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.”

There are significant cultural and operational differences which will need to be accounted for when making moves in 2024.

CFOs will continue to fight against poor operating margins, reduced reimbursement, and inflated expenses in 2024, developing and executing a strategic path to a financially sustainable future is essential. For some, this can mean an acquisition or merger.

Hospitals and health systems of every type are feeling the financial pressure—even nonprofits will continue to grapple with existential questions about their strategy and structure moving forward.

Realizing the fundamental differences between for-profit and nonprofit hospitals will play a large part in a leader’s decision making.

For-profit and nonprofit hospitals are fundamentally similar organizations with subtly different cultural approaches to managing the economics of healthcare. All acute care hospitals serve patients, employ physicians and nurses as their primary personnel, and operate in the same regulatory framework for delivery of clinical services.

There are, however, a few primary differences between for-profit and nonprofit hospitals, which could potentially impact ROI.

TAX STATUS

The most obvious difference between nonprofit and for-profit hospitals is tax status, and it has a major impact financially on hospitals and the communities they serve.

Hospital payment of local and state taxes is a significant benefit for municipal and state governments, said Gary D. Willis, a former for-profit health system CFO said. The taxes that for-profit hospitals pay support "local schools, development of roads, recruitment of business and industry, and other needed services," he said.

The financial burden of paying taxes influences corporate culture—emphasizing cost consciousness and operational discipline. For example, for-profit hospitals generally have to be more cost-efficient because of the financial hurdles they have to clear.

OPERATIONAL DISCIPLINE

With positive financial performance among the primary goals of shareholders and the top executive leadership, operational discipline is one of the distinguishing characteristics of for-profit hospitals, said Neville Zar, the former senior vice president of revenue operations at Steward Health Care System, a for-profit that includes 3,500 physicians and 18 hospital campuses in four states.

When Zar was at the system, a revenue-cycle dashboard report was circulated at Steward every Monday morning at 7 a.m., including point-of-service cash collections, patient coverage eligibility for government programs such as Medicaid, and productivity metrics.

A high level of accountability fuels operational discipline at for-profits, Zar said.

FINANCIAL PRESSURE

Accountability for financial performance flows from the top of for-profit health systems and hospitals, said Dick Escue, former CIO at a health insurance company. Escue also worked for many years at a rehabilitation services organization that for-profit Kindred Healthcare of Louisville, Kentucky, acquired in 2011. "We were a publicly traded company. At a high level, quarterly, our CEO and CFO were going to New York to report to analysts. You never want to go there and disappoint. … You're not going to keep your job as the CEO or CFO of a publicly traded company if you produce results that disappoint."

Finance team members at for-profits must be willing to push themselves to meet performance goals, Zar said.

For-profit hospitals also routinely utilize monetary incentives in the compensation packages of the C-suite leadership, said Brian B. Sanderson, managing principal of healthcare services at Crowe.

"The compensation structures in the for-profits tend to be much more incentive-based than compensation at not-for-profits," he said. "Senior executive compensation is tied to similar elements as found in other for-profit environments, including stock price and margin on operations."

In contrast to offering generous incentives that reward robust financial performance, for-profits do not hesitate to cut costs in lean times, Escue says.

"The rigor around spending, whether it's capital spending, operating spending, or payroll, is more intense at for-profits. The things that got cut when I worked in the back office of a for-profit were overhead. There was constant pressure to reduce overhead," he says. "Contractors and consultants are let go, at least temporarily. Hiring is frozen, with budgeted openings going unfilled. Any other budgeted, but not committed, spending is frozen."

SCALE

The for-profit hospital sector is highly concentrated. In 2023, there are 5,157 community hospitals in the country, according to the American Hospital Association. Nongovernmental not-for-profit hospitals account for the largest number of facilities at 2,978. There are 1,235 for-profit hospitals, and 944 state and local government hospitals.

On the other hand, the country's for-profit hospital trade association, the Federation of American Hospitals, represents 1,000 tax-paying community hospitals and health systems throughout the U.S., accounting for nearly 20% of U.S. hospitals.

Scale generates several operational benefits at for-profit hospitals.

"Scale is critically important," said Julie Soekoro, former CFO of a Community Health Systems (CHS)-owned hospital. And one benefit of being CHS-owned? The access to resources and expertise, Soekoro said at the time.

Best practices are shared and standardized across all CHS hospitals. "Best practices can have a direct impact on value," Soekoro says. "The infrastructure is there. For-profits are well-positioned for the consolidated healthcare market of the future… You can add a lot of individual hospitals without having to add expertise at the corporate office."

The High Reliability and Safety program at CHS is an example of how standardizing best practices across the health system's hospitals has generated significant performance gains, she says.

Scale also plays a crucial role in one of the most significant advantages of for-profit hospitals relative to their nonprofit counterparts: access to capital.

Ready access to capital gives for-profits the ability to move faster than their nonprofit counterparts, Sanderson says. "They're finding that their access to capital is a linchpin for them. … When a for-profit has better access to capital, it can make decisions rapidly and make investments rapidly. Many not-for-profits don't have that luxury."

COMPETITIVE EDGE

There are valuable lessons for nonprofits to draw from the for-profit business model as the healthcare industry shifts from volume to value.

When healthcare providers negotiate managed care contracts, for-profits have a bargaining advantage over nonprofits, Doran says. "In managed care contracts, for profits look for leverage and nonprofits look for partnership opportunities. The appetite for aggressive negotiations is much more palatable among for-profits."

This article was adapted from previous coverage. Reread it here.

Editor's note: This story was updated on 12/29/2023. 

There were seven main threads propelling CFOs' decision making in 2023.

CFOs now find themselves at the intersection of various critical drivers that shape the financial outlook and strategic direction of their healthcare organizations.

So, what were the main threads propelling their decision making in 2023?

There were seven elements that encapsulated the key considerations for CFOs across all industries in 2023, according to Deloitte. Take a look at these seven drivers and read our full story to learn how each applied to CFOs in the healthcare sector.

New data says that health costs have not outpaced the rate of inflation this year, so what can CFOs do?

New data has been unveiled indicating that health costs have not outpaced the rate of inflation this year.

But what does this mean for hospital and health system CFOs? Read on to find out.

The report published by Turquoise Health utilized the list of CMS' 500 shoppable services. To understand the price dynamics of these shoppable services, the report dove into its payer dataset, which contained negotiated rates between payers and providers for all covered services across insurance plans and locations. Payers included UnitedHealthcare, Cigna, Aetna, and Blue Cross Blue Shield.

As of the third quarter's conclusion, there has been a 2% increase in negotiated rates for all 500 shoppable services, aligning closely with the 1.9% U.S. inflation measured by the PCE price index.

Notably, this growth rate remains below the overall U.S. inflation rate determined by the Consumer Price Index. The report highlights specific areas of notable price increases, such as Chickenpox and Measles vaccines, while identifying deflationary trends in services like off-hours medical services, allergy tests, and vaginal deliveries.

For example, in Los Angeles, the negotiated rate for vaginal delivery with post-delivery care varies widely, ranging from $1,183 to $32,563.

What does this mean?

It is crucial for hospital CFOs to recognize that substantial price variations exist for the same care both across different cities and within the same markets, as revealed by the report.

Understanding and addressing these variations is imperative for hospital CFOs to navigate evolving reimbursement landscapes and ensure financial stability.

As the healthcare industry undergoes increased scrutiny on pricing transparency, proactive strategies to manage and standardize costs will be pivotal for financial sustainability.

But where to start? Adoption of the price transparency requirement is key.

It will likely take some time before there is a widescale adoption of that type of pricing feature by providers, but hospitals shouldn't skip steps in the meantime by not doing their part to be as transparent as possible to patients.

"The higher percentage of completeness regarding the publication of machine-readable files and accurate patient estimate tools, the closer we are to empowering patients to gain confidence in knowing how much their healthcare services will cost," Chris Severn, CEO of Turquoise Health, told HealthLeaders.

"Adherence from both hospitals and payers also eliminates a significant burden of negotiating new rates because all rate data will be publicly available, meaning fair rate calculation becomes simpler and accessible," Severn says.

"Overall, these lead to lowering the cost of healthcare."