On today’s episode of Gist Healthcare Daily, Kaufman Hall co-founder and Chair Ken Kaufman joins the podcast to discuss his recent blog that examines Ford Motor Company’s decision to stop producing internal-combustion sedans, and talk about whether there are parallels for health system leaders to ponder about whether their traditional strategies are beginning to age out.
Labor shortages have been a continuing obstacle for hospitals and health systems, after the coronavirus pandemic spurred industry job reductions and clinicians left the field due to burnout. Temporary nurse staffing agencies swooped in to ease labor shortages, with hospital systems paying higher rates to temp agencies to staff their floors.
Hospitals ended last year with negative margins, driven by labor expenses that rose as much as 36% compared with pre-pandemic levels. The average weekly rate for travel nurses reached $3,900 in January 2022, according to staffing platform Vivian Health, prompting lawmakers and industry groups to ask the White House to investigate nurse staffing agencies.
But hospitals may be catching a break from labor and temporary staffing pressures. Data from private healthcare staffers, including Aya Healthcare and Fastaff, show that demand for temporary nurses declined by 2.2%, with median bill rates dropping 2.9% week over week, according to the Jefferies report.
The accelerated decline in demand and bill rates could be a sign of labor woes easing, especially for nurse-dependent hospital operators like HCA Healthcare, according to the report.
“As we see order and bill rate data for temp nurses decline, we are gaining optimism that nurse-dependent healthcare providers such as hospitals [HCA Healthcare, Community Health Systems, Tenent Healthcare] and post-acute players [Amedisys, Encompass Health, Enhabit] will begin to see labor headwinds ease, which should help these companies achieve or exceed earnings goals this year,” the report said.
While labor shortages have battered HCA Healthcare and CHS, both operators suggested in recent earnings reports that labor pains could be easing. HCA reported in January that it was decreasing its nursing turnover and CHS reported in October that it had made progress in reducing its contract labor expenses.
Hospitals continue gaining jobs
Reports have showed that labor shortages appear to be easing this year, with a December report from Fitch Ratings noting that staffing shortages at nonprofit hospitals appeared to be incrementally waning.
Context:
Value-based care is widely accepted as key to the health system’s transformation. Changing provider incentives from volume to value and engaging provider organizations in risk-sharing models with payers (including Medicare) are means to that end. But implementation vis a vis value-based models has produced mixed results thus far and current financial pressures facing providers (esp. hospitals) have stymied momentum in pursuit of value in healthcare. Last week, CMS indicated it intends to continue its value-based insurance design (VBID) model which targets insurers, and last month announced continued commitment to its bundled payment and ACO models. But they’re considered ‘works in process’ that, to date, have attracted early adopters with mixed results.
Questions:
What’s ahead for the value agenda in healthcare? Is it here to stay or will something replace it? How is your organization adapting?
Key takeaways from Discussion:
My take:
Hospitals, health systems, medical groups and other traditional providers are limited in their abilities to respond to opportunities in AI and value-based models by near-term operating margin pressures and uncertainty about their finances longer-term. Risk avoidance is reality in most settings, so investments in AI-solutions and value-based models must produce near-term ROI: that’s reality. Outsiders that operate in less-regulated environments with unlimited access to capital are advantaged in accessing and deploying AI and value-based model pursuits. Thus, partnerships with these may be necessary for most traditional providers.
AI is tricky for providers:
Integration of AI capabilities in hospitals and medical practices will produce added regulator and media scrutiny about data security and added concern for operational transparency. It will also prompt added tension in the workforce as new operational protocols are implemented and budgets adapted. And cooperation with EHR platforms—EPIC, Meditech, Cerner et al—will be essential to implementation. But many think that unlikely without ‘forced’ compliance.
Value-based models:
Participation in value-based models is a strategic imperative: in the near term, it adds competencies necessary to network design and performance monitoring, care coordination, risk and data management. Longer-term, it enables contracting directly with commercial payers and employers—Medicare alone will not drive the value-imperative in US healthcare successfully. Self-insured employers, private health insurers, and consumers will intensify pressure on providers for appropriate utilization, lower costs, transparent pricing, guaranteed outcome and satisfying user experiences. They’ll force consumerism and value into the system and reward those that respond effectively.
The immediate implications for all traditional provider organizations, especially not-for-profit health systems like the 11 who participated in Chicago last week, are 4:
Generative AI and value-based models are the two most compelling changes in U.S. healthcare’s future. They’re not a matter of IF, but how and how soon.
https://mailchi.mp/c9e26ad7702a/the-weekly-gist-april-7-2023?e=d1e747d2d8
Constrained by the Affordable Care Act’s medical loss ratio (MLR) requirement that health insurers must spend 80-85 percent of their revenue on medical services, payers have been pivoting to providing care, managing pharmacy benefits, and supporting other healthcare services, in order to fuel earnings growth. The graphic above shows why UnitedHealth Group (UHG) is seen as the health insurance industry’s most noteworthy model of this vertical integration strategy, thanks to its flourishing Optum division.
Optum is now as big a profit driver for UHG as its UnitedHealthcare insurance arm, with each bringing in $14B of net earnings in 2022.
Optum’s 7.7 percent operating margin is almost two points higher than UnitedHealthcare’s, which owes much of its revenue and earnings growth to its expanding Medicare Advantage (MA) business. As both sides of UHG’s business have grown, so too have intercompany eliminations, which have increased by over 80 percent in five years, reaching $108 billion in 2022. These payments from one division of UHG to another—mostly from the insurance business to the provider arm—allow the company to shift profit-capped insurance revenues into other divisions, driving increased profitability for the overall enterprise.
It will be worth watching the trend in intercompany eliminations at other vertically integrated insurance companies, with an eye for whether integration truly results in lower cost of care for patients or just higher margins for the insurers.
Renton, Wash.-based Providence suffered its third credit downgrade in less than three weeks when Moody’s revised a rating on bonds the 51-hospital system holds to “A2” from “A1.”
Such a rating reflects an expectation margins will remain weak in 2023. The outlook is negative.
The move follows similar actions by Fitch Ratings March 17 and S&P Global March 21 amid an anticipated multiyear process of financial recovery.
Capital expenditure for Providence is expected to be restricted after the completion of a couple of major projects this year to effect “margin recovery,” Moody’s said.
Providence reported a $1.7 billion operating loss in 2022.
Tacoma, Wash.-based Virginia Mason Franciscan Health has laid off more than 300 administrative employees, the Puget Sound Business Journal reported April 4.
The job cuts affected less than 2 percent of the health system’s 19,000-plus workforce.
“Like many healthcare providers in the Pacific Northwest, we are experiencing tremendous financial strain caused by a number of factors, including lasting impacts from the COVID-19 pandemic, inflation and labor shortages,” Kelly Campbell, vice president of marketing and communications, told the Journal.
Affected employees will be eligible for career transition assistance, extended benefits and severance programs, according to the report.
Virginia Mason, which includes 10 hospitals and nearly 300 care sites, said it is focused on improving efficiencies and reducing costs in response to financial headwinds.
In 2022, Washington hospitals reported a total net loss of more than $2.7 billion, compared to a $1.2 billion loss in 2021, while their net operating loss was $2.1 billion, up from $742 million in 2021.
“We’re very concerned that access to this specialized care, the highest level of care, and in many cases, the life-saving care is threatened by unsustainable financial losses as hospitals are resorting to extraordinary means to close the gaps in their budgets,” Cassie Sauer, president and CEO of the Washington State Hospital Association, said in a March 21 media briefing.
I have been both a frontline officer and a staff officer at
a health system. I started a solo practice in 1977 and
cared for my rheumatology, internal medicine and
geriatrics patients in inpatient and outpatient settings.
After 23 years in my solo practice, I served 18 years as
President and CEO of a profitable, CMS 5-star, 715-bed,
two-hospital healthcare system.
From 2015 to 2020, our health system team added
0.6 years of healthy life expectancy for 400,000 folks
across the socioeconomic spectrum. We simultaneously
decreased healthcare costs 54% for 6,000 colleagues and
family members. With our mentoring, four other large,
self-insured organizations enjoyed similar measurable
results. We wanted to put our healthcare system out of
business. Who wants to spend a night in a hospital?
During the frontline part of my career, I had the privilege
of “Being in the Room Where It Happens,” be it the
examination room at the start of a patient encounter, or
at the end of life providing comfort and consoling family.
Subsequently, I sat at the head of the table, responsible for
most of the hospital care in Southwest Florida. [1]
Many folks commenting on healthcare have never touched
a patient nor led a large system. Outside consultants, no
matter how competent, have vicarious experience that
creates a different perspective.
At this point in my career, I have the luxury of promoting
what I believe is in the best interests of patients —
prevention and quality outcomes. Keeping folks healthy and
changing the healthcare industry’s focus from a “repair shop”
mentality to a “prevention program” will save the industry
and country from bankruptcy. Avoiding well-meaning but
inadvertent suboptimal care by restructuring healthcare
delivery avoids misery and saves lives.
RESPONDING TO AN ATTACK
Preemptive reinvention is much wiser than responding to an
attack. Unfortunately, few industries embrace prevention. The
entire healthcare industry, including health systems, physicians,
non-physician caregivers, device manufacturers, pharmaceutical
firms, and medical insurers, is stressed because most are
experiencing serious profit margin squeeze. Simultaneously
the public has ongoing concerns about healthcare costs. While
some medical insurance companies enjoyed lavish profits during
COVID, most of the industry suffered. Examples abound, and
Paul Keckley, considered a dean among long-time observers of
the medical field, recently highlighted some striking year-end
observations for 2022. [2]
Recent Siege Examples
Transparency is generally good but can and has led to tarnishing
the noble profession of caring for others. Namely, once a
sector starts bleeding, others come along, exacerbating the
exsanguination. Current literature is full of unflattering public
articles that seem to self-perpetuate, and I’ve highlighted
standout samples below.
PROFIT-MARGIN SQUEEZE
Both nonprofit and for-profit hospitals must publish financial
statements. Three major bond rating agencies (Fitch Ratings,
Moody’s Investors Service, and S & P Global Ratings) and
other respected observers like KaufmanHall, collate, review,
and analyze this publicly available information and rate health
systems’ financial stability.
One measure of healthcare system’s financial strength is
operating margin, the amount of profit or loss from caring
for patients. In January of 2023 the median, or middle value,
of hospital operating margin index was -1.0%, which is an
improvement from January 2022 but still lags 2021 and 2020.
Erik Swanson, SVP at KaufmanHall, says 2022,
“Is shaping up to be one of the worst financial years on
record for hospitals. Expense pressures — particularly
with the cost of labor — outpaced revenues and drove
poor performance. While emergency department visits
and operating room minutes increased slightly, hospitals
struggled to discharge patients due to internal staffing
shortages and shortages at post-acute facilities,” [11]
Another force exacerbating health system finance is the
competent, if relatively new retailers (CVS, Walmart, Walgreens,
and others) that provide routine outpatient care affordably.
Ninety percent of Americans live within ten miles of a Walmart
and 50% visit weekly. CVS and Walgreens enjoy similar
penetration. Profit-margin squeeze, combined with new
convenient options to obtain routine care locally, will continue
disrupting legacy healthcare systems.
Providers generate profits when patients access care.
Additionally, “easy” profitable outpatient care can and has
switched to telemedicine. Kaiser-Permanente (KP), even before
the pandemic, provided about 50% of the system’s care through
virtual visits. Insurance companies profit when services are
provided efficiently or when members don’t use services.
KP has the enviable position of being both the provider
and payor for their members. The balance between KP’s
insurance company and provider company favors efficient
use of limited resources. Since COVID, 80% of all KP’s visits are
virtual, a fact that decreases overhead, resulting in improved
profit margins. [12]
On the other hand, KP does feel the profit-margin squeeze
because labor costs have risen. To avoid a nurse labor strike,
KP gave 21,000 nurses and nurse practitioners a 22.5% raise over
four years. KP’s most recent quarter reported a net loss of $1.5B,
possibly due to increased overhead. [13]
The public, governmental agencies, and some healthcare leaders
are searching for a more efficient system with better outcomes
at a lower cost. Our nation cannot continue to spend the most
money of any developed nation and have the worst outcomes.
In a globally competitive world, limited resources must go to
effective healthcare, balanced with education, infrastructure, the
environment, and other societal needs. A new healthcare model
could satisfy all these desires and needs.
Even iconic giants are starting to feel the pain of recent annual
losses in the billions. Ascension Health, Cleveland Clinic,
Jefferson Health, Massachusetts General Hospital, ProMedica,
Providence, UPMC, and many others have gone from stable
and sustainable to stressed and uncertain. Mayo Clinic had
been a notable exception, but recently even this esteemed
system’s profit dropped by more than 50% in 2022 with higher
wage and supply costs up, according to this Modern Healthcare
summary. [14]
The alarming point is even the big multigenerational health
system leaders who believed they had fortress balance sheets
are struggling. Those systems with decades of financial success
and esteemed reputations are in jeopardy. Changing leadership
doesn’t change the new environment.
Nonprofit healthcare systems’ income typically comes from three
sources — operations, namely caring for patients in ways that are
now evolving as noted above; investments, which are inherently
risky evidence by this past year’s record losses; and philanthropy,
which remains fickle particularly when other investment returns
disappoint potential donors. For-profit healthcare systems don’t
have the luxury of philanthropic support but typically are more
efficient with scale and scope.
The most stable and predictable source of revenue in the
past was from patient care. As the healthcare industry’s cost
to society continues to increase above 20% of the GDP, most
medically self-insured employers and other payors will search for
efficiencies. Like it or not, persistently negative profit margins
will transform healthcare.
Demand for nurses, physicians, and support folks is increasing,
with many shortages looming near term. Labor costs and burnout
have become pressing stresses, but more efficient delivery of
care and better tools can ameliorate the stress somewhat. If
structural process and technology tools can improve productivity
per employee, the long-term supply of clinicians may keep up.
Additionally, a decreased demand for care resulting from an
effective prevention strategy also could help.
Most other successful industries work hard to produce products
or services with fewer people. Remember what the industrial
revolution did for America by increasing the productivity of each
person in the early 1900s. Thereafter, manufacturing needed
fewer employees.
PATIENTS’ NEEDS AND DESIRES
Patients want to live a long, happy and healthy life. The best
way to do this is to avoid illness, which patients can do with
prevention because 80% of disease is self-inflicted. When
prevention fails, or the 20% of unstoppable episodic illness kicks
in, patients should seek the best care.
The choice of the “best care” should not necessarily rest just on
convenience but rather objective outcomes. Closest to home may
be important for take-out food, but not healthcare.
Care typically can be divided into three categories — acute,
urgent, and elective. Common examples of acute care include
childbirth, heart attack, stroke, major trauma, overdoses, ruptured
major blood vessel, and similar immediate, life-threatening
conditions. Urgent intervention examples include an acute
abdomen, gall bladder inflammation, appendicitis, severe
undiagnosed pain and other conditions that typically have
positive outcomes even with a modest delay of a few hours.
Most every other condition can be cared for in an appropriate
timeframe that allows for a car trip of a few hours. These illnesses
can range in severity from benign that typically resolve on their
own to serious, which are life-threatening if left undiagnosed and
untreated. Musculoskeletal aches are benign while cancer is life-threatening if not identified and treated.
Getting the right diagnosis and treatment for both benign and
malignant conditions is crucial but we’re not even near perfect for
either. That’s unsettling.
In a 2017 study,
“Mayo Clinic reports that as many as 88 percent of those
patients [who travel to Mayo] go home [after getting a
second opinion] with a new or refined diagnosis — changing
their care plan and potentially their lives. Conversely, only
12 percent receive confirmation that the original diagnosis
was complete and correct. In 21 percent of the cases, the
diagnosis was completely changed; and 66 percent of
patients received a refined or redefined diagnosis. There
were no significant differences between provider types
[physician and non-physician caregivers].” [15]
The frequency of significant mis- or refined-diagnosis and
treatment should send chills up your spine. With healthcare
we are not talking about trivial concerns like a bad meal at a
restaurant, we are discussing life-threatening risks. Making an
initial, correct first decision has a tremendous influence on
your outcome.
Sleeping in your own bed is nice but secondary to obtaining the
best outcome possible, even if car or plane travel are necessary.
For urgent and elective diagnosis/treatment, travel may be a
good option. Acute illness usually doesn’t permit a few hours of grace, although a surprising number of stroke and heart attack victims delay treatment through denial or overnight timing. But even most of these delayed, recognized illnesses usually survive. And urgent and elective care gives the patient the luxury of some time to get to a location that delivers proven, objective outcomes, not necessarily the one closest to home.
Measuring quality in healthcare has traditionally been difficult for the average patient. Roadside billboards, commercials, displays at major sporting events, fancy logos, name changes and image building campaigns do not relate to quality. Confusingly, some heavily advertised metrics rely on a combination of subjective reputational and lagging objective measures. Most consumers don’t know enough about the sources of information to understand which ratings are meaningful to outcomes.
Arguably, hospital quality star ratings created by the Centers for Medicare and Medicaid Services (CMS) are the best information for potential patients to rate hospital mortality, safety, readmission, patient experience, and timely/effective care. These five categories combine 47 of the more than 100 measures CMS publicly reports. [16]
A 2017 JAMA article by lead author Dr. Ashish Jha said:
“Found that a higher CMS star rating was associated with lower patient mortality and readmissions. It is reassuring that patients can use the star ratings in guiding their health care seeking decisions given that hospitals with more stars not only offer a better experience of care, but also have lower mortality and readmissions.”
The study included only Medicare patients who typically are over
65, and the differences were most apparent at the extremes,
nevertheless,
“These findings should be encouraging for policymakers
and consumers; choosing 5-star hospitals does not seem to
lead to worse outcomes and in fact may be driving patients
to better institutions.” [17]
Developing more 5-star hospitals is not only better and safer
for patients but also will save resources by avoiding expensive
complications and suffering.
As a patient, doing your homework before you have an urgent or
elective need can change your outcome for the better. Driving a
couple of hours to a CMS 5-star hospital or flying to a specialty
hospital for an elective procedure could make a difference.
Business case studies have noted that hospitals with a focus on
a specific condition deliver improved outcomes while becoming
more efficient. [18] Similarly, specialty surgical areas within
general hospitals have also been effective in improving quality
while reducing costs. Mayo Clinic demonstrated this with its
cardiac surgery department. [19] A similar example is Shouldice
Hospital near Toronto, a focused factory specializing in hernia
repairs. In the last 75 years, the Shouldice team has completed
four hundred thousand hernia repairs, mostly performed under
local anesthesia with the patient walking to and from the
operating room. [20] [21]
THE BOTTOM LINE
The Mayo Brother’s quote, “The patient’s needs come first,” is
more relevant today than when first articulated over a century
ago. Driving treatment into distinct categories of acute, urgent,
and elective, with subsequent directing care to the appropriate
facilities, improves the entire care process for the patient. The
saved resources can fund prevention and decrease the need for
future care. The healthcare industry’s focus has been on sickness,
not prevention. The virtuous cycle’s flywheel effect of distinct
categories for care and embracing prevention of illness will decrease
misery and lower the percentage of GDP devoted to healthcare.
Editor’s note: This is a multi-part series on reinventing the healthcare
industry. Part 2 addresses physicians, non-physician caregivers, and
communities’ responses to the coming transformation.
Hospital finances are starting to stabilize as razor-thin margins become the new normal, according to Kaufman Hall’s latest “National Flash Hospital Report,” which is based on data from more than 900 hospitals.
External economic factors including labor shortages, higher material expenses and patients increasingly seeking care outside of inpatient settings are affecting hospital finances, with the high level of fluctuation that margins experienced since 2020 beginning to subside.
Hospitals’ median year-to-date operating margin was -1.1 percent in February, down from -0.8 percent in January, according to the report. Despite the slight dip, February marked the eight month in which the variation in month-to-month margins decreased relative to the last three years.
“After years of erratic fluctuations, over the last several months we are beginning to see trends emerge in the factors that affect hospital finances like labor costs, goods and services expenses and patient care preferences,” Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said. “In this new normal of razor thin margins, hospitals now have more reliable information to help make the necessary strategic decisions to chart a path toward financial security.”
High expenses continued to eat into hospitals’ bottom lines, with February signaling a shift from labor to goods and services as the main cost driver behind hospital expenses. Inflationary pressures increased non-labor expenses by 6 percent year over year, but labor expenses appear to be holding steady, suggesting less dependence on contract labor, according to Kaufman Hall.
“Hospital leaders face an existential crisis as the new reality of financial performance begins to set in,” Mr. Swanson said. “2023 may turn out to be the year hospitals redefine their goals, mission, and idea of success in response to expense and revenue challenges that appear to be here for the long haul.”
MedPAC’s recommendation that acute care hospitals don’t need a significant increase in 2024 Medicare rates is “totally insufficient and out of touch with reality,” according to the American Hospital Association.
“This view is one-sided, inaccurate and misleading,” Ashley Thompson, AHA’s senior vice president of public policy analysis and development, wrote in a March 23 blog post. “After years of once-in-a-lifetime events in the form of a global pandemic and record inflation, hospitals across the country are struggling to continue to fulfill their mission to care for their patients and communities.”
In its annual March report to Congress, MedPAC recommended an update to hospital payment rates of “current law plus 1 percent,” which the AHA says is not enough for many hospitals to keep their doors open.
The commission found that most indicators of sufficient Medicare rates for providers were positive or improved in 2021, though it acknowledged that hospitals saw more volatile cost increases in 2022 compared to years prior. Hospital margins were also lower last year than in 2021, according to preliminary data, driven in part by providers facing higher than expected costs and capacity and staffing challenges.
The report also said that its 2024 payment recommendations “may not be sufficient” to sustain some safety-net hospitals with a low number of commercially insured patients, and proposed $2 billion in add-on payments.
Across the U.S., a total of 631 rural hospitals — or about 30 percent of all rural hospitals — are at risk of closing in the immediate or near future.
MedPAC’s recommendations for 2024 differ from how some health economists have recently described hospitals’ finances. In January, hospitals had a median operating margin of -1 percent according to Kaufman Hall, a finding that arrived on the heels of 2022 being named the worst financial year for hospitals since the start of the COVID-19 pandemic.
“It is also important to realize that MedPAC’s report and data has limitations,” Ms. Thompson wrote, referring to a misalignment in the calendar year MedPAC chose to analyze and how hospitals can differ in how they report their individual financial earnings.
MedPAC said its report reflects 2021 data, preliminary data from 2022, and projections for 2023, along with recent inflation rates.
“…cost reports are filed for hospitals’ own specific fiscal years, and because surges, relief payments, and eventual expense increases happened at different times for different hospitals, these calculated margins don’t necessarily provide a fully accurate picture of the financial reality in 2021,” Ms. Thompson wrote.
The AHA stressed that hospitals’ finances in 2023 face much different challenges compared to 2021, when the industry was more supported by strong investment returns and federal pandemic relief.
“The fact that massive numbers of hospitals are not currently closing due to financial pressures should be seen as positive for patients and communities,” Ms. Thompson said. “Instead, some observers seem to be disappointed that more hospitals are not failing financially.”
A detailed response from the AHA to the MedPAC report is available here.
Sacramento, California-based Sutter Health crossed the finish line strong but ultimately wrapped up 2022 with a $249 million net loss, a substantial decline from the $1.1 billion profit of 2021.
A $628 million dip in investment income, a $578 million decrease in net unrealized gains and losses on investments and the $208 million disaffiliation of Samuel Merritt University all contributed to the nonprofit’s year-over-year decline.
Still, the tally is a $289 million improvement over the $538 million net loss the system had reported at the year’s nine-month mark.
The loss was also blunted by a 12-month operating income of $278 million—a bump over the $199 million operating income of 2021 and a feather in Sutter’s cap at a time when several other major nonprofit systems are reporting hundreds of millions in operating losses.
“Our operating financial performance has put Sutter in a position to reinvest more within the system, which can help support even higher quality, equitable healthcare for patients throughout California,” CEO and President Warner Thomas said in a press release.
Sutter’s total operating revenues rose 3.9% year over year to $14.8 billion in 2022. This was just ahead of the 3.3% increase to $14.5 billion in total operating expenses. The system wrote in a release that “like other healthcare organizations around the country,” it was not immune from inflationary pressures on expenses like wages and benefits or supplies.
However, the strong results of its 2021 financial recovery initiative and patient volumes “returning to near-2019 levels by year’s end” give Sutter “a stable base to invest in the future,” the system said.
HENRY KOTULA 