CommonSpirit Health's latest earnings report was a mixed bag, but ultimately the system was left with a large operating loss.
CommonSpirit recently released its fiscal year 2024 first-quarter results, which ended September 30, where gains were largely offset by costs.
The health system experienced robust volume growth, reflected in increased adjusted admissions and outpatient and ED visits, the report showed. However, these gains were offset by rising costs, particularly elevated labor costs and inflation rates surpassing payer reimbursement rates.
The financials, with operating revenues at $8.87 billion and operating expenses at $9.16 billion, resulted in an operating loss of $291 million and EBITDA of $237 million, with margins of -3.3% and 2.7%, respectively.
Despite these challenges, the health system remains proactive, implementing initiatives to enhance efficiency and financial stability in supply chain, pharmacy, payer contracting, and purchased services, the report said.
The commitment to market-based growth strategies, including the development of ambulatory offerings and integrated delivery networks, underscores CommonSpirit's resilience amid industry headwinds.
But will it be enough for CommonSpirit to see some black next quarter?
Time will tell, but between consistent losses and layoffs, the system may need to fight its poor margins for a bit longer. In fact, CommonSpirit reported a $1.4 billion operating loss and a $259 million net loss for its 2023 fiscal year, which ended June 30.
In the video interview excerpt below, Tande discusses how this new bill with impact the payer/provider relationship and how Scripps plans to help “bend that cost curve a little bit more.”
"For an organization of Scripps' size, the cost of the minimum wage bill is measured in the tens of millions of dollars per year," its CFO says.
Eyes were wide when California Governor Gavin Newsom signed a new law that will gradually raise healthcare workers' hourly minimum wage to $25, a bill that has an estimated price tag of $4 billion for the 2024-25 fiscal year.
But, that estimated $4 billion price tag is just at the state level and doesn't necessarily include the costs for private organizations or those in the non-profit healthcare world.
CFOs across the US have already been grappling with sky rocketing labor costs and workforce unrest, so CFOs in California in particular really need to strategize for this unknown added cost.
In this exclusive interview, hear how Brett Tande, CFO of California-based Scripps Health, plans to strategize and budget for the new bill that could potentially cost the organization tens of millions of dollars per year.
Plan of action
While the new law factors in gradual wage increase schedules (rather than an immediate increase for all healthcare workers) CFOs in California need to start budgeting fairly soon.
Luckily, Tande says, health systems that have focused on sustaining high credit ratings may find themselves with a slightly longer lead time to adapt to these higher, unfunded costs.
“For the last 20 or 30 years, healthcare systems have been building up these balance sheets, and the beauty of that is that it gives organizations like Scripps a little bit more time to find that point of stability,” Tande says. “But not every organization is similarly situated, and all will have to weather these higher costs at some point.”
“While Scripps doesn’t have to react overnight, we will need to respond and maintain. For an organization of Scripps’ size, the cost of the minimum wage bill is measured in the tens of millions of dollars per year. This will definitely have an impact on labor expenses, no matter how much you strategize.”
Labor expenses, Tande says, are the largest expense for healthcare systems.
"Depending on the health system, you're generally talking about 52% to 55% of your revenue that is going to be eaten up by labor expenses, and so that's the big one,” he says.
So, what’s the plan for making up for these added costs? Renegotiating with payers may be the key for Scripps.
On the consumer side, Tande says having seismically compliant hospitals and having higher minimum wages are both good things.
“But, we also have to recognize that there's a cost to that. And so, whether it's you or me, the way that is going to reflect itself is in higher premiums for patients over time,” Tande says.
But on the provider side, there's going to be quite a bit of pressure with the payers, he says.
“The way that cost pressure has manifested itself has been in payer contract terminations or more public negotiations between healthcare systems and payers. That's happened in the past and is almost certain to continue with greater frequency in the future,” Tande said.
So, he says the reality is that this new bill will continue to put pressure on the payer/provider relationship, especially as California healthcare systems will be looking to cut more costs.
“Actually, no. It's not reality. It's just mathematics,” he says.
“This cost is going to be significant, and we can't go negotiate with Medicare or Medicaid. Broadly speaking, I would say these two payers represent 50% to 60% of patients in the state, so the remainder of that's left on commercial insurance negotiations,” Tande said.
Two medical groups affiliated with Scripps terminated their Medicare Advantage contracts for 2024, although Tande noted the move was made without regard to the minimum wage bill specifically.
Tande said he thinks all health systems will more closely monitor their commercial contracts to ensure they are sufficiently priced. While this could include terminations in some cases, Tande said Scripps strives to avoid that outcome where possible.
What does the future hold?
“As we grow, the question will be: how can we grow and provide a higher level of care to patients in this growing market?” Tande said.
To balance out these added labor costs, aside from payer negotiations, Scripps will be looking to add in more technology across the board.
“You know, it's funny, a couple of years ago, if someone said, you know, how realistic is it that you're going to be deploying AI within your organization? And I probably would have laughed. I've been really impressed by the speed with which this has taken off,” he said.
As for CFOs outside of California, while wage increases won’t be as high as California, many states are preparing for a wage increase on January 1. This means that budgeting for higher labor expenses in 2024 should be a top priority for CFOs in all states.
The role of the CFO has expanded exponentially, and there were seven key considerations driving their complex decision-making in 2023.
Hospital and health system CFOs no longer sit back and just crunch the numbers. More than ever, CFOs are looked at as strategic decision makers working hand-in-hand with the CEO.
These 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 this year? According to Deloitte, there were seven drivers that encapsulated the key considerations for CFOs across all industries in 2023. Let’s dive into these seven drivers and how each applied to CFOs in the healthcare sector:
Value creation
Healthcare orginizations must focus on building value not only for shareholders but also for stakeholders, including patients, staff, and the community.
Initiatives that enhance patient outcomes, improve operational efficiency, and contribute to the overall well-being of the community align with the imperative of value creation.
In 2023, more CFOs were working to implement patient-centered care models that improve the patient experience and outcomes, thereby enhancing the hospital's value proposition.
For example, Stacey Malakoff, the CFO of New York-based Hospital for Special Surgery (HSS), told HealthLeaders that more so than ever, it was imperative that HSS invested the appropriate resources to ensure the highest quality patient experience and to support planned expansion and growth in 2024.
Strategy
As a strategic thought partner to the CEO, business units, and the board, CFOs now play a crucial role in aligning financial strategies with the broader organizational objectives.
Developing financial strategies to adapt to emerging healthcare trends such as revenue cycle technology, telehealth adoption, or value-based care models was top of mind for healthcare CFOs.
Talent and leadership
Guiding the healthcare workforce amid industry changes and innovation is a vital responsibility for hospital CFOs. Talent management strategies that attract, retain, and develop skilled professionals contribute to organizational resilience.
The digital transformation of healthcare requires CFOs to leverage data and technology to turn information into actionable insights. Data-driven decision-making and investments in technology infrastructure are integral to financial success.
CFOs worked hard this year to streamline data management, new technology, and enhance the accuracy of financial reporting.
In terms of leveraging data, Dave Mazurkiewicz, EVP and CFO of McLaren Health Care, recently told HealthLeaders the organization will focus on streamlining its data warehouse in 2024, which Mazurkiewicz says is “our single source of truth.”
“As an example, we now know our margin for each MS-DRG—whether it takes place on the inpatient or outpatient side—by hospital, by physician, and by patient. This is critically important when evaluating the financial impact of our decisions, on which our growth depends.”
Enterprise risk and regulation
Managing risks is crucial to preserving shareholder value and ensuring organizational resilience. Hospital CFOs must navigate the complex regulatory landscape, from compliance with healthcare regulations to mitigating financial risks.
For healthcare CFOs, this meant establishing robust compliance protocols to adhere to healthcare regulations and minimize the risk of financial penalties.
Climate and sustainability
Hospitals are increasingly expected to address the challenges of climate change. CFOs and CEOs play a role in navigating sustainability initiatives that align with environmental responsibility while optimizing financial performance.
For example, UPMC announced it will reduce its greenhouse gas emissions by 50% across the Pittsburgh-based mega-system over the next eight years as part of its commitment to the Health Care Sector Climate Pledge.
Last year, 61 of the nation's largest health systems, including UPMC, signed the Biden administration initiative to cut greenhouse emissions in half.
In addition to UPMC, WellSpan President and CEO Roxanna Gapstur, also shared details about the organization's sustainability strategy, which includes creating sustainable clinical operations and reducing water, waste, and chemical use.
Agility and resilience
Anticipating and adapting to unexpected events are essential for success in the healthcare sector. CFOs must ensure financial strategies are agile enough to withstand unforeseen challenges and disruptions.
In 2023, CFOs spent time developing contingency financial plans to respond to unexpected events such as public health crises or natural disasters—all while still trying to financially recover from the COVID-19 pandemic.
After challenges in 2022, Mayo Clinic is witnessing a robust rebound, and it has "bold, forward, and unbound" plans for that added cash.
Nonprofit Mayo Clinic, operating hospitals across several states, recently released its 2023 third quarter earnings report. The filing indicates a significant turnaround, with revenues surpassing expenses, propelled by sustained high demand for healthcare services.
Read on for more details on what led to its third-quarter success and what Mayo plans to do with its cash.
An increase in cash and outpatient visits
According to the earnings report, Mayo’s third-quarter revenue increased 8.2% year over year to $4.5 billion, while expenses rose 4.8% to $4.2 billion.
Noteworthy is the surge in outpatient visits and surgeries, up by 6.6% and 7% compared to both 2021 and 2022. While supplies and service expenses grew by 9.5%, the rate of increase has slowed since last year.
This rebound is attributed to sustained strong demand for healthcare services, emphasizing the pivotal role of understanding and meeting patient demand in financial recovery.
Salary and benefits expenses, a huge pain point for most CFOs, rose modestly, under 3%, attributed to planned wage hikes and positive signs in recruitment progress. The addition of full-time equivalent staff, especially cost-effective allied health employees, helped keep these expenses low, the report says.
At a time when CFOs are pulling back on contract labor, this shows that the shift towards full-time equivalent staff, including allied health employees, is a positive approach to workforce management and could help foster long-term cost-effectiveness and stability.
A $5 billion "bold, forward, and unbound" redesign
A noteworthy capital expenditure of $282 million this quarter, part of a $792 million annual spend, emphasizes Mayo’s commitment to major projects, including modernizations and expansions, showcasing a forward-looking investment strategy.
The "bold, forward, and unbound" redesign will introduce new facilities that incorporate innovative care approaches and digital technologies, according to the news release.
According to the health system, the concept will offer patients a centralized location for all required services related to their specific condition, eliminating the need for navigating between different departments and will create a neighborhood of sorts, Mayo says.
Other projects are well underway in Arizona, Florida, La Crosse, Mankato, and now soon in Rochester, Mayo says.
Two major strategies are at the forefront of one CFO's 2024 financial planning.
Hospital and health system CFOs are finally seeing some financial relief as revenue increases offset rising expenses and operating margins stabilize, but 2023 was far from easy.
This means CFOs need to step up their 2024 planning to ensure financial stability, and on top of streamlining its revenue cycle, Dave Mazurkiewicz, EVP and CFO of McLaren Health Care, will be doing this by prioritizing its supply chain cost containment and the organization’s overall growth.
Read on to hear how Mazurkiewicz will be achieving these two tasks.
Supply chain cost containment
On the supply chain side, McLaren is tightening up its vendor processes with vendor management initiatives, Mazurkiewicz says.
“For example, we want more complete compliance with our registration policies when representatives come on our property to call on our physicians. We want reps to negotiate with our purchasing colleagues directly and not distract our physicians or take time away from patient care,” he says.
“We make commitments to our suppliers that we fully honor, so we’re ensuring they honor their commitments to us, too.”
McLaren will also dedicate more resources to focusing on contract management value analysis.
There’s a flood of new medical devices and implants coming to market to try to replace some of the revenue suppliers lost when elective surgeries disappeared during the pandemic, he says, and these new products are not necessarily coming to market because they are a great value.
That means in 2024, McLaren will be doing a value analysis on patient and economic benefit every time it considers switching a preferred product.
“No hospital can do a procedure with a loss; that math doesn’t work,” Mazurkiewicz says.
Organizational growth
McLaren’s other focus for 2024 is on growth.
“We continue to expand our digital solutions to make it easier for patients to access our services. We want people to choose us for our quality but also for ease of access. We’re putting extra effort into understanding the patient’s preference and what they consider ‘easy,’” he says.
Many patients now want to be able to schedule appointments from their phone at a time that’s convenient for them, so Mazurkiewicz says, McLaren must make sure it has the tools for patients to do that easily.
Another initiative McLaren is expanding in 2024 to fuel growth is the continued build out of its data warehouse, which Mazurkiewicz says is “our single source of truth.”
“As an example, we now know our margin for each MS-DRG—whether it takes place on the inpatient or outpatient side—by hospital, by physician, and by patient. This is critically important when evaluating the financial impact of our decisions, on which our growth depends.”
To beat payers at their own game, one CFO is looking to his revenue cycle to even the playing field.
The payer/provider relationship has been strained in 2023, to say the least. Between ever-changing payer requirements and frequent denials, providers often feel like they are in a no-win situation.
As more hospitals and health systems look to fight back, many are bringing in more AI and technology to streamline revenue cycle process and reduce burdens across the board.
Most hospitals and health systems have a workforce that was heavily strained and became burnt out during the pandemic, and Mazurkiewicz says they are still dealing with the aftereffects.
“One of the effects of that burnout has been in documentation,” he says. “Insurers have raised the bar on expectations of documentation and prior authorization and will not pay if those expectations are not met.”
Mazurkiewicz says payers have been ramping up initiatives to ensure what they’re paying for has all the clinical documentation they require and more, so payers are now auditing more claims, delaying more claims, and that’s delaying cash flow.
“In the past year we’ve seen a substantial increase in initial denials, primarily coming from Medicaid and Medicare Advantage managed care plans. That means our revenue cycle initiatives need to be more focused on denials management,” he says.
So how will McLaren be achieving this? By continuing to prioritize revenue cycle AI and technology.
“We’re using AI to help with claims processing and documentation of our care. These tools help ensure physicians are fully and accurately documenting why they recommend a certain course of treatment, and then assess whether a claim is likely to be denied based on each insurer’s rules,” Mazurkiewicz says.
He says that these revenue cycle tools even provide insights into the reasons why a claim may be denied, so they can make those corrections before a claim is even submitted.
“It’s making sure our documentation is as right as our diagnoses.”
On a more basic operational level, Mazurkiewicz says for 2024 he will also increase McLaren’s focus on collecting cash at the point of service, when appropriate, which will in turn reduce its billing costs.
CFOs will need to continue to be strategic as they aim to maintain healthy operating margins and a strong balance sheet.
Stacey Malakoff, the CFO of New York-based Hospital for Special Surgery (HSS), recently spoke with HealthLeaders on the three financial initiatives she will be focusing on to ensure financial success in 2024. And, while the priorities themselves are important, following some guiding principles is key to strategic decision-making.
“My ‘north star’ in setting financial priorities is to support our commitment to be the best place in the world for patients and the best place for professionals in healthcare to advance their careers,” Malakoff says.
This "north star" is what led Malakoff to her three financial priorities for 2024. See them below and read the entire story here.
How to best leverage it is something organizations are learning on the fly. But for healthcare leaders and workers, it's just as important to understand what technology can't and shouldn't do.
Tackling those misconceptions is critical, explains University Health's vice president of health information management and revenue cycle Seth Katz.
Katz spoke with HealthLeaders about implementing technology in revenue cycle, why automation is not a plug-and-play solution, and medical coding as the next strategy to leverage.
The CFO of the Hospital for Special Surgery details its three financial priorities for 2024 and why other finance leaders should do the same.
2023 was a tumultuous year for hospital and health system CFOs. Even though CFOs saw some financial relief as revenue increases offset rising expenses and operating margins began to stabilize, 2023 was far from easy.
Unfortunately, 2024 is likely to be just as bumpy.
CFOs will need to continue to be strategic in 2024 as they aim to maintain healthy operating margins and a strong balance sheet. In this article, Stacey Malakoff, the CFO of New York-based Hospital for Special Surgery (HSS), details the three financial initiatives she will be focusing on to ensure financial success in 2024 and why other CFOs should prioritize the same.
When planning financial goals for the new year, CFOs need to think about 2024 in the context of long-range strategic plans and financial projections, Malakoff says.
“It is imperative for CFOs to continue to maintain healthy operating margins, strong philanthropy, and a strong balance sheet—all while still making the critical strategic investments that will ensure future success,” according to Malakoff.
Here are three of HSS’ 2024 financial priorities that other CFOs should consider as well:
Its people and culture
More so than ever, it is imperative that HSS invests the appropriate resources to ensure that it can recruit and empower the most talented clinical and ancillary staff to ensure the highest quality patient experience and support planned expansion and growth, Malakoff says.
“Empowerment includes investments in professional development, employee engagement, safe work environment, and wellness and resiliency,” Malakoff says.
For example, HSS is approaching its fourth year with a best-in-class, internal wellness program led by a U.S. Special Forces veteran who is also a nurse.
Patient access
“We have lots of opportunity to expand access as demand for HSS expertise is high and growing throughout the NYC tri-state area, nationally, and internationally as consumers and employers increasingly understand the importance and variability of quality in musculoskeletal health,” Malakoff says.
That’s why HSS is investing in the transformation of its NYC main campus to a more ambulatory setting and complex joint/spine center. HSS is also opening new regional locations, increasing capacity and service offerings at several current regional locations, and expanding its physical footprint in Florida.
“Additionally, we invest in improving access to knowledge in many ways, such as the HSS eAcademy which provides continuing medical education to specialists in 145 countries,” Malakoff says.
All of these major investments need to be made in a carefully planned manner to ensure the highest standards of care and prudent financial management, she says.
Operational efficiency
A continued focus on efficiency is imperative given expense inflation and other economic pressures affecting healthcare providers, Malakoff says.
“Investing in our priorities requires that we find efficiency and economies throughout the organization,” she says. That’s why, Malakoff says, HSS’ financial and operations leadership teams are collaborating to capitalize on synergies and address needs that have been reshaped significantly by the rapidly changing environment.
“One example of this is our focus on optimizing space and capacity utilization across all facilities and service lines,” she says.
