Back to Profitability: How Non-Profit CFOs Can Battle the Red

Margin declines, expense growth, and an impending "labordemic" has been spelling trouble for non-profit hospitals looking to claw their way to financial relief.

Median operating and operating EBITDA margins for non-profit hospitals declined significantly from fiscal year 2021 to 2022, Fitch Ratings said, and this decline is primarily due to persistent high labor costs and the inelastic nature of hospital revenue.

In fact, with stimulus funds tapering off, median revenue growth slowed and expenses increased due to a reliance on expensive external contract labor and increased salary and wage costs.

So, what can CFOs of non-profit hospitals and health systems do to fight back?

CFOs need to place their focus on operational effectiveness, Brett Tande, CFO of Scripps Health, a $4.3 billion not-for-profit integrated health system in San Diego, California, told me in November.

“Consistent with what we've been showing in our quarterly results throughout 2023, we're probably going to lose about $30 [million] to $40 million in our next earnings report,” Tande says.

“One of the biggest items that we need to focus on is getting back to profitability,” he says.

Why has profitability been a challenge for Scripps? Aside from labor costs and hardships from the pandemic, the system has been undergoing various construction projects even prepandemic. But nonetheless, profitably is what pays for these updates.

Scripps has projects continuing to break ground and has future plans for its other campuses as well.

“What pays for that is that positive operating cash flow that we need,” he says. “And when it's depressed, you've got to see those debt levels come up. And that's what we've been seeing over the last couple of years. And I think for in 2024, we'll see that more as well.”

That being said, getting that profitability back to a level that can support the organization will be very important, Tande said, “so, I will be working on that.”

The question then becomes, how do you do that?

Tande said the pandemic was very challenging for Scripps, not only financially but obviously for its staff as well.

Now that we are on the other side of the pandemic, Scripps’ focus is on operational effectiveness, and Tande says the last year or two have been really promising.

“Our productivity numbers now look great throughout the organization and we're really just trying to sustain that,” he says. “We think that has a lot of value.”

Aside from maintaining productivity, reimagining what’s “always been done” is necessary as well.

“Are there ways we can reassess or reimagine the utility of what we're doing or is there a better way to do something?” Tande pondered. “How can we help to drive a better patient experience and outcome or how can we do it a little bit more efficiently?”

That's the approach they have to take, he says.

“And again, it's not just in that clinical setting,” Tande says. “Reimagining operations has to be done throughout the organization. It could be in HR, revenue cycle, supply chain, or otherwise, but we need to try to be able to reduce our costs.”

When reducing costs, “there are a lot of irons that we have in the fire across the organization,” Tande says.

And, like most organizations, working with payers isn’t off the table when looking to reduce costs.

“We have to figure out from a revenue side how to work with payers and figure out if there are other approaches that we can take with them,” he says. “Which is something that the entire industry needs to do.”