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Odds Are Stacked Against Not-For-Profits Seeking Stronger Margins, Lessened Credit Pressure

Analysis  |  By Amanda Norris  
   October 11, 2023

Hospital volumes for not-for-profits have largely recovered from the pandemic, however, expenses, particularly salaries and wages, remain stubbornly high.

Margin declines, expense growth, and an impending “labordemic” is spelling trouble for non-profit hospitals looking to claw their way to financial relief according to a new report from Fitch Ratings.

Median operating and operating EBITDA margins for not-for-profit hospitals declined significantly from fiscal year 2021 to 2022, and this decline, Fitch says, is primarily due to persistent high labor costs and the inelastic nature of hospital revenue.

The report also notes that hospital expenses grew in 2020, even as there was a significant drop in year-over-year volumes and revenues. This was partially offset by federal stimulus funds.

While outpatient visits gradually improved, inpatient admissions increased from pandemic lows in 2021, driving revenue growth. However, 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.

The healthcare sector continues to experience staffing shortages for both clinical and non-clinical roles, leading to increased labor costs, the report points out. The report suggests that this “labordemic” is expected to persist through 2024 and possibly beyond. This is on trend with what we have been seeing, as CFOs have put more energy into retaining talent on a budget.

Consistent with the trends HealthLeaders has been reporting on, the Fitch report says hospitals have been tapering off more expensive travel nursing staff and are focusing on building their permanent staffing levels in-house.

Fitch says hospitals are achieving this by offering higher salaries and bonuses, leading to a decline in external contract labor utilization—but this may not be sustainable.

In fact, hospital payrolls have been rising for 19 consecutive months as of August 2023, the report says.

On the same note, Fitch says hospital employees' average hourly earnings growth has slowed to 3.75% from a high of 8.4% since the start of the pandemic. But while it has come down from its peak, it remains well above the 2.3% growth seen for hospital employees from 2010 to 2019.

This indicates that higher labor costs probably won't be going anywhere soon.

What does this mean for CFOs in 2024 and beyond?

There are a few key strategies that CFOs—from all hospital and health systems—should consider when planning for 2024.

Controlling labor costs: Hospital CFOs will need to prioritize controlling labor costs, as they continue to be a significant driver of expenses. This includes addressing recruitment and retention challenges, offering competitive salaries, and minimizing reliance on expensive external contract labor.

Revenue diversification: CFOs may need to explore strategies to diversify revenue sources. This could include expanding into services that can generate more revenue.

One way to do this is to develop and implement a strategy to expand the outpatient footprint. Stacy Taylor, CFO at Nemaha County Hospital, a top 100 a critical access hospital located in Nebraska, has done just that.

The hospital, which sits in the south-east corner of Nebraska, is a small critical access hospital that sees about 2,000 ER patients a year. On top of this, roughly 25,000 outpatients come through the facility in a year.

If you’re a smaller, critical access hospital, you need to capitalize on those outpatient services, Taylor said.

“As a critical access hospital, one thing that we have done to maintain financial stability is to make ourselves true to the critical access model of reimbursement. We've stayed true to that outpatient business,” Taylor said.

Cost efficiency and budget management: CFOs should focus on optimizing expenses and managing budgets efficiently. This may involve adopting technology solutions, streamlining operations, and scrutinizing spending to ensure financial sustainability.

Brad Archer, MD, chief medical officer of Rapid City, South Dakota-based Monument Health, said his organization had to rise to the challenge of not having government payers cover the totality of their costs.

“It is a challenge, and it got worse with COVID with the increase in supply chain costs and the increase in labor costs. We are having to be careful as we look at our expansion into different service lines,” Archer previously told HealthLeaders.

The payer mix has not kept Monument from launching new service lines, he said, but it is a consideration. Archer said Monument is becoming leaner in terms of efficiency, and as it continues to maintain and improve quality, the organization is looking to do so in a way that is most efficient and financially feasible.

“We are getting better with our revenue cycle—connecting our clinical teams to our revenue cycle and finance teams to achieve the best possible financial outcome,” Archer said.

Monitoring payer-mix and volume shifts: To piggyback on Archer’s payer statement, it's essential to closely monitor payer mix and shifts in patient volumes. Understanding how these factors impact operating margins and taking proactive steps to address challenges can be crucial—especially in light of the challenging payer/provider relationship.

In fact, as payer contracts agreed upon in a different financial climate reach their expiration, the two sides are being forced to come to the table and find new common ground during a new normal in healthcare.

"Those negotiations will be ferocious because once again hospitals have burned through their cash," Britt Berrett, managing director and teaching professor at Brigham Young University and former CEO with HCA, Texas Health Resources, and Scan Medical Center, told HealthLeaders. "Their biggest issues are salary, wages, and benefits. They don't see those going away. So this is going to be all-out battle between providers and payers."

CFOs could have more leverage in these talks than they think, but it requires willingness and preparation to pull levers that may be uncomfortable.

Strategic workforce planning: CFOs should engage in strategic workforce planning to address staffing shortages. This includes creating effective recruitment and retention strategies and potentially considering investments in training and development to cultivate a skilled and loyal workforce.

This will be even more important in 2024 as healthcare strikes are likely to continue. For example, the Kaiser Permanente strike—the largest healthcare workers’ strike in history—recently ended without a deal. Nonetheless, the three-day walkout set the stage for future workforce demands that CFOs will now need to be prioritizing.

Adaptation to market conditions: CFOs also know they need to continue to adapt to market conditions, especially in areas with high-growth potential. Understanding local labor markets and competition for healthcare professionals can help in developing tailored strategies.

In 2024, hospital CFOs will continue to face the challenge of weak margins and elevated labor costs due to ongoing staffing shortages, and successfully managing these challenges will be crucial for financial sustainability and positive credit ratings. CFOs need to remain agile, explore revenue diversification, and focus on cost efficiency to navigate these financial pressures effectively.

 

Amanda Norris is the Associate Content Manager of Finance, Payer, Revenue Cycle, and Strategy for HealthLeaders.


KEY TAKEAWAYS

Weak margins are expected to persist through 2023 and into 2024 due to an inelastic revenue model and higher labor costs due to still very tight labor conditions, even as operations broadly continue to gradually rebound, a new report says.

As pressure mounts, there are a few key strategies that CFOs should consider when planning for 2024.


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