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3 Drivers Pressuring Health System Operating Margins

Analysis  |  By Jay Asser  
   March 13, 2024

Solving for these challenges is a must for leaders to maintain a healthy bottom line.

Low operating margins at hospitals and health systems right now are the result of several factors that are giving CFOs headaches.

While margins have stabilized for many operators, certain drivers are putting immense pressure on health systems’ finances, forcing leaders to rethink and refine their strategies to stay out of the red.

Chief among those concerns is labor costs, according to a report from the Healthcare Financial Management Association (HFMA) and healthcare strategy and market research company Eliciting Insights.

The report reveals the biggest financial pain points for hospitals, based on survey responses of 135 health system CFOs and qualitative interviews with CFOs during the first quarter of the year.

Here are the top three causes of low operating margins cited by CFOs and how they can respond.

Higher labor costs

Chosen by nearly all respondents (96%), lowering expenses associated with the workforce remains a priority for health systems.

One of the primary reasons hospitals’ margins are suffering is due to the shortage of workers, especially nurses. Ninety nine percent of surveyed CFOs said that among all roles, nursing is experiencing the most shortage, followed by LPN/med tech nursing (75%), lab techs (74%), and radiology techs (73%).

By focusing on recruitment and retention, leaders can bolster a workforce that is both strong and sustainable. That entails investing in your staff by raising salaries to be commensurate with industry demand and offering creative benefits to keep employees happy.

Cutting down on turnover will also lessen hospitals’ reliance on contract labor, which was necessary during the COVID-19 pandemic but is now ballooning costs.

Organizations should also be putting resources into building up the next generation of workers through involvement in education.

Lower reimbursement from payers

After labor costs, reimbursement was the next biggest concern among surveyed CFOs, chosen by 84% of respondents.

Many leaders believe they aren’t being adequately reimbursed for services by payers, which is draining their finances. Taking a hard stance at the negotiating table can often be beneficial, but it may not always be possible.

So, what can CEOs and CFOs do? Some strategies include reducing costs without negatively affecting quality of care, allowing hospitals to not need a change in rates. Or, operators can consider adding speciality services that payers reimburse at a higher rate, which will also attract more patients seeking diverse types of care.

Maybe most importantly, however, leaders should establish a collaborative relationship with payers that is mutually beneficial. If payers see that you’re able to improve patient outcomes and do it in a cost-effective way, reimbursement will follow. Open communication will also create more transparency around rates, leading to more effective dialogue in negotiations.

Higher supply costs

Selected by 47% of surveyed CFOs, supply chain expenses finished ahead of lower inpatient volumes (25%), lower outpatient volumes (17%), and lower patient collections (10%) as the third-most pressing challenge.

To optimize the supply chain, CFOs should do value analysis on the products they’re currently using or products they’re considering switching to so they can understand how necessary the costs associated with those products are.

Can you use cheaper products that won’t impact quality of care? That simple change may have a significant impact on the bottom line.

Jay Asser is the contributing editor for strategy at HealthLeaders. 

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