Organizations will need to embrace change if they want to improve their financial well-being.
It can be argued that 2022 was one of the most financially challenging years hospitals and health systems have ever experienced, and it looks like 2023 is going to bring more difficulties as these organizations try to overcome rising costs, labor shortages, and inflation—just to name a few.
"Today, hospitals are facing multiple issues in the healthcare industry, including the rising cost of labor, a labor shortage, rising costs of supplies due to inflation, pandemic spikes, and reductions to Medicare and Medicaid reimbursements," Michael Sunday, Jr., CFO for Pardee UNC Health Care, previously told HealthLeaders. "To take on these challenges, we are first looking at ways to not rely on contract labor. That could mean creating a hospital contract labor pool to reduce the impact of contract labor. Other steps would include hiring in-house recruiters to help bring qualified employees into the organization and finding ways to reduce costs, including the reduction of waste and energy consumption."
Tina Wheeler, sector leader for Deloitte's U.S. healthcare practice, released the 2023 Outlook for Healthcare, where she identified four forces that will impact health systems and hospitals in the next year. Her research is based on the results of a recent survey conducted by the Deloitte Center for Health Solutions.
The four forces are:
- Inflation and affordability: Only 7% of health system survey respondents said inflation and affordability issues were not likely to impact their 2023 strategy while 76% thought it would have a significant impact.
- Digital transformation: Twenty-nine percent of health system survey respondents said the accelerated digital transformation would likely have a major impact on their organization's strategy in 2023, while 63% thought it would have a moderate effect.
- Shrinking margins: It is likely 2022 will be one of the worst financial years hospitals have experienced in decades. With operating margins compressed, some hospitals could get acquired while others may be forced to close their doors.
- New payment models: Transitioning to new payment models, such as value-based care, will be a top priority in 2023, among those health plan leaders surveyed for 2023.
"The thought always has been that healthcare was kind of recession-proof, but what we're seeing is a trend—with inflation being so high—where consumers are saying [I need to prioritize] putting food on the table or I have to afford to put gas in my car," Wheeler says. "People deferred elective procedures and even general healthcare during COVID-19. And now inflation has almost exacerbated that effect, because now people are saying, 'Well, if I can do a virtual visit, am I really that sick, or do I really need that test?' And then the other concern is, how is that going to impact preventative care."
The financial impact of delayed care
One of the most significant financial challenges facing hospitals and health systems in 2022 was declining margins. A major contributing factor to this margin pressure has been the decline in patient volumes.
"A lot of health systems are still recovering from low patient volumes and revenue shortfalls that are tied to the pandemic," Wheeler says. "And on top of that, it's the perfect storm because you've got increasing cost of supplies due to inflation, you've got labor costs, which are continuing to rise. And the one thing that we've found statistically is that wage inflation doesn't go away. So, when you start paying people more, whether it's nurses, clinicians, cafeteria workers, or maintenance workers—once you start paying more, it's difficult to pull back."
One thing Wheeler and her team at Deloitte have noticed is that the issue when it comes to labor isn't as much of a shortage as it is these organizations lack a sufficient plan to reduce their labor costs. One way Wheeler says hospitals and health systems can combat this is by focusing more on the organization's digital transformation, which can help eliminate those low-value processes and jobs.
"The other trend that we're seeing from a cost savings perspective is how a lot of health systems are asking: 'Do I need to have a big IT shop, or should I outsource that?' So, we call that an operate play, where you're taking an area where you used to have a department of 100 or 1,000 people and are saying, 'No, we don't need to do that. Let's focus on what we're good at, which is treating patients and providing care to communities," Wheeler says. "And maybe we should be outsourcing more of these functions, which in turn will reduce costs."
Another tactic that can help offset margin pressures, according to Wheeler, is revenue differentiation. Different streams of revenue from sources that hospitals may not have necessarily been involved with previously can go a long way in reducing this burden.
"We're seeing a huge trend along those lines," Wheeler says. "We're seeing this continued convergence in our industry. You've got all of the retail disruptors in healthcare. As the retailers are getting in, healthcare providers are considering getting into retail. So, continuing to think about not being a traditional hospital, but looking at other revenue streams to differentiate so that you would have higher margin products to offset some of these lower margin issues that you're dealing with. It's continuing to look at ways to not be just that traditional bricks and mortar healthcare."
Exploring new payment options
Concerning the health plan industry, most health plans will start 2023 in a strong financial position, according to the Deloitte research, thanks to a decline in healthcare claims in 2022. Hospitals and health systems, however, are likely going to start off the new year in the red and spend 2023 figuring out how to move back into the black. One way Wheeler says they can do that is through alternative payment methods such as value-based care.
"Health plan executives that we surveyed specifically said continuing the journey of value-based care was top of mind and part of the strategy for 2023," Wheeler says. "It's such a contrast—the headlines about health plan financials in contrast to healthcare provider financials. And so, I think what will be interesting to see is health systems will inevitably move to more value-based care. There's a view that the healthcare system must shift … but there's also hesitation because they're facing such a difficult time. If they haven't been doing anything in the last five to 10 years, they're probably already behind."
Wheeler says she's seen organizations run pilot programs, but they haven't been delivering well on those pilots because they haven't fully embraced care delivery transformation.
"I'm focusing on quality and value and trying to align the financial aspects of healthcare with the delivery of care. Healthcare, in general, is known as a loss leader—you can't make any money at healthcare," Javier Vallejo, CFO for Prism Health North Texas, previously told HealthLeaders. "Time and time again, if you look at the business cycles, the facilities that are doing something right, the facilities that are working towards the future, they are finding ways to bridge that gap and bring those two concepts together."
As for Wheeler, she says organizations just need the "right push" to make value-based care work for them.
"I believe 2023 is going to be another challenging year for hospitals and health systems as they work to balance financial pressures with the need to invest in the future while ensuring high-quality care," Wheeler says in her report. "These organizations will likely need to do all they can to attract and maintain patients."
Amanda Schiavo is the Finance Editor for HealthLeaders.
2023 will be another financially challenging year for hospitals and health systems.
Healthcare is no longer recession-proof.
Organizations need to focus more on their digital transformation to offset labor costs.