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.
A new bill may cause a shake-up for hospital and health systems.
The Lower Costs, More Transparency Act, a bipartisan healthcare policy bill, recently passed the House of Representatives, setting the stage for a potential shake-up for healthcare organizations.
This legislation aims to increase hospital price transparency and curb certain practices by pharmacy benefit managers (PBMs).
But why is it significant?
Well, of particular significance is the proposal to equalize payments for drugs in Medicare, whether or not they are administered in hospital outpatient departments or doctor's offices.
Additionally, the bill seeks to postpone payment cuts for hospitals catering to high volumes of uninsured patients until 2026, a delay from the previously anticipated 2023.
Healthcare organizations also need to be on the lookout for increased price transparency scrutiny, especially as many organizations are still struggling with adherence.
What does it mean for CFOs?
Crucial for hospital and health system CFOs is the potential impact of the bill's site-neutral policy on drug reimbursements in Medicare.
Hospitals' opposition to the equalization of drug payments, contending that it would cut into hospital revenue, underscores the financial implications for healthcare institutions
With the legislation projected to reduce hospital payments by over $3.7 billion over a decade, CFOs must carefully navigate the financial landscape amid evolving policies.
The bill also introduces transparency reforms for PBMs, addressing issues of spread pricing and mandating the disclosure of rebates and compensation. This legislative push aligns with broader efforts to scrutinize and regulate PBMs, acknowledging their role in influencing rising drug prices.
For CFOs, adapting strategies to comply with potential transparency requirements and understanding the financial implications of proposed changes will be pivotal.
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."
2024 will be make or break for nonprofit hospitals, says Fitch Ratings.
The outlook is still “deteriorating” for 2024 as staffing shortages and rising inflation is putting the pressure on nonprofit hospitals, according to a recent report from Fitch Ratings.
On top of this, Fitch says downgrades and negative outlooks will likely continue to outpace upgrades and positive outlooks.
Out of these ongoing struggles has emerged a “trifurcation” of credit quality that will only become more prominent in 2024, the report said.
“Much of a hospital’s ability to be successful, will depend on their ability to recruit and retain staff in the currently hyper-competitive landscape for personnel,” said Fitch senior director and sector head Kevin Holloran.
So what does this really mean for CFOs of nonprofits? There are a few key takeaways that CFOs can utilize to remain financially stable in 2024:
Managing salary, wages, and benefits is crucial.
The report highlights that managing the largest single expense for healthcare providers, which is salary, wages, and benefits, is the most important factor for operational success in 2024. CFOs should focus on attracting and retaining staff at all levels to reduce usage and cost per hour of external contract labor, leading to cost savings.
Labor shortages remain a challenge.
The industry continues to struggle with labor shortages, which have been a significant pressure point in recent years. CFOs should anticipate that this shortage will persist in the foreseeable future, potentially impacting operating metrics. Developing strategies to address this challenge and mitigate its effect on operations and financial stability will be crucial.
Incremental operational recovery expected in 2024.
While overall labor supply shortage and financial pressures are expected to continue, the report suggests that there will be incremental operational recovery in 2024. CFOs should plan for this recovery and work towards gradually improving financial performance by addressing key challenges and implementing strategies that align with industry trends.
Some providers may lag behind.
The report also cautions that not all healthcare providers will experience the same level of recovery. Fitch expects a number of providers to lag significantly behind in their operational and financial recovery. CFOs should assess their organization's unique circumstances and actively work to prevent falling behind by prioritizing financial stability and growth initiatives.
Contending with disruptors was top of mind for healthcare CFOs in 2023, and Amazon Clinic gave them a run for their money, literally.
CFOs know that if you choose not to, or simply can’t, partner with the disruptors in your market, be prepared to compete with them.
Market disruptors will be in most markets in no time. Not only are these disruptors targeting the most profitable portions of a healthcare CFO’s business, but they are also more aggressive than the normal competition.
So, who were CFOs seeing as the biggest disruptors in the market in 2023? Look no further than big tech, retail giants, private equity, and national payer vertical integration. This year though, Amazon Clinic was in the spotlight.
Retail giant Amazon is still disrupting healthcare in several ways, but one of the areas Amazon Clinic took aim at this year is somewhere providers are especially vulnerable: price transparency.
As we know, healthcare costs can be incredibly cloudy, so when Amazon Clinic announced its commitment to price transparency, CFOs were forced to rethink their competitiveness in their pricing structures.
Luckily, even though Amazon Clinic represents a major market disruptor for healthcare CFOs, organizations learned that they could adapt and compete by leveraging existing strengths, embracing price transparency technology, and prioritizing the patient experience.
Leveraging Existing Strengths
What Amazon Clinic is attempting to do with their transparent, tiered pricing isn't unheard of and its limitations make it more supplemental than a true replacement of care services, but providers should be getting the message loud and clear that innovation is necessary for them to survive in the future.
Providers still have the homefield advantage as the more trusted source for care and they still have a leg-up by allowing patients to pay with their insurance, a fact that CFOs should leverage.
Embracing Price Transparency Technology
When it comes to price transparency technology, it will likely still take some time before there is a widescale adoption of advanced technology in this space, but hospitals shouldn't skip steps in the meantime by not doing their part to be as transparent as possible for patients.
Streamlining pricing and making it readily available for patients to view is a must, not only in the regulatory space but for bettering the patient experience too.
Prioritizing The Patient Experience
Speaking of patient experience, building greater trust with patients by creating ease of use is a good place to start when a disruptor like Amazon Clinic encroaches an organization’s lane.
"Healthcare, I believe, is still a relationship business and will be at least for a while longer," Kris Kurtz, CFO at University of Michigan Health-West, toldHealthLeaders this year.
"We have patient relationships today for the most part, so it's our business to loosen access, and the ease of use is probably the best strategy we can deploy. As an industry, we make it far too difficult for patients to enter and navigate the system. In some instances, we may need to partner with the disruptors rather than compete with them. [Likely it's] probably a combination of both," Kurtz said.
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.
