Hospitals’ business models are being upended by fundamental changes within the health care system, including one that presents a pretty existential challenge: People have far more options to get their care elsewhere these days.
Why it matters:
Health systems’ responses to major demographic, social and technological change have been controversial among policymakers and economists concerned about the impact on costs and competition.
Communities depend on having at least some emergency services available, making the survival of hospitals’ core services crucial.
But without adaptation — which is already underway in some cases — hospitals may be facing deep red balance sheets in the not-too-distant future, leading to facility closures and shutteredservices.
The big picture:
Many hospitals have recovered from the sector’s post-pandemic financial slump, which was driven primarily by staffing costs and inflation. But systemic, long-term trends will continue to challenge their traditional business model.
Many of the services that are shifting toward outpatient settings — like oncology, diagnostics and orthopedic care — are the ones that typically make hospitals the most money and effectively subsidize less profitable departments.
When hospitals lose these higher-margin services, “you’re starving the system that needs profits to provide services that we all might need, but particularly uninsured or underinsured people might need,” said UCLA professor Jill Horwitz.
And hospitals have long claimed that much higher commercial insurance rates make up for what they say are inadequate government rates.
But as the population ages and moves out of employer-sponsored health plans, fewer people will have commercial insurance, forcing hospitals to either cut costs or find new sources of revenue.
By the numbers:
Consulting firms are projecting a bleak decade for health systems.
Oliver Wyman recently predicted that under the status quo, hospitals will need to reduce their expenses by 15-20% by 2030 “to stay viable.”
Boston Consulting Group last year projected that health systems’ annual financial shortfall will total more than $200 billion by 2027, and their operating margins will have dropped by 10 percentage points.
To break even in 2027, a “typical” health system would need payment rate increases of between 5-8% annually — twice the rate growth over the last decade, according to BCG. If the load is borne solely by private insurers, hospitals will need a 10-16% year-over-year increase.
Between the lines:
This is the lens through which to view health systems’ spree of mergers and acquisitions, which have increasingly drawn criticism from policymakers, regulators and economists as being anticompetitive.
For better orworse, when hospitals have a larger market share, they are in a better position to negotiate and bring in more patients, and they can dilute some of the financial pain of poorer-performing facilities.
And when they acquire physician practices or other outpatient clinics, they’re still getting paid for delivering care even when patients aren’t receiving it in a traditional hospital setting.
“I think the hospitals have sort of said … ‘We can keep doing things the same way and we can just merge and get higher markups,'” said Yale economist Zack Cooper. “That push to consolidate is saying, ‘Let’s not move forward, let’s dig in.'”
Yes, but:
A big bonus of outpatient care is that it’s supposed to be cheaper. But when hospitals charge more for care than an independent physician’s office would have, or they tack on facility fees, costs don’t go down.
“They’ve protected their portfolio, and that’s added to the cost of health care,” said Johns Hopkins professor Gerard Anderson.
The other side:
Hospitals are typically on the losing end of negotiations with insurers right now, thanks to how large insurers have become, and are “in an extremely difficult competitive position,” said Ken Kaufman, co-founder of consulting agency Kaufman Hall.
Criticizing their mergers and acquisitions as anticompetitive is a “complete misunderstanding of the situation,” he said, and moving toward a new care model will take “an incredible amount of resources.”
Reality check:
Hospitals account for 30% of the country’s massive health spending tab, and they’ll have to be at the forefront of any real efforts to contain costs.
They’re also anchors in their communities and are powerful lobbyists, which helps explain why Congress has struggled to modestly reduce what Medicare pays hospital outpatient departments.
In this week’s graphic, we dive into recently released data on Tenet Healthcare’s 2023 financial performance. While the for-profit healthcare services company’s annual margin on hospital operations has declined since 2017, its overall profitability has more than doubled, thanks to strong performances from its ambulatory surgery center (ASC) chain,
United Surgical Partners International (USPI), which has consistently posted margins above 30 percent. Despite bringing in less than one fifth of Tenet’s total revenue, USPI is now responsible for almost half of Tenet’s overall margin.
Tenet has pursued this growth aggressively since buying USPI in 2015, swelling its ASC footprint from 249 locations in 2015 to more than 460 in 2023, with plans to increase that number to nearly 600 by the end of next year.
Tenet appears to be doubling down on its strategy of pursuing high-margin services over high-revenue services, especially as outpatient volumes are expected to far surpass growth in hospital-based care over the next decade.
U.S. Hospital YTD Operating Margin Index November 2021-December 2023
The observations and questions from this chart are both interesting and required reading for hospital executives:
Why were hospitals profitable at the 4% plus level through the worst of the 2021 Covid period?
What exactly happened between December of 2021 and January of 2022 that resulted in a profitability decrease from a positive 4.2% to a negative 3.4%?
Despite the best efforts of hospital executives, overall operating margins were negative throughout calendar year 2022 and did not return to positive territory until March of 2023.
Hospital margins remained positive throughout 2023 and into 2024. However, overall margins have remained below those experienced in both 2021 and in the pre-Covid year of 2019.
The above questions and observations have proven interesting, and the ongoing numbers have proven quite useful in many quarters of healthcare. But recently I was talking with Erik Swanson, who is the leader of the Kaufman Hall Flash Report and our executive behind the data, numbers, and statistics. Erik and I were speculating about all of the above observations, but our key speculation was whether the 2023 operating margin results actually reflected a hospital financial turnaround or, in fact, were there “numbers behind the numbers” that told a different and much more nuanced story. So Erik and I asked different questions and took a much deeper dive into the Flash Report numbers. The results of that dive were quite telling:
Too many hospitals are still losing money. Despite the fact that the Operating Margin Index median for 2023 and into 2024 was over 2%, when you look harder at the Flash Report data, you find that 40% of American hospitals continue to lose money from operations into 2024.
There is a group of hospitals that have substantially recovered financially. Interestingly, the data shows over time that the high-performing hospitals in the country are doing better and better. They are effectively pulling away from the pack.
This leads to the key question: Why are high-performing hospitals doing better? It turns out that several key strategic and managerial moves are responsible for high-performing hospitals’ better and growing operating profitability:
Outpatient revenue. Hospitals with higher and accelerating outpatient revenue were, in general, more profitable.
Contract labor. Hospitals that have lowered their percentage of contract labor most quickly are now showing better operating profitability.
An important managerial fact.The Flash Report found that hospitals with aggressive reductions in contract labor were also correlated to rising wage rates for full-time employees. In other words, rising wage rates have appeared to attract and retain full-time staff which, in turn, has allowed those hospitals to reduce contract labor more quickly, all of which has led to higher profitability.
Average length of stay.No surprise here. A lower average length of stay is correlated to improved profitability. Those hospitals that have hyper-focused on patient throughput, which has led to appropriate and prompt patient discharge, have also proven this to be a positive financial strategy.
Lower financial performers have financially stagnated throughout the pandemic. The data shows that throughout the pandemic, hospitals with good financial results improved those results, but of more consequence, hospitals with poor financial performance saw that performance worsen. The Flash Report documents that the poorest financially performing hospitals currently show negative operating margins ranging from negative 4% to negative 19%. Continuation of this level of financial performance is not only unstainable but also makes crucial re-investment in community healthcare impossible.
The urban hospital/rural hospital myth. A popular and often quoted hospital comparison is that there is an observable financial divide between urban and rural hospitals. Erik Swanson and I found that recent data does not support this common perception. When you compare “all rurals” to “all urbans” on the basis of average operating margin, no statistically significant difference emerges. However, what does emerge—and is a very important statistical observation—is that the lowest performing 20% of rural hospitals are, in fact, generating much lower margins then their urban counterparts this year. It is at this lowest level of rural hospital performance where the real damage is being done.
Rural hospitals and obstetrics. The data does confirm one very important American healthcare issue: Obstetrics and delivery services are one of the leading money losers of all hospital service offerings. And the data further confirms that rural hospitals are closing obstetric departments with more frequency in order to protect the financial viability of the overall rural hospital enterprise. This is a health policy issue of major and growing consequence.
The point here is that data, numbers, and statistics matter both to setting long-term social health policy agendas and to the strategic management of complex provider organizations. But the other point is that the quality and depth of the analysis is an equally important part of the process. A first glance at the numbers may suggest one set of outcomes. However, a deeper, more careful and penetrating analysis may reveal critical quantitative conclusions that are much more telling and sophisticated and can accurately guide first-class organizational decision-making. Hopefully the analytics here are a good example of this very point.
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.
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.
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.
The pandemic accelerated the outpatient shift, which had been progressing steadily for decades, into a new gear, as safety-minded consumers avoided inpatient settings.
Using the latest forecasting data from strategic healthcare consulting firm Sg2, the graphic above illustrates how the outpatient shift will continue to accelerate in the coming years. With each projected to grow by 20 percent or more, outpatient, virtual, and home-based care services will continue far outpace growth in hospital-based care over the next decade.
Ambulatory surgery centers (ASCs) will be at the center of this care shift, reflected by a projected 25 percent rise in ASC volumes by 2032.
The breadth of care available at home will also expand as care delivery technology improves. With the population becoming older and sicker, higher incidence of chronic disease will be met by a rapid expansion of home evaluation and management services (E&M),reflecting a shift away from hospitals and doctors’ offices as hubs for complex care management.
Instead, the patients still coming to hospitals will present with increasingly acute conditions, driving up demand for resource-intensive critical care, as broader inpatient volume remains relatively flat.
Health systems are ramping up investments in ambulatory surgery centers and forming joint ventures with outpatient partners to accelerate the development of new centers. The trend is picking up steam as complex procedures increasingly move to ASCs, which are steadily growing as the preferred site of service for physicians, patients and payers.
Tenet Healthcare, one of the largest for-profit health systems in the country, has been paying close attention to outpatient migration for years and has cemented itself as the leader in the ASC space. It now operates more than 445 ASCs — the most of any health system — and 24 surgical hospitals, according to its first-quarter earnings report.
United Surgical Partners International, Tenet’s ASC company, strengthened its footing in the ASC market after its $1.2 billion acquisition of Towson, Md.-based SurgCenter Development and its more than 90 ASCs in December 2021. Over the next several years, USPI will inject more than $250 million into ASC mergers and acquisitions and work with SurgCenter to develop at least 50 more ASCs, according to terms of the transaction.
The SurgCenter acquisition was completed shortly after Tenet sold five Florida hospitals to Dallas-based Steward Health Care for $1.1 billion. In 2022, Tenet also acquired Dallas-based Baylor Scott & White Health’s 5 percent equity position in USPI to own 100 percent of the company’s voting shares and paid $78 million to acquire ownership of eight Compass Surgical Partners ASCs.
These ASC investments and hospital sales make it clear that CEO Saum Sutaria, MD, sees surgery centers to become Tenet’s main growth driver in the coming years. Dr. Sutaria has described USPI as the company’s “gem for the future,” and aims to have 575 to 600 ASCs by the end of 2025.
While Tenet continues to increase its ASC market share, its closest competitor is Deerfield, Ill.-based SCA Health, which UnitedHealth Group’s Optum acquired for $2.3 billion several years ago.
SCA has more than 320 ASCs, but has expanded its focus on value-based care under Optum and is doubling down on supporting physicians across the specialty care continuum rather than operating as an ASC company “singularly focused on partnering with surgeons in their ASCs,” SCA CEO Caitlin Zulla told Becker’s.
While Tenet may operate the most ASCs among health systems, it lags behind Optum in terms of the number of physicians it employs. Optum is now affiliated with more than 70,000 physicians, making it the largest employer of physicians in the country, and is continuing to add to that through mergers and acquisitions.
Nashville, Tenn.-based HCA Healthcare, another for-profit system, employs or is affiliated with more than 47,000 physicians, but is also ramping up its surgery center portfolio. HCA comprises 2,300 ambulatory care facilities, including more than 150 ASCs, freestanding emergency rooms, urgent care centers and physician clinics, according to its first-quarter earnings report.
Like Tenet and Optum, HCA is heavily focused on expanding its outpatient portfolio. The company ended 2021 with 125 ASCs, four more than it had at the end of 2020, and added more than 25 ASCs last year. It is focused on both developing and acquiring surgery centers in the coming years.
The other big ASC operators include Nashville, Tenn.-based AmSurg, with more than 250 surgery centers, and Brentwood, Tenn.-based Surgery Partners, with more than 120 centers. Surgery Partners spent about $250 million on ASCs acquisitions last year and recently signed collaboration agreements with two large health systems —- Salt Lake City-based Intermountain Health and Columbus-based OhioHealth.
Oakland, Calif.-based Kaiser Permanente has 62 freestanding ASCs and outpatient surgery departments on its hospital campuses, a spokesperson for the health system told Becker’s.
As the locus of care continues to shift from inpatient hospitals to outpatient centers, health system executives face a growing conundrum over pricing. The combination of “consumerism” and tougher reimbursement policies raises a question about how aggressively systems should discount services to compete in the ambulatory arena.
Site-neutral payment remains a goal for Medicare, and consumers are increasingly voting with their pocketbooks when it comes to choosing where to have procedures and diagnostics performed. “We know we’re going to have to give on price,” one CEO recently shared with us. “The question is how much, and how soon.”
Should hospitals proactively shift to match prices offered by freestanding centers, or should they try to defend their substantially higher “hospital outpatient department” (HOPD) pricing?
The former choice could help win—or at least keep—business in the system, but at the risk of turning that business into a money-losing proposition.
To compete successfully, hospitals will not only need to lower price, but also lower cost-to-serve—rethinking how operations are run, how overhead is allocated, and how services are staffed and delivered in ambulatory settings.
“We’ve got to get our costs down,” the CEO admitted. “Trying to run an ambulatory business with our traditional hospital cost structure is a recipe for losing money.”
And as a system CFO recently told us, “We can’t just trade good price for bad, for doing the same work. We have to be smart about where to discount services.” The future sustainability of many health systems will hinge on how they navigate this transition to an ambulatory-centric model.
New Hyde Park, N.Y.-based Northwell Health began 2023 with a low, but positive operating margin, but labor costs are expected to increase again this year on the back of recent union activity in the state.
To offset such increases that were not anticipated in the 2023 budget, Northwell is evaluating opportunities to reduce expenses and increase revenue across the health system, which includes 21 hospitals and about 83,000 employees.
Michael Dowling, CEO of Northwell, spoke to Becker’s Hospital Review about the health system’s biggest challenge this year, how it approaches cost-cutting and why outpatient care is its biggest growth area.
Editor’s note: Responses are lightly edited for length and clarity.
Question: Many health systems saw margins dip last year amid rising inflation, increased labor costs and declining patient volumes. How have you led Northwell through the challenges of last year?
Michael Dowling: We ended 2022 with a low, but positive margin. We’ve been coming back from COVID quite successfully, and we’re back pretty much in all areas to where we were prior to the pandemic. Volumes have returned and we’re very busy. We came into 2023 with a positive budget and a positive margin. We anticipate that you’re always going to have challenges and disturbances, but it’s important to stay focused and deal with it. We have a very detailed strategic plan, which outlines our various goals, and we stick to it.
Q: What is your top priority today?
MD: The biggest issue for us today is labor costs. We have lots of union activity in New York at the moment. There were various nurse strikes in New York City at the beginning of the year. None of our hospitals were involved in those deliberations, but some of those hospitals agreed to contracts that have increases that were not anticipated in anybody’s 2023 budget. That’s going to have an effect on us. We have negotiations ongoing with the nurses’ union, and have 10 unions overall. About 90 percent of Northwell’s facilities have unions, so the bottom line is we are going to have expenses as a result of these contracts that were not anticipated in the budget. I don’t know the final number on these contracts yet, but it’s definitely going to be more than what we anticipated.
The unions in New York get a lot of government support and have become very empowered and quite aggressive. The bottom line is there’s more expense than we anticipated in our budget, so we need to figure out how to address that. We’re looking at everything across our health system to find expense reductions or revenue enhancements to be able to make up for the increased labor costs and be optimistic about ending the year with a positive margin. But we’re in a good place and are not like some other health systems that are struggling financially.
Q: Where are the biggest opportunities to reduce expenses or increase revenue to offset the increased labor costs?
MD: It’s a combination of a lot of things. We have a detailed capital plan that we may slow down. We hire about 300 people a week, so maybe we’ll target that hiring into specific areas and not be as broad based as we thought we could be. We will examine if we have specific programs or initiatives we can curtail without doing any damage to our core mission. It will end up being a portfolio of items; it won’t be one big thing. On the revenue side, we’re working very hard to increase our neurosurgery, cardiac, cancer and orthopedic businesses. Over the next couple of months, all of those things will be taken into consideration. The bottom line is we are going to come out of this winning.
Q: Looking three or four years down the line, where do you see the biggest growth opportunities for Northwell?
MD: Our biggest growth is in outpatient care. A lot of surgeries are moving outpatient, so we have to get ahead of that. Some think we are only a hospital system, but only about 46 percent of our business is from our hospital sector today. Home care is going to grow phenomenally, especially given the new technology that’s available. Digital health will also dramatically expand.
We’re also looking at expanding into new geographic areas and markets. It’s about positioning your offerings in places close to where people live, so you reduce the inconvenience of people having to travel long distances for care when it should be available to them closer to home. When you do that, you increase market share. We’re constantly increasing our market share by being very aggressive about going to where the customer is and providing the highest quality care that we can. Part of that is also being able to recruit top-line, quality physicians. When you do that, you attract new business because you have competencies that you didn’t have before. It’s a combination of all of these things, but there’s certainly no limit to the opportunities in front of us. We’re not in a world of challenges; we’re in a world of opportunity. The question is are we aggressive enough and do we have enough tolerance for some risk? We need to be as aggressive as we possibly can to take advantage of some of those opportunities.
Q: What is the biggest challenge on the horizon for Northwell?
MD: The biggest challenge is the huge growth in government payer business — Medicare and Medicaid. The problem with Medicaid — especially in a union environment — is it doesn’t cover your costs. The government is a big part of a potential future issue there. By increasing Medicaid, the more of your business becomes Medicaid and the worse you end up doing, unless you can increase your commercial payer business to continue to cross-subsidize. We also have a lot of union negotiations over the next couple of months, which will put a strain on our 2023 budget, but we will resolve it.
Q: How do you see hospitals and health systems evolving as CMS, commercial payers and patients continue to push more services to outpatient settings, where they can arguably be performed at a higher quality and lower cost?
MD: I think it’s going to continue to grow. For example, Northwell has 23 hospitals — 21 of which it owns — yet it has 890 outpatient facilities. We’ve been ahead of this curve a long time. Our primary expansion is in ambulatory care, not in-hospital care. Like I said, only 46 percent of Northwell’s total business is its hospital business. If you’re relying on the hospital to be the core provider of the future, you’re going to lose. You’ve got to take a little bit of a hit by going out and expanding your ambulatory presence. But the more you expand ambulatory and grow in the right locations, the more you increase market share, which brings more of the necessary inpatient care back to your hospitals. Our hospitals are growing and getting busier in addition to our outpatient centers because we are growing market share. If we enter a new community and see 100 people, five of them will need to be hospitalized. That’s a new market. Ambulatory cannot be disassociated from its connection to the inpatient market.
Q: Many financial experts are projecting a recession this year. How might that affect hospitals and health systems, and how can they best prepare?
MD: Even if we do have a recession, it doesn’t mean that people don’t get sick. In fact, people’s problems increase. Our business does not slow down if we have a recession; our business will probably increase. On the revenue side, it won’t necessarily affect our government reimbursement, which we don’t do well on anyway. The things you worry about during a recession is if employers give up the coverage of their staff. Then those employees with no insurance may go on a state Medicaid program, and that might affect hospitals.
In the healthcare sector, even in a recession, the need for hospital services actually increases. No recession could be as bad as what we experienced during COVID, yet we managed it. We had a problem that we didn’t even understand, and we worked through it. I think healthcare deserves an extraordinary credit for what was done during COVID. If there is a recession, we will deal with it. It’s just one of those things that happens, and we will respond to it in as comprehensive a way as we can. I can’t control it, but I can control our response. Leadership to me is about having a positive disposition; basically saying that whatever happens to you, you’re going to win.
HENRY KOTULA 