash Report covers these and other key performance metrics.
HENRY KOTULA 