Rising Costs, Dwindling Revenues, Inflation Among Top Healthcare Challenges for 2022

The pandemic and growing staffing crisis are impacting a number of key financial areas in healthcare, possibly forcing a reevaluation of the care that hospitals can provide.

Editor's note: This article is part two of a two-part series about 2022 healthcare finance trends. Read part one.  

Anyone paying close attention to the economy knows that the cost of virtually everything is going up significantly, and that includes the cost of delivering healthcare.

Several factors are at play here, including the escalating cost of paying healthcare workers. If left unchecked, the combined reasons could force hospitals and healthcare systems to cut some services, scramble to find new operational efficiencies, and perhaps even overhaul how care is delivered.

"Labor inflation is currently unprecedented," says Denise Chamberlain, executive vice president and CFO at Edward-Elmhurst Health, a $1.7 billion health system in the suburbs of Chicago.

"According to Kaufman Hall, a healthcare advisory firm, for the month of September 2021, labor costs were up 18.4% compared to the same month in 2020 (healthcare labor costs have typically risen 3% to 5% per year). EEH's number is not quite as high yet, but it is climbing as additional pay increases and incentives are being put in place to try to stabilize the workforce," Chamberlain stresses.

Staffing challenges are just one of the major issues and challenges that healthcare CFOs will wrestle with in 2022. Following are several other trials and trends to expect.

The rush for higher pay hits hospitals hard in the pocketbook

Payroll hikes at current levels are reason for great concern, especially since the staffing crisis in healthcare shows no sign of easing anytime soon. Many healthcare workers are leaving their jobs for higher-paying ones or joining agencies that place temporary nursing staff where most needed at any given time—at higher rates. This trend, and the need to pay staffers excessive overtime to maintain levels of care, is placing a huge financial burden on hospitals.

"One main issue facing healthcare CFOs and how it impacts their organization is managing through the labor shortage and the escalating costs it is causing," Chamberlain says. "Shortages of key clinical resources was an issue pre-pandemic. COVID-19 accelerated the exodus of healthcare workers from the industry and didn't allow time for health systems to educate and graduate the next wave of frontline team members."

Unfortunately, employee emergency funds, bonuses, and extra pay isn't going to solve this, Chamberlain says. Instead, the staffing crisis will create long-term economic challenges that have the potential to change the healthcare financial model.

"Solutions will require redesign of care models, developing the ability for families to have a larger role in providing care, and redesigning the value proposition for direct caregivers," Chamberlain says. "It likely also requires macro-economic changes in national policy around education funding, immigration, and other opportunities to address the supply of clinical resources."

Declining revenues make it hard for healthcare systems to grow

While hospitals and healthcare systems are forced to dig deep for payroll dollars, they are also finding those dollars harder to come by. The rise in costs to deliver services, combined with declining revenues, will be a barrier to growth at many systems.

"The cost of labor has made a meaningful shift up, challenging the already-very-slim margins in health systems. But staffing shortages can reduce revenue (such as through unstaffed beds or unstaffed operating rooms) at a time when healthcare has already taken a hit," stresses Mallory Caldwell, US Health Leader at EY (Ernst & Young).

While Caldwell says he thinks spending in the sector will start to revive over the next two years, total real consumer spending on healthcare today is still nearly 5% below its pre-pandemic level, according to EY analysis, he says.

In the meantime, this high turnover of healthcare workers is also impacting recruiting, training, and education costs.
"A related impact of increased turnover of experienced nurses is that replacement nurses are new to the organization and often new to nursing," Chamberlain says. "This leads to increased time in orientation (increased labor costs without the immediate benefit of production) as well as a higher percentage of less experienced nurses on our units."

To protect the quality of care being provided by less experienced nurses, Edward-Elmhurst Health (and probably other healthcare systems) have hired additional nurse educators as resources to augment shifts with less nursing leadership or experienced staff.

"Of course, these added nurse educators also increase the costs per patient," Chamberlain confirms.

Inflation forces are at their worst with rising drug prices

Inflation will have severe impacts in many areas of healthcare, but especially with the price of drugs.
"Drug inflation has been the most severe," Chamberlain explains. "According to the Kaufman Hall report, the average drug cost per patient in September 2021 was up 40.4% compared to September 2020."

Another area of increased cost and lost productivity was with vaccine requirements, Chamberlain explains.

"Like most health systems, EEH required our employees to become vaccinated. We experienced the same issues as other organizations with some employees not wanting to get a vaccine for various reasons. We were able to reach 99% vaccination rates without a material impact to our labor force, but it required a lot of time, which was a distraction from other work," Chamberlain says.

Also impacting healthcare systems is the highly correlated demand to simultaneously sustain market share and grow, while reducing (or slowing the increase in) the overall cost of care delivery.

But this is a significant challenge in light of the impact of inflation forces on the industry.

"A major issue facing CFOs is the interplay with cost inflation versus what I would call inelastic (or even declining) revenue streams," says Brad Haws, CFO at Emory Healthcare. "Implicit in this item is the current labor crunch that is happening with contract labor and the great resignation. I believe that cost pressures will be heightened in the short-term with higher inflation, and I don't believe that revenue in most cases (and certainly not with Medicare and Medicaid) will be adjusting at the same rates.  Our ability to manage this will be difficult from a clinical quality and coverage basis."

Healthcare suffers supply chain woes like all other industries

In addition to dwindling staff and declining revenues, another significant challenge impacting healthcare providers is supply chain issues.

"Like the staffing shortage, the negative effects in this area are growing as well," explains Clifford 'Cliff' Loader, CFO at Northern Arizona Healthcare. "It's becoming difficult to acquire computers or medical devices that require a micro-chip. Even certain medications are simply unavailable, and we're having to utilize other treatment alternatives in these areas. For the things we can find, the prices are growing exponentially. It's quite remarkable."

As with many factors, a challenge in one area can impact another, and supply chain challenges are helping to drive up inflation, Chamberlain says.

"Supply chain logistics have impacted healthcare the same as other industries, and these issues have driven up inflation," Chamberlain explains. "According to the same Kaufman Hall report, the average supply cost per patient in September 2021 was up 14.2% versus September 2020. Supply inflation pre-pandemic had been running around 2% for EEH."

Payer reimbursements aren't keeping pace with inflation

With increasing labor, supply, and pharmaceutical expenses, hospitals will be looking for increased rates from payer partners and will continue to focus on improving operational efficiencies to counteract those growing expenses, according to Charlton Park, CFO and chief analytics officer at the University of Utah Health.

Unfortunately, reimbursement rates are not keeping up with inflation, and cost cutting is required across the board.

"We are experiencing market-placed difficulties which range from private equity competing for our remunerative services to consolidation of payers and large systems," Haws says. "These market dynamics are challenging and make the competitive landscape even more difficult to manage. The fear is that this will create an environment that is riper for the haves and have-nots. Have and have-not could be expressed as a dichotomy between rural and urban; surgical specialties versus primary care; large systems versus isolated, sole provider hospitals."

Making matters worse: "At the same time that operational costs are increasing, many of our patients have lost, or left, their jobs and access to commercial medical insurance due to the pandemic. These patients are now coming to us without insurance, or as Medicaid patients," Loader explains. "So, while it's costing more to provide care, we're getting paid less when we get paid at all. This downward pressure on our already thin margins is threatening our ability to reinvest in critical equipment as it ages and needs to be replaced."

Steps that CFOs can take to help their organizations meet these challenges

As bad are things are financially now, hospitals and healthcare systems need to brace for more difficult times ahead. The pandemic shows no signs of easing. The staffing crisis won't be resolved for a few years. And new revenue opportunities will be few and far between.

As a result, Caldwell offers several tips on what CFOs need to do to help their organizations successfully navigate these tough times. In 2022, Caldwell says healthcare CFOs should:

• "Dig deeper in identifying near-term operational efficiencies."
• "Continue driving longer-term strategies to reimagine the care and wellness delivery system."
• "Explore new technology, digital, and data investments to improve processes."
• "Seek out a variety of potential partnerships, both within the sector and with less conventional collaborators, who can help extend and expand hospital and health systems' market presence."