CFO Doug Watson shares what is top of mind as he officially steps into his new role at Allina Health.
Allina Health, a Minnesota-based health system, just named Doug Watson its new chief financial officer.
Watson stepped into his new role in June, having served as interim CFO. He brings a wealth of finance experience to his position and has some goals in mind for the system.
Luckily for Watson he is more than well-suited to tackling his top-of-mind issues and goals as he moves forward in his organization. He previously served as Interim Executive Vice President and System CFO at Sharp Healthcare, as well as several other vice president and CFO roles.
Labor Expenses
Labor currently makes up about 60% of average hospital expenses, and Watson notes the aging population’s potential to exacerbate the issue.
“When you see the population of the country aging into a higher level of needed care, that's challenging in an environment where staffing is really difficult,” Watson told HealthLeaders. “We're not minting enough nurses or doctors to keep up with current demand.”
The healthcare industry has been in a balancing act with commercial insurance underpinning the subsidization of government programs over the last few decades. Watson thinks that may change with a growing aging population.
“When you're a senior citizen, you want to access care differently than you did when you were younger,” Watson said. “As you start shifting the demographics, it really starts to challenge that historic balance and it's unclear how that's going to work out.”
The Patient Experience
Another top-of-mind goal for this CFO? Creating a friction-less patient experience.
Watson says friction comes into play for a patient when they aren’t in the know. Regardless of a system’s care model, he says the key is to be looking to produce care at an affordable cost point, in the right setting, at the right time, in a manner that is patient friendly.
“I think there's a lot of opportunity to improve that and that's certainly one of the things we're thinking about,” he said. “How do you think about the patient journey, and where those points of friction are? Where are those opportunities, where they're directly related to us, that we can change?”
Going forward, Watson is looking at how leaders can make healthcare "more efficient, effective, and friendly.”
Will health systems begin to steer clear of private equity investments?
Private equity is everywhere. As it continues to be a controversial topic, the Steward Health Care fiasco has made that spotlight even brighter.
As Steward Health Care is on its way to securing a $225 million loan to keep its 31 health systems operational ahead of auctions, its actions have not gone unnoticed by lawmakers.
The health system filed for bankruptcy on May 6 after it was days away from running out of money. Later this week Steward will seek approval for the loan, provided by a group of unidentified lenders, in bankruptcy court. The loan is expected to keep the health system running until autumn.
According to a WBUR report, Steward has said that it has more than 100,000 creditors and liabilities lying somewhere between $1 billion and $10 billion.
Massachusetts state officials are fed up with the health system, claiming it has threatened public health across the east side of the state. In February Massachusetts Governor Maura Healey and House Speaker Ron Mariano demanded for Steward to reveal its finances, sell its hospitals and leave the state completely.
Steward plans to sell off its remaining hospitals and physicians’ network at a pair of auctions on June 27.
Legislation Inspiration
A new bill is aimed at preventing future Steward-like financial crises. The Corporate Crimes Against Health Care Act proposed by Senator Elizabeth Warren is aimed at cracking down on private equity misconduct in healthcare. The bill would pose high penalties for investors who profit at the expense of their healthcare business.
According to a report from the Boston Herald, Warren, along with the president of the Massachusetts Nursing Association and other healthcare workers, Steward’s CEO and equity firm Cerberus made millions by purchasing hospital properties, selling off the land underneath the buildings and then leasing the buildings back to the hospitals.
“Let me be clear, this disaster is private equities’ fault. Cerberus and Steward’s CEO Ralph de la Torre, cut Steward’s resources so close to the bone that hospitals couldn’t afford lifesaving medical care,” Warren said, according to the report.
Warren said the proposal would not inhibit Steward’s bankruptcy proceedings, but it would prevent other health systems from taking the same path of ownership via private equity.
The proposal would make it a crime to steer a hospital towards bankruptcy to the point where a patient dies. Health system CEOs could be charged with manslaughter and face a prison sentence under the plan.
The Future of Private Equity
Healthcare bankruptcies related to private equity have been on the rise, but new findings reveal that actual investment activity by firms continues to slow down. A handful of factors come into play here including buyer and seller price differences, regulatory climate and hints that the Federal Reserve will hold rates higher for longer.
As the healthcare industry continues to pump the brakes on private equity, coupled with Warren’s proposed plan, private equity may even come to more of a lull in the future. Much is still yet to be determined, including the approval of Warren's plan and the financial viability of Steward Health for the rest of 2024 and beyond.
Accurate payer-provider data exchange is critical to negotiations. If one party does not have plentiful, accurate data, it can hurt everyone involved.
The tug-of-war between payers and providers hits the precipice at the negotiating table. Contract negotiation is more than just tough business, and the strategies each party takes to the table can be do or die for any organization.
Before going into a negotiation, both payers and providers need to put in some research.
For example, providers must ensure they’ve reviewed their contracts and create a habit of doing so often. On the other hand, payers must also ensure they are up to date on their contracts and can supply providers with accurate information and data throughout the negotiation process.
When it comes to successful negotiations though, leveraging data is an important strategy for payers to utilize.
Let Data Drive the Discussion
Both payers and providers should know their target statistics, both financial and strategic, and how they need to be adjusted. If each party comes amply prepared with data, it makes it easier to see where the numbers, like KPIs, protocols, and evidence-based medicine data sets need to fall. Each should ensure that they understand their data, the key issues for their organization, and the solutions that will be viable for both parties.
When it comes to the payer’s role in data, Piyush Khanna, vice president of clinical services at CareFirst Blue Cross Blue Shield, says payers can help provide accurate data for providers so they can look at information in the same way payers do.
“When we go into the negotiation we can put that data in front of [the providers], but we need to also make sure they have access to it throughout the contracting process, so they have more real-time intervention capabilities to influence patient outcomes,” Khanna said.
With higher use of EHRs and more clinical data repositories available to both the payer and the provider, Khanna said that the data is there, but it can be unorganized and slow to make an appearance.
“We can certainly leverage the power of the data, and we have to remember data has been traditionally fragmented in healthcare,” Khanna said.
“I think clinical data access in more real time will become more relevant. Because whether it's progression or regression on outcomes, you want to have more leading indicators that are available through the clinical data set. That is something I see as more leveraging and making it into contractual aspects as well, especially on readmissions.”
While data that reflects the needs and goals of each organization is highly important, data that reflects cost utilization and expense can truly drive the discussion home. At the end of the day each health care leader involved knows that sustainable profitability is crucial to keep an organization in business.
Stepping into the negotiation room with an open mind, hard numbers, and flexibility will be vital, no matter which side of the table you are on. The more data, the better. If you are approaching the negotiation table with exact numbers, you’ll be able to articulate exactly where your organization can be flexible, and where it cannot.
A new report by Strata highlights the latest financial performance for hospitals and physician groups across the country. The report, which looked at monthly data from over 135,000 physicians and 1,600 hospitals, highlights five key metrics.
The median hospital margin held steady for a second month at 4.7%, while patient volumes and revenues continued to increase.
Supply and drug expenses for hospitals increased, which put non-labor expenses ahead of labor expenses after a slowdown the previous month.
Both inpatient and outpatient services brought significant growth to gross hospital revenues and hospitals saw a 12th consecutive month of year-over-year gross revenue increases.
The highest year-over-year in patient volumes came from outpatient visits which were up almost 13% compared to the same time in 2023.
Physician expenses stayed above $1 million in April and physician practices continue to generate high costs in need of investment support for practice operations.
Could a sales tax solve hospitals' financial crisis?
Denver Health is turning to its city council as it faces a financial crisis.
The nonprofit hospital is working with members of the city council to implement a 0.34% sales tax increase that would help pay for uncompensated care. If approved, the tax will be added to the ballot in November.
Denver Health has been struggling with uncompensated care costs for a while. In 2020, the hospital lost $60 million from uncompensated care costs, and saw that number double to $120 million in 2022. Last year its uncompensated care costs soared to $136 million, with $35 million of that sum coming from patients who live outside the city. Over half—65%—of Denver Health’s patients are covered by Medicaid or are uninsured.
Medical Costs Hitting Nonprofits
Denver Health is one of many nonprofit health systems across the country feeling the effects of soaring costs. Nonprofits seemed to be doing okay after the pandemic, with one study showing 73% of nonprofit hospitals and health systems had at least “strong” days of cash on hand in 2022.
Although margins have increased, and some nonprofits have had luck pivoting elsewhere to increase operating margins, some are still dealing with rising labor costs. Labor expenses continue to weigh down hospitals and with nonprofits unable to cut services, cost caps are coming into play.
However, cost caps may even be further damaging to nonprofits. A report from Fitch Ratings shows how state benchmarks could hurt nonprofit revenue and operating margins during a time when operators are combating rising expenses.
Denver’s Dilemma
The proposed tax would increase Denver's sales tax to over 9%, with the tax collection capped at $70 million. According to NBC affiliate KUSA, a city council member has advanced the proposal, which still requires full council approval before it gets on the ballot.
According to the Denver Gazette, this tax would make Denver the highest-taxed major city in the wider metro area, and some council members worry that Denver voters may recoil at the prospect of a tax hike.
According to the report, earlier this year Denver Health CEO Donna Lynne put pressure on state and federal policymakers to pay for the uncompensated care costs. In March, the state accelerated $5 million to the hospital when state health care leaders warned that the hospital was nearing a financial “death spiral”
According to Lynne, the sales tax would ensure that patients outside the city are helping to cover the payments.
"There is a possibility that there would have to be service reductions, if we are not successful in all of those fronts," she said, according to the report.
The gap between highest and lowest performing hospitals shrank this year.
Nonprofit hospital margins jumped to 4.3%, up 33% year over year, according to findings from a KaufmanHall report released.
In addition to the improved margins for the 1,300 hospitals analyzed in the report, the gap between the lowest and highest performing hospitals has narrowed. Those that performed the best saw a margin of 28.9%, while the worst performing hospitals came in at -16.1%.
“While hospital margins have demonstrated improvement over the last several years, growth has slowed in the last few months and may be settling on a new normal. A closer look at hospital performance at the individual level shows an increased divide between higher performing and lower-performing hospitals,” said report author and senior vice president of data and analytics Erik Swanson in the report.
Month over month operating margins were up 7%, and year to date they soared to 21% higher than in 2023. The operational cash profit margin year to date was also up 14% compared to the same period last year.
In April, net operating revenue per calendar day increased to 9% year to date, 5% year to date in March. Year over year in April inpatient revenue jumped to 12%.
Data from the KaufmanHall report showed three notable items:
In April outpatient revenue increased 10% year over year and average length of stay decreased 4%. Emergency department visits also increased up to pre-pandemic levels.
The Big Picture
Last year labor costs and inflation brought major cash shortages to many hospitals. Margins from 2020 indicate that federal support was vital throughout the pandemic in order for hospitals to remain financially viable.
In search of cost savings, many hospitals turned to supply chain optimization and the delay of new tech implementations. From one study, many hospitals and health systems cited low payer reimbursement as the top cause for low operating margins.
“Recovering from the pandemic, we have seen a slight overall improvement in average operating margins over the past three years,” said HFMA Chief Partnership Executive Todd Nelson in a press release.
Bouncing Back From 2023
A previous study by Deloitte found that operating margins reached an eight year low of -0.8% in 2023.
Health systems are the “lifeblood” of an innovative health system, the report concludes. Profits are important to fund the mission of a health system and enable it to better serve the community. Leaders should focus on their fiduciary responsibility to support health systems long term.
The health system is one of many nonprofits seeing strong gains coming out of the first quarter.
Advocate Health reported a first-quarter operating income of $103.7 million, according to financial reports released last month. This is compared to the system’s earnings of $10.4 million during the same period in 2023.
The health system’s first quarter revenue increased 7.8% year over year to $8.1 billion, but expenses closely followed, growing 6.6% to $8 billion. The 67-hospital system saw labor costs increase 6.7% to $4.7 billion, while supply and drug costs increased 12.5% to $1.7 billion.
After the addition of nonoperating items like investment returns, the system saw a net income of $682.6 million after the first quarter, up from $578.7 million from its first quarter in 2023.
The total sum for unrestricted cash and investments was $21.8 billion and long-term debt was $7.4 billion.
Where the Nonprofit Found Strength
Major nonprofit health systems have seen consistent higher volumes and revenues, specifically for second quarter results, but not all have fared so well. For instance, Providence (the sixth largest nonprofit) reported a $202 million operating loss (-2.8% operating margin) in its second quarter last year.
In 2022, about 73% of nonprofit hospitals and health systems had at least “strong” days of cash on hand, but about one in ten (9%) had “vulnerable” or “highly vulnerable” levels, according to an S&P report. Advocate Health brought in about $27 billion in annual revenues during 2022, according to the system’s financial reports.
According to a Kaiser Family Foundation report, “the value of financial investments among nonprofit hospitals and health systems have likely stabilized or increased with 2023 market improvements.”
Based on financial reports it’s likely that pandemic relief funds lent a hand in these non-recurring operating revenues. Totals jumped from $13 million in 2019 to $29 billion among nonprofit health systems, and fell down to $8 billion in 2022, according to KFF news.
The improvement of operating margins in 2023 is perhaps due to decreases in labor expenses and increases in volume and reimbursement rates, but even so, these margins tend to remain below pre-pandemic levels.
Advocate Health, born out of the partnership of Advocate Aurora Health and Atrium Health, saw its earnings soar upwards nearly a billion halfway through its first year with an operating margin of 0.6% and a whooping $938.4 million from investments.
A lot of CFO shuffling has happened since the beginning of 2024.
This year new CFOs are stepping into new roles and expanding their titles at several health systems all over the country. Studies show that healthcare CFO tenures last an average of 4.7 years.
Here’s a list of five recent CFO moves to know:
Allina Health, a Minneapolis-based health system, moved Doug Watson to CFO. Since January Watson was the system's interim finance executive.
New York City-based Montefiore Health System executive vice president and CFO Colleen Blye expanded her role to chief business officer.
Nikki Hutchinson succeeded Tim Rieger as CFO of Cincinnati-based Mercy Health's Lima (Ohio) market last month. Rieger is set to retire on July 12.
At Adventist Health Sonora in California, Greg McCulloch was promoted to president after serving as the hospital's CFO since 2014.
At Portland-based MaineHealth, Albert Swallow III shared plans to retire as CFO in early 2025.
A few specific inpatient and outpatient services in particular are feeling the effects of lower reimbursements leaving CFOs to strategize.
Lower payer reimbursements have had a big effect on inpatient and outpatient services—but there are ten that are taking the cake.
Recent data from Strata Decision Technology analyzed the cost of care across inpatient and outpatient facilities and narrowed in on rate changes seen between 2021 and 2023. It found that there are certain services that had an operating gap that spanned between an eye-opening -12.1% and -42.9%.
How did we get here?
The report, published by the AHA, explains that underpayments from Medicare and Medicaid totaled nearly $130 billion in 2022, and Medicare paid just 82 cents for every dollar hospitals spent caring for patients. This is resulting in a shortfall of almost $100 billion.
What’s worse news for CFOs though is that those cumulative underpayments in the second half of the last decade increased 40% compared to the first half, and that’s even after adjusting for inflation.
Medicare and Medicaid aren’t the only payer types facing intense reimbursement challenges; payers across the industry have seen a steady decline below costs for reimbursements.
What do the numbers show?
Here are ten services where the reimbursement rates don’t cover the costs of providing care across inpatient and outpatient settings:
Inpatient services
Behavioral health: -34.3% below cost
Nephrology: -34.1%
Burns and wounds: -24.1%
Pulmonology: -19.4%
Infectious disease: -15.3%
Outpatient services
Burns and wounds: -42.9% below cost
Nephrology: -32.3%
Behavioral health: -31.7%
Pulmonology: -17.5%
Infectious disease: -12.1%
What’s the CFO Gameplan?
Rising costs and lower reimbursements are spelling “stress” for CFOs, and while viable solutions can seem elusive, they’re not impossible.
Bill Pack, CFO at Conway Regional Health System and a HealthLeaders CFO Exchange member, recently shared some of his top strategies for battling these prevalent issues in his own health system.
Outside of exploring all cost reduction avenues and negotiating a fair partnership with a payer, Pack points to two other important strategies that he deploys: diversification of services and utilization management and efficiency improvements.
“We are also expanding and adding services that include higher-reimbursed procedures or specialties to offset the lower margins of resource-intensive services,” Pack said.
“We are implementing utilization management processes to ensure that resources are used efficiently,” Pack says. “We are also identifying areas for improvement in care delivery, which lowers costs and improves patient care.”
UnitedHealth is warning investors and other payers of a disturbance to the Medicaid market.
The Medicaid business is under watch, according to UnitedHealth CEO Andrew Witty. At a conference on May 29, Witty told investors that Medicaid managed-care payers are getting hit with low state reimbursements, and it may go on for some time. Shortly after this, UnitedHealth’s stock dipped, also bringing down the Medical-Managed Care group.
"We've come through this prolonged redetermination cycle in Medicaid," Witty said. "Making sure the utilization, and the rate and everything else stay in perfect synchronicity during a multi quarter cycle — there's probably going to be some disturbance around that."
Medicaid Unwinding
In April 2023, states began disenrolling ineligible Medicaid members— ‘Medicaid unwinding’—for the first time since the beginning of the pandemic. The rules preventing states from removing members from their Medicaid plans were peeled back, but surveys found that many were wrongfully disenrolled while payers continued to profit.
One study showed that Medicaid fee-for-service physician payments are about 30% lower than Medicare payments, and commercial payments are even lower.
CMS extended Medicaid waivers into 2025, protectingthose who would otherwise be left without coverage. In some states, like Texas and Florida, Medicaid unwinding has left millions without coverage.
A year after Medicaid unwinding began, 22.4 million people have been disenrolled from Medicaid through the redetermination process, according to KFF.
UnitedHealth
Medicaid reimbursements are coming as states continue to determine member eligibility,; drastically cutting beneficiary rolls over the past year.
Witty’s comments indicate the state reimbursements will need to reflect Medicaid per-patient costs, but this could take some time to figure out. Speaking to investors at the conference, Witty also said that this may mean a “multi-quarter cycle” for states to begin paying Medicaid premium rates that are adequate enough to meet the cost of coverage for Medicaid patients, Bloomberg reported.
Utilization is the top concern, as it's currently the primary driver of medical costs. This uptick in costs has accelerated spending on benefits and also hurt Medicare Advantage plan profits. Just this week, UnitedHealth’s stock dropped about 4%, leaving it at $484.72, making it the worst performing stock in the Dow Jones Industrial Average.
The stock of other insurers, like Molina Healthcare and Cetene, also fell this week. UnitedHealth’s stock dropped to a six-week low, despite the insurer’s favorable first quarter earnings, which pacified investor apprehension toward Medicare Advantage and unease after the Change Healthcare cyberattack.