Financial stabilization is finally here, for some.
Hospitals and providers struggled through some of the roughest times in healthcare history during the pandemic. But a new report is painting a better post-pandemic picture.
A report released by Kaufman Hall illustrates that hospitals' finances are rebounding and even stabilizing. And while this is an optimistic note on which to end 2024, providers should be careful to examine what worked during the past year to make sure this stability continues.
The Breakdown
The report, examining financial data from more than 1,300 hospitals through October, showed that hospitals’ year-to-date operating margin index was 4.4%, a slight increase from 4.3% in September.
“There’s been a slight underperformance relative to pre-pandemic levels,” said Erik Swanson, senior vice president at Kaufman Hall.
“However, seeing the median operating margins being consistently positive throughout the course of 2024 is a good sign,”
Swanson noted that improvements in patient volume are a big reason for hospitals’ financial stability this year. With slightly shorter lengths-of-stay, many health systems were able to regain some stability.
Swanson also pointed out that many hospitals have improved their care transition processes. Making sure patients are discharged or transferred to a post-acute site of care in an efficient manner plays an important role in managing the length of stay.
The fact that patients are staying in the hospital for a shorter amount of time leads to lower utilization of goods and supplies, he added.
Additionally, the report highlighted that patient volume levels have fluctuated less than they have in recent years, making it easier for hospitals to plan and deploy resources effectively to meet that demand in 2024.
Lastly, the report showed that contract labor was a major source of spending for 2024 and 2023. As we examined earlier this year, several health systems have cut costs by minimizing or eliminating contract labor.
The Big Picture
Overall, hospital finances are stabilizing. The upside is stronger operating margins, easier-to-predict patient volumes, (accompanied by shorter lengths of stay,), improved outpatient revenue, and a decrease in some general expenses.
But a few concerns remain, including for non-profit health systems that may still incur higher costs. Cybersecurity also remains a major challenge, and cyberattacks are becoming even more sophisticated and widespread.
There is also, still, a growing gap between strong and struggling hospitals. Some experts say the industry is becoming more divided between financially healthy and unhealthy organizations. Fitch expects not-for-profit hospitals to have improved margins in 2024, but S&P Ratings has a negative outlook on 25% of hospitals. Underperforming hospitals may need to examine new strategies to keep up with their peers.
On the payer side, it may be worth noting that Moody's expects lower profitability for health insurers due to reduced Medicare Advantage reimbursement rates. This might mean payers will start looking to reap profits in other areas.
Lastly, with a new administration, the healthcare policy landscape is unpredictable.
The Key Lessons for CFOs
While some health systems will be celebrating a successful financial year, others will need to create a more effective strategic plan for 2025. CFOs will need to examine what a path to stabilization or optimization will look like for their organization.
One strategy that has worked for some is creating more partnerships and expanding outpatient services. Health systems can find savings in lower- cost care sites. CFOs should also examine the cost of care transition processes and see what can be improved to help lower costs.
CFOs can also examine contract labor. If health systems can create a strong work force for 2025, that will build a solid foundation and put them in a position to cut contract labor.
Lastly, (and we know CFOs are tired of hearing this by now), look carefully at value-based care model strategies. VBC models and an emphasis on preventative care can feel like too big of an undertaking to be impactful, but the key is taking baby steps. If more health systems focus on playing an active role in preventative care in their communities, this works toward better planning for patient volumes and utilization costs and can even help lower emergency department visits. Several health systems have seen the benefits of taking a step in the direction of VBC models.
Check out these three CFO tips on quality, perspective and collaboration.
TMC Health CFO Bradley hipp recently spoke with HealthLeaders about his new role and his plans for his organization. Check out these three tips from him, as well as the accompanying article where we dive deeper into how Hipp views the most important strategies for success as a CFO.
CFOs grappled with a lot this year. From Medicare Advantage, to physicians, to value-based care, to multiple hospital closures. Take a look at the finance topics that took the spotlight this year.
The HealthLeaders UpNext CFO Exchange dove into the most pressing issues for finance executives, inside and outside the health system. Investing in improved care access and educating clinical teams about the financial implications of their work are two critical challenges for future CFOS. See what else upcoming CFOs should prioritize as they step into executive roles.
The HealthLeaders CFO Exchange brought on a fiery discussion on payers and physician shortages. CFOs are grappling with adaptation to shifting payer strategies and value-based care, and they may have to employ harder tactics to stay on top of payers. In this article we hear from several HealthLeaders Exchange members on their biggest pain points and insights and advice for dealing with physician shortages and strategizing with payers.
Medicare Advantage is never a dull topic, but this year brought ongoing controversy around the program. In this article we looked at Sanford Health as the latest system to drop its MA plan with Humana and where the MA trends are heading.
Preventative care, robust technology, and dedicated clinicians are key ingredients in the recipe for successful value-based care. In this article we spoke with the CFO of Advocate Health to learn how the health system saved $135 million under two federal programs with an emphasis on value-based care.
In this article we examined a bill called The Medicare Patient Access and Practice Stabilization Act that would, if passed, boost physician pay by 4.7%, replacing Medicare’s planned 2.8% pay cut. We analyzed how CFOs would need to prepare for both scenarios, if this bill does or does not pass, and carefully how they will need to strategize around the implications of this policy.
While the operating margins of some hospitals have improved this year, others are facing a different reality. In this article we looked at some of the root causes for hospital closures including increased regulatory requirements that impose significant financial and operational burdens on hospitals, particularly rural hospitals.
Switching to Epic not only improved operations, but also team synergy.
So much of healthcare requires collaboration, and executives today are realizing that old strategies, and systems, aren't going to cut it.
UMass Memorial Health (UMMH) installed the Epic EHR platform in 2017.
Now the organization has achieved Epic's Gold Stars Level 10 recognition for its use of the platform. The recognition is awarded to users who enhance team workflow and efficiency while delivering the highest quality care. UMMH is the only hospital or health system in Massachusetts to have achieved the milestone in 2023 and is categorized in the top four percent of all Epic organizations
Before the integration, UMMH – the largest not-for-profit health system in central Massachusetts -- was working off of five different revenue cycle teams, which caused confusion and inefficiency to the system's daily operations, as well as staff dissatisfaction.
"The clinical system was not integrated across the entire system, so we effectively had to work in silos because we couldn't really move information across," said UMass Memorial Health CFO Sergio Melgar.
Before the unanimous vote to integrate Epic, Melgar said UMass trudged forward with poor operational connections and a high price tag to do just about anything. Switching IT systems allowed UMMH to come together and find a new staff synergy across the organization.
"One of the first keys to the success is that we were actually able to integrate people under different systems, but under a common leadership," said Melgar. "Once that happened, then decisions could be made across the system in a much faster way."
The switch also prompted more transparency across the organization, paving the way for smoother operations where each staff member was working from the same data and the same system.
"So a lot of these bad habits that have been formed by the individual silos, now, could basically begin to be eliminated," said Melgar.
Melgar said UMMH didn't customize its Epic system too much, which helped speed up the integration and expansion process.
"We modified it a little bit from what was recommended and did have a little bit more of a finance element in the front than what others might have done, and I think it's helped us tremendously," he said.
The format in which Epic is structured also helped UMMH to get a better grip of its flow of data by moving more items to the front end of the system.
"In a lot of the legacy revenue systems, in particular, the work is back-ended," he said. "Some of those are moved to the front, and the reason they're moved to the front is that if you can get them done correctly at the front, the flow of information is more complete."
The journey to get where the health system is today was long, grueling, and tough on staff. It required intense training for every staff member and somber meetings with board members. It also required a loan of $125 million, and a total of $700 million invested over 10 years.
CFOs should keep in mind that while an IT system switch may be exactly what a health system needs, the road to get there can be long, riddled with potholes and speed bumps. For a switch like this, CFOs must acknowledge the fiscal realities that go hand-in-hand with a long-term strategy for system transformation.
"I think [it] has helped our quality tremendously, because for one, I think our information is much more readily available," Melgar said. "It's much more uniform. We have much more common practices and we're able to implement things across the system much quicker."
"It's not perfect," he said "but it's definitely getting better."
Stay tuned for a deeper dive into this story including what sacrifices it took to switch systems, what it took to bring UMMH's staff to excel with Epic's system, the cost savings, and how Meglar honed in on his financial strategy for a successful overhaul.
Prior to joining TMC, Hipp served as chief financial officer for Banner University Medicine Tucson. He has also held finance leadership positions with Loyola Medicine and WellPoint.
Right off the bat, Hipp says he was excited to jump into his new position and knew he was stepping into a quality-driven organization.
"TMC is a leader in these areas, providing excellent quality, high patient experience," he says.
"You've got a dedicated community that is hugely supportive of Tucson Medical Center and what we mean to the community then drives the financials."
There's much that goes into ensuring quality from a health system, and Hipp says one thing he found and loved at TMC was that the organization has a good grip on how to pivot and adapt when needed.
"Just when you think you kind of figure something out, whether it's through legislation or a pandemic or anything else, it throws you a curveball and you're constantly trying to figure out what kind of curveballs are coming next," he says. "Having that basic block and tackling technique, I believe that TMC has that basic act of tackling down really well."
Quality comes first, and finances will follow, Hipp explains.
One piece of Hipp's financial strategy at TMC is looking at operations through a service line perspective. To do this, there must be service line alignment and a strategic arrangement. CFOs should examine what a community really needs and then think about those needs through a service line lens.
A second piece is staying on top of payer tactics. Hipp says health systems don't always have the luxury of margins to fall back on, so CFOs must work with payers to not only get them more engaged on denials, but also with peer reviews to be able to stick to their prior authorizations.
"It's a two-edged sword," he says. "You're losing on the revenue side and then your cost to collect goes way up because you have to invest resources in the revenue cycle side to track that down and to monitor that."
Partners, Not Employees
One consistent theme amongst finance leaders' goals and strategies this year has been collaboration; it's vital for health systems, particularly in finance. CFOs must make sure they are not making decisions in a vacuum and include other valuable perspectives from clinical teams that will affect patient care.
"I see finance's role as more of a consultative type approach, where we can present data to the chair or the physician leadership," Hipp says.
Hipp says healthcare finance must move on from the dictatorial type of reporting and strategizing that may have dominated in the past, and into an era of close-knit collaboration that brings invaluable insight to the discussion.
Physicians and nurses have the expertise and the scientific mindset to think through operational challenges. Hipp recalled a memory from his time working at Loyola that put physicians' work and dedication in perspective.
"Probably 10 years ago, when I was at Loyola, I was kind of stuck in traffic getting to an 8 a.m. meeting," he says. "It was a surgical clinical program meeting. It was one of those mornings where just everything was just kind of going wrong, and you're irritated when you walk in. Then we get to the meeting. We're in this room. The lead person on the physician side wasn't there. We're like, ‘Oh, god, what's going on?' He walks in 15 minutes later. He still has his scrubs on and he has blood on his scrubs. He said, ‘We had a tough night last night. We just had a double lung transplant.'"
Moments like this, Hipp says, put the value of physicians' work into perspective. To make the most informed clinical financial decisions, clinicians need to be at the table.
"And you think that you're so important with what you're trying to do?" he says. "But if you don't have that collaboration with those physicians then you're not going to be successful."
This past year has been a rough one for healthcare finance leaders. From regulatory woes to labor challenges, CFOs have had to grapple with nonstop challenges.
This year I spoke to many talented CFOs that are making a big difference in their organization with their experience, strategy, and innovative ideas. Here are eight of those CFOs to keep on your radar for 2025.
Doug Watson, CFO of Allina Health, spoke with HealthLeaders when he first stepped into his role as CFO about labor expenses and the patient experience.
Pat Keel, CFO of St, Jude’s Children’s Research Hospital, and a HealthLeaders Exchange member, spoke with us about data analytics adoption and resource allocation, as well as what it takes to succeed as a modern day CFO.
Kirsten Largent, CFO of OSFHealthcare, spoke with Healthleaders when she first stepped into her role about the importance of community and innovation, and also how her organization focuses on opportunities in women’s healthcare and preventative care.
Brandon Williams, CFO of Providence, and a HealthLeaders Exchange member, spoke with us about the skills needed to succeed as a CFO in today’s healthcare environment.
Colleen Byle, CFO and Chief Business Officer of Montefiore Health System spoke with HealthLeaders about what her dual title means to her, as well as her insights on digital investments and labor management.
John Beaman, CFO of Adventist Health, spoke with HealthLeaders about how he handles private equity competition, physician retention, and hospital credit downgrades.
April Audain, Denver Health CFO, spoke with HealthLeaders as she stepped into her new role and how she plans to strategize tackling uncompensated care costs at Colorado’s largest safety net hospital.
See how this health system got out of the negative.
Penn State Health achieved a substantial financial turnaround in 2024, setting the organization up for a much improved year in 2025.
With better performance across several metrics, the organization more than quadrupled its operating income this year.
The numbers:
Operating income FY24: $56.8 million
Operating income FY23: net loss of $160 million
FY24 Improvement: $217 million
Operational performance: 12% improvement in net patient service revenue, totaling $3.8 billion.
Growth contributor: Operations at Lancaster Medical Center (opening in October 2022) and the addition of the Pennsylvania Psychiatric Institute, which became fully integrated into Penn State Health in July 2023, both contributed to Penn State Health’s 2024 growth.
Executive Take
Penn State Health’s CFO said the results come from the organization's disciplined approach and the turnaround has improved its investment opportunities.
“Our disciplined practices have resulted in notable improvements in just one year,” said Paula Tinch, executive vice president of finance and chief financial officer for Penn State Health. “This strong financial position has enabled Penn State Health to further invest in its core missions of patient care, research and training the next generation of physicians.”
Our focus on balancing financial responsibility with meeting the evolving needs of the communities we serve is yielding positive results,” said Deborah Addo, interim CEO of Penn State Health. “We remain committed to operating efficiently to ensure long-term sustainability while consistently reinvesting in key clinical services for the people of Pennsylvania and beyond.”
What Happened In 2023?
Penn State Health attributed much of its losses in FY23 to debt and expenses related to two recently opened hospitals, Hampden Medical Center and Lancaster Medical Center Officials also cited increased costs resulting from inflation and worker shortages.
Officials said the losses stemmed from negative forces impacting all healthcare systems, including higher costs for recruiting and retaining employees as well as supplies.
On top of this, the system had $28 million in debt service related to Hampden and Lancaster medical centers, and investments in information technology.
Outlook and Guidance
The outlook for 2025 is uncertain. With a new presidential administration underway and many healthcare policies up in the air, CFOs need to be prepared for the unexpected.
While it's likely not the right time for riskier investments, if a health system is struggling, CFOs can explore partnerships that could help with operational burden. Outside of this, CFOs should focus on stabilizing their organization’s finances and contributing to reserve funds to fall back on in an unpredictable regulatory environment.
Financial optimization looks a lot like technology optimization.
Value-based care may sound great, but as providers know, it takes a lot of savvy coordination to make it work.
To successfully manage the financial transformation, CFOs will need to use tools like data analytics and artificial intelligence (AI), while fostering consistent collaboration between payers and providers.
AI & tech investments for holistic care
HFMA Senior Vice President for Content and Professional Practice Guidance Rick Gundling says it’s important for CFOs to look at what types of technology investments are going to make the difference for patient care, under a holistic care model.
We know the impact AI can make in the hospital, from clinical note-taking, to data extraction, to diagnostics. But AI can also help fill in the gaps by monitoring the patient before, after and in -between care visits.
Additionally, AI can go further than simply just asking a patient if they took their meds today. Think of AI and other tools as being used to address things like food scarcity and mental health by pointing patients towards the right resources in their community.
As discussed in part one of this story, providers need to be a strong community partner, and that means looking at how the health system is involved with its neighbors, from food-drives to exercise programs to health education classes. How providers invest and spend time in their communities will inform how they structure their value-based care models.
CFOs should explore AI solutions that integrate seamlessly with their existing systems, ensuring the smooth exchange of data across platforms and departments. AI can also help monitor and optimize the ongoing performance of value-based contracts, making it easier for CFOs to identify areas where financial adjustments or changes to care protocols need to be made.
The duty of data
Providers must get better at extracting the right data, and this goes further than just having a robust electronic health record. A big driver of the messiness in value-based care is the exorbitant amount of data required to make it work well. While data access isn’t usually the challenge, extracting the right data at the right time, as well as aligning that data, is crucial. This is where AI can lend a hand so providers don’t get overwhelmed with large datasets, like population health metrics.
Allison Foster, director of Value Based Care at SCAN Health Plan, says she knows VBC can’t work without the right data and the right approach. As a former implementation project manager at Epic Systems, Foster knows that VBC can’t succeed without it.
“I think the biggest piece to all of this is data sharing and analytics and transparency,” she says.
Much of her work at Epic revolved around interoperability functionality, she says, and ensuring that when a patient is admitted, their records are easily accessible in different locations.
“I think when it comes to general value-based care, you can only do it if you have the whole patient story in front of you,” she says. “So I think the biggest tension that you see in value-based care is that different parties [in] these conversations and these contracts have different data.”
The CFO's data strategy must be two-fold. They must collaborate with CTOs to make the right investments in data analytics that will align with the health system’s current care model structure. Next, they must ensure the payer and provider are using the same financial data that influences contracts.
“I think the biggest headache for providers and for payers is making sure you're not building just administratively complex bureaucratic systems,” says Foster. “What you ultimately want to do is incentivize high-quality care.”
Collaboration from all angles
Gundling says the foundation of value-based care is figuring out how to do less, while creating more. When providers figure out how to conduct less-expensive and less-complex care, it allows the system to see savings.
“Providers are the best people to decide what happens for their patients, rather than a health plan,” says Foster. “So when you talk about global capitation, you're giving them all of the dollars that they need to decide where that should be spent and spend it on what they think matters most for those patients.”
When payers, providers, and the patient are saving on cost, that’s what makes the model sustainable, says Gundling. Consistent collaboration is vital.
Setting up a health system’s financial system for value-based care is no small task. But CFOs have the knowledge and expertise to do it. CFOs must foster trust and collaboration both in and out of the health system and prioritize internal relations with their staff, both clinical and executive.
Looking at the cost of care per patient per month is a critical measurement, and one clinicians should be aware of too, says Gundling. CFOs should be able to collaborate with clinicians on the financial impact of their care decisions.
“I think the CFOs need to be almost internal consultants as well,” says Gundling.
They also must be consistent in their collaboration with payers, ensuring data, strategies and financial incentives are all aligned.
“Value based care models sort of force payers and providers to collaborate with each other and really think about designing a care model that isn't just incentivizing how many times someone goes to the provider office,” says Foster.
