On Monday, Fitch Ratings, the New York City-based credit rating agency, released a report predicting that the US not-for-profit hospital sector will see average operating margins reset in the one-to-two percent range, rather than returning to historical levels of above three percent.
Following disruptions from the pandemic that saw utilization drop and operating costs rise, hospitals have seen a slower-than-expected recovery.
But, according to Fitch, these rebased margins are unlikely to lead to widespread credit downgrades as most hospitals still carry robust balance sheets and have curtailed capital spending in response.
The Gist:As labor costs stabilize and volumes return, the median hospital has been able to maintain a positive operating margin for the past ten months.
But nonprofit hospitals are in a transitory period, one with both continued challenges—including labor costs that rebased at a higher rate and ongoing capital restraints—and opportunities—including the increase in outpatient demand, which has driven hospital outpatient revenue up over 40 percent from 2020 levels.
While the future margin outlook for individual hospitals will depend on factors that vary greatly across markets, organizations that thrive in this new era will be the ones willing to pivot, take risks, and invest heavily in outpatient services.
Creating a great rating agency presentation is imperative to telling your story. I’ve probably seen a thousand presentations across the past three decades and I can say without a doubt that a great presentation will find its way into the rating committee. Show me a crisp, detailed, well-organized presentation, and I’ll show you a ratings analyst who walks away with high confidence that the management team can navigate the industry challenges ahead.
During the pandemic, Kaufman Hall recommended that hospitals move financial performance to the top of the presentation agenda. Better presentations chronicled the immediate, “line item by line item” steps management was taking to stop the financial bleeding and access liquidity. We still recommend this level of detail in your presentations, but as many hospitals relocate their bottom line, management teams are now returning to discussing longer-term strategy and financial performance in their presentations.
Beyond the facts and figures, many hospitals ask me what the rating analysts REALLY want to know. Over those one thousand presentations I’ve seen, the presentations that stood out the most addressed the three themes below:
What makes your organization essential? Hospitals maintain limited price elasticity as Medicare and Medicaid typically comprise at least half of patient service revenue, leaving only a small commercial slice to subsidize operations. The ability to negotiate meaningful rate increases with payers will largely rest on the ability to prove why the hospital is a “must-have” in the network. In other words, a health plan that can’t sell a product without a hospital in its network is the definition of essential. This conversation now also includes Medicare Advantage plans as penetration rates increase rapidly across the country. Essentiality may be demonstrated by distinct services, strong clinical outcomes and robust medical staff, multiple access points across a certain geography, or data that show the hospital is a low-cost alternative compared to other providers. Volume trends, revenue growth, and market share show that essentiality. A discussion on essentiality is particularly needed for independent providers who operate in crowded markets.
What makes your financial performance durable? Many hospitals are showing a return to better performance in recent quarters. Showing how your organization will sustain better financial results is important. Analysts will want to know what the new “run rate” is and why it is durable. What are the undergirding factors that make the better margins sustainable? Drivers may include negotiated rate increases from commercial payers and revenue cycle improvements. On the expense side, a well-chronicled plan to achieve operating efficiencies should receive material airtime in the presentation, particularly regarding labor. It is universally understood that high labor costs are a permanent, structural challenge for hospitals, so any effort to bend the labor cost curve will be well received. Management should also isolate non-recurring revenue or expenses that may drive results, such as FEMA funds or 340B settlements. To that end, many states have established new direct-to-provider payment programs which may be meaningful for hospitals. Expect questions on whether these funds are subject to annual approval by the state or CMS. The analysts will take a sharpened pencil to a growing reliance on these funds.
The durability of financial performance should be represented with highly detailed multi-year projections complete with computed margin, debt, and liquidity ratios. Know that analysts will create their own conservative projections if these are not provided, which effectively limits your voice in the rating committee.
We also recommend that hospitals include a catalogue of MTI and bank covenants in the presentation. Complying with covenants are part of the agreement that hospitals make with their lenders, and it is the organization’s responsibility to report how it’s performing against these covenants. General philosophy on headroom to covenants also provides insight to management’s operating philosophy. For example, is it the organization’s goal to have narrow, adequate, or ample headroom to the covenants and why? As the rating agencies will tell you, ratings are not solely based on covenant performance, but all rating factors influence your ability to comply with the covenants.
What makes your capital plan affordable? Every rating committee will ask what the hospital’s future capital needs are and how those capital needs will be supported by cash flow, also known as “capital capacity.” To answer that question, a hospital must understand what it can afford, based on financial projections. Funding sources may require debt, which requires a debt capacity analysis with goals on debt burden, coverage, and liquidity targets. Over the years, better presentations explain the organization’s capital model, outline the funding sources, and discuss management’s tolerance for leverage.
There is always a lot to cover when meeting with the rating agencies and a near endless array of metrics and indicators to provide. As I’ve written before, how you tell the story is as important as the story itself. If you can weave these three themes throughout the presentation, then you will have a greater shot at having your best voice heard in rating committee.
HCA Healthcare is the single hospital operator that Bloomberg identifies as one of “50 Companies to Watch in 2024.”
“From Alphabet and BYD to Eli Lilly and Vivendi, keep an eye on these global stocks this year,” the outlet proposes for the 50 companies out of the 2,000 firms assessed. Bloomberg analysts highlighted the companies as those warranting a closer look, based on “contrarian views and upcoming catalysts for change such as new leadership, asset sales or acquisitions, and plans for new products and services.”
With 182 hospitals and more than 37,000 hospital beds, Bloomberg analyst Glen Losev said HCA “faces cost and revenue challenges that point to a reduction in its operating margin. Wages are increasing, especially for nurses, as are non-labor costs because of general inflation. And fewer physician visits indicate softening demand for care in areas such as elective surgeries.”
HCA is tied to an estimated 5% increase to its revenue in 2024 with a market cap of $72 billion.
The company posted $47.66 billion in revenue for the first nine months of 2023 compared to $44.73 billion in the same period of 2022. Its fourth quarter earnings are due later this month.
Other healthcare companies recognized by Bloomberg as worth watching are Novo Nordisk, BeiGene, Boston Scientific and Eli Lilly. Weight loss drug possibilities drive potential for Novo Nordisk and Eli Lilly, with estimated revenue increases of 22% and 16%, respectively.
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.
Claim denials are increasing, especially in Medicare Advantage, and it’s affecting hospital’s revenue cycles and patient care.
“We definitely are seeing an increase in denials,” said Sherri Liebl, executive director of Revenue Cycle, CentraCare Health, a large multispecialty system in Minnesota. CareCare has two acute care hospitals, seven Critical Access Hospitals and 30 standalone clinics, many of them in rural areas.
CentraCare reported a positive margin this year, but in no way realizes the profits of insurers, especially the national insurers where Liebl is having the most difficulty with claims.
CentraCare’s goal in its cost to collect – not all-around denials – is to be at 2%. The health system is closer to 7% on its cost to collect.
“The cost for our organization is exorbitant,” Lieble said.
Much of the blame for denials is falling to artificial intelligence being used in algorithms to deny claims.
UnitedHealthcare has been sued in a class action lawsuit that alleges the insurer unlawfully used an artificial intelligence algorithm to deny rehabilitative care to sick Medicare Advantage patients.
Cigna has also been suedfor allegedly using algorithms to deny claims. The lawsuit claims the Cigna PXDX algorithm enables automatic denials for treatments that do not match preset criteria, evading the legally required individual physician review process.
A Cigna Healthcare spokesperson said the vast majority of claims reviewed through PXDX are automatically paid, and that the PXDX process does not involve algorithms, AI or machine learning, but a simple sorting technology that has been used for more than a decade to match up codes. Claims declined for payment via PXDX represent less than 1% of the total volume of claims, the spokesperson said.
Industry consultant Adam Hjerpe, who formerly worked for UnitedHealth Group, said there’s nothing new about payers using artificial intelligence. AI has been used for 20 years in robotic processes, statements in Excel and algorithms, he said.
Everybody is working with good intent, Hjerpe said. There are reasonable controls in place to avoid fraud and abuse.
Claims are being denied for missing information, or for the information being out of sequence, or for the claim giving an incomplete picture of the care.
“We don’t want care delayed,” he said.
Nobody wins in claims denials, said Susan Taylor, Pega’s vice president of Healthcare and Life Sciences.
While payers save money in the short-term, in the long-term, the best arrangement is to have payers and providers work together to prevent denials, said Taylor, who has worked in healthcare for more than 25 years, starting on the health system side before moving into IT.
“There are more claims of note being denied,” Taylor said. “If you look at the ecosystem, there are a lot of opportunities for error.”
The solution is building an agility layer to streamline workflows throughout the revenue cycle, from initial claim submission to the complex denials processing stage.
WHY THIS MATTERS
Liebl said that denials have increased over the past two years and that there’s also been an uptick in payer audits months after payment has been made.
Insurers want justification for why CentraCare should keep its payments, and this is especially true for Medicare Advantage claims, she said.
One insurer said the claim didn’t meet inpatient criteria and downgraded the claim to an observation patient.
“We have a pretty good success rate as far as being able to justify we did the right care,” Liebl said.
Asked what’s driving the higher denial rates Lieble said, “Everybody wants to keep margins and expand their business. I think it comes down to profit margins, trying to keep profit margins high; we’re just trying to stay afloat.”
To combat denials and work with payers, CentraCare founded a joint operating committee to have successful partnerships. They’ve been more successful with the local Minnesota plans than the national plans, but Liebl is optimistic, she said.
“I am hopeful we can create partnerships …” she said. “Some of the denials we receive are against their payer policy. We need to be able to hold payers accountable.”
Larger health systems have a little more clout, and CentraCare is able to partner with other health systems through the Minnesota Hospital Association.
What’s being lost in all this is the patient, Liebl said. Sometimes a patient is getting a bill up to a year after a procedure.
“Sometimes the patient focus is lost when we work through some of this,” she said.
“They keep our money longer,” Liebl said. “They hold our money hostage. We have denials sitting out there for 300 days. It’s a lot of administrative burden on our part. We’ve spent a lot of money just to get the money in the door. Finally when that claim has been resolved, it’s a year later. No one wins? I think there is some winning going on one side.”
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.
While hospitals’ overall performance declined slightly in September compared to the previous month, the median Kaufman Hall Calendar Year-To-Date Operating Margin Index reflecting actual margins was 1.4% in September. This slight increase was due to the historical variation in the performance of hospitals across 2023.
Volume decreased across the board, but data indicate improvement in the overall financial picture compared to 2022.
Using data from Kaufman Hall’s latest National Hospital Flash Report and publicly available investor reports for some of the nation’s largest health systems, the graphic below takes stock of the state of health system margins.
After the median hospital delivered negative operating margins for twelve-straight months, 2023 has made for a positive but slim year so far, with margins hovering around one percent. Amid this breakeven environment, fortunes have diverged between nonprofit and for-profit health systems.
The largest for-profit systems, HCA Healthcare and Tenet Healthcare, posted operating margins of around 10 percent between July 2022 and June 2023, while the three largest nonprofit systems, Kaiser Permanente, CommonSpirit Health, and Ascension, suffered net losses.
Although Kaiser Permanente’s margin bounced back in the first half of this year, CommonSpirit and Ascension’s margins continued to decline, more than doubling the operating losses of the prior six months.
One key to the recent success of the largest for-profit systems is their diversification away from inpatient care.
Case in point: almost half of Tenet’s profits in 2023 have come from its ambulatory division, driven by its United Surgical Partners International (USPI) ambulatory surgery center network, which has posted 40 percent margins over the past several quarters.
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
HENRY KOTULA 