By Jeff Studenka, SVP of Marketing & Mark Glickman, SVP, Growth & Strategy
Over the past year, progress has been made on the road to post-pandemic financial recovery.
According to a recent report from Kaufman Hall, key indicators — including improved outpatient revenue and shorter average length of stay — reveal that hospital finances overall are beginning to stabilize post-pandemic.
Smaller health systems (0-25 beds) saw an increase in net operating revenue per calendar day, with a 13.8 percent increase from 2023 to 2024 and a 7.7 percent increase year-to-date. Larger health systems (500+ beds) experienced a 15.5 percent year-over-year increase in net operating revenue.
This data suggests that some providers have experienced modest financial stabilization from the historic lows of 2022 — an optimistic outlook.
But, the reality is that hospitals and healthcare systems are still facing unprecedented financial challenges.
Surging Costs
Rising expenses are the most pressing.
Baseline costs have surged dramatically in a number of essential areas, including workforce, drug and medication expenses, and administrative costs, according to a Costs of Caring report from the American Hospital Association.
The same report revealed that hospitals’ labor costs, which on average account for 60 percent of a hospital budget, increased by more than $42.5 billion between 2021 and 2023.
Despite its largely positive outlook, Kaufman Hall’s report includes statistics that reinforce the AHA’s concerns over growing cost issues in healthcare: Hospitals’ total expenses per calendar day increased by 6 percent year-over-year from July 2023 to July 2024. Costs for drugs and other supplies rose by nearly 10 percent year-over-year and 17 percent year-to-date.
Waning Reimbursement
Costs of providing care are outstripping reimbursement — by a significant amount.
According to the AHA’s Cost of Caring report, “[e]conomy-wide inflation grew by 12.4 percent between 2021 and 2023 — more than two times faster than Medicare reimbursement for hospital inpatient care.”
Reimbursement challenges aren’t confined to Medicare and Medicaid health plans.
Underpayment by all payers has become the norm for several essential and complex healthcare services. For example, payments for inpatient behavioral health services were 34.3 percent below costs across all payers in 2023, according to the AHA. Average payments for outpatient burn and wound services were 42.9 percent below costs across all payers.
Deny, Deny, Deny
On average, providers are spending $43.84 per claim — $19.7 billion a year — to adjudicate with health plans. Claims denials from commercial payers increased by 20.2 percent in 2023.
A recent study from Premier found that “[n]early 15 percent of all claims submitted to private payers for reimbursement are initially denied, including many that were pre-approved to move forward through the prior authorization process.” In Q4 2023, 54.3 percent of those rejected claims were ultimately overturned, but only after multiple rounds of provider appeals.
These issues are even more acute with MA- and Medicaid-managed care plans: Denials issued by commercial MA plans increased by 55.7 percent in 2023. Many of these claim rejections are ultimately overturned, but there’s no compensation for the costs required to navigate the resource-intensive denials management process. Billions of dollars in expenses and lost revenue for providers each year are the result.
Ongoing Staffing Shortages
Labor shortage remains a top concern for healthcare leadership — nurses in particular.
Despite continued improvements, the national RN vacancy rate is 9.9 percent. 47.8 percent of hospitals still report vacancy rates of over 10 percent. This is in addition to the exorbitant costs associated with nurse turnover, which increased by 7.5 percent from 2023 to 2024 — for a total of $56,300 per staff RN.
The most pressing concern associated with the nursing shortage and its financial implications is the affect on patient experiences. Gaps in the nursing workforce mean imbalanced nurse-to-patient ratios, which directly impact care quality and outcomes. It can also affect patient satisfaction and a hospital’s quality rating and brand reputation, adding further downward pressure on hospital finances.
Clinical staff shortages may get the most attention, but nonclinical positions are also sitting empty. Revenue cycle professionals are a prime example.
Many revenue cycle jobs that were transitioned to remote positions during the pandemic are still remote positions, which means revenue cycle experts have a larger pool of remote jobs to choose from. Greater competition for fewer workers can drive up salaries, making it more expensive for hospitals to recruit, hire, and retain qualified talent.
Unfilled revenue cycle roles can lead to a backlog of unsubmitted claims, unworked denials, stalled prior authorizations, and incomplete documentation — which inevitably causes delays in reimbursement and care delivery.
For any scaling health system, technology is necessary to alleviate processes that can be automated, but funds and expertise are required to implement it.
Providers at a Critical Crossroads
Without significant intervention, these challenges are expected to continue — and worsen.
Today, they’ve created an ecosystem of financial uncertainty in which many hospitals and health systems operate with little to no margin. Less capital means providers can’t invest in the infrastructure needed to optimize, even sustain, operations, including keeping up with the technology curve or matching payer offshoring with their own initiatives.
Too often, closures are the result.
Over 30 percent of rural hospitals in the country — 700+ facilities — face closure due to acute financial challenges. 360 of those are at immediate risk, according to a report from the Center for Healthcare Quality and Payment Reform.
Closures are the worst-case scenario. But, any financial challenge means that dollars are diverted from patient care.
3 Paths on the Road to Recovery
Healthcare leaders are already exploring long-term and short-term solutions to navigate financial pressures and promote their organization’s post-pandemic viability.
Meeting increasing care demand, investing in new technologies and therapies, and maintaining readiness for a potential healthcare crisis are all front of mind. Innovation is key to furthering these goals, but so is pragmatism — a combination that accounts for more collaborative trends on the path forward.
Mergers
Financial uncertainty in any industry is accompanied by increased merger and acquisition (M&A) activity. The healthcare industry is no exception.
Hospital M&A activity in Q1 of 2024 hit a first-quarter high — the highest since 2020 — with 20 announced transactions generating $12 billion, four of which were “mega mergers.”
For hospital leadership struggling to maintain cash flow and operating capital, M&A can be an attractive option — especially “cross-market” mergers that reduce antitrust concerns. These mergers are an effective avenue for expanding service areas, strengthening core capabilities, and growing market share to bolster hospital finances.
But, not all healthcare leaders are rushing to sign on the dotted line. Many provider CFOs are concerned that the rise of these transactions has triggered increased regulatory scrutiny that could make deals more complex and opportunities less viable.
Joint Ventures
Healthcare is a consumer market.
Households account for 28 percent share of total health spending in the U.S., second only to the federal government (33 percent). As patients become responsible for more (and more) of their healthcare costs, they are seeking better, more cost-effective options. And, those options are becoming more prevalent and easier to access.
Retail clinics, walk-in urgent care centers, telehealth services, and pharmacy clinics align with 21st-century consumer expectations, providing healthcare services with greater convenience, often at a fraction of the cost.
Ambulatory surgery centers (ASCs) are now a critical component of the healthcare system, accounting for more than half of the outpatient surgery market — approximately 23 million procedures per year. This number is expected to continue growing.
ASCs are a financial boon for patients and payers; less so for hospital profit margins. ASCs reduced Medicare costs by $28.7 billion from 2011 through 2018 and are expected to reduce costs by an additional $73.4 billion by 2028. Recent research estimates that shifting outpatient procedures for “non-complex, commercially insured individuals to ASCs could reduce spending by 59% and save consumers $684 on average per outpatient procedure.”
A growing number of hospitals are taking an “If you can’t beat ’em, join ’em.” approach, seeking out profitable ASC joint ventures. A 2023 survey of hospital leadership found that “63% of hospitals plan to increase ASC investments or affiliations.” In 2021, 46 percent of hospitals and health systems had at least one ASC.
Partnerships
Since the beginning of 2022, the “number of days cash on hand for hospitals and health systems has declined by 28.3 percent.” Providers — especially those in severe financial distress — are using reserve funds to maintain operations and access to care, rather than investing in necessary infrastructure and technology.
On-going financial pressures are prompting health system leaders to establish external partnerships. According to Black Book’s 2023 annual outsourcing services survey, 59 percent of hospitals with over 150 beds are “turning away from tuning up in-house nonclinical services and moving to more outsourcing” due to “lack of in-house expertise, the need to keep up with another accelerated pace of technology implementation with reduced capital, and the risk of not supporting existing technology.” Reducing revenue leakage, automating inefficient processes, and scaling to match payer technology and offshoring capabilities are obvious benefits.
But, these partnerships can — and should — extend beyond staffing or technology solutions. Technology isn’t an effective solution unless it’s paired with change management and integration within the health system’s operational framework.
Change management is critical for successful technology adoption. Experienced external partners help guide behavioral shifts among healthcare staff to overcome resistance to change. This accelerates the adoption of new processes, technologies, and workflows to ensure providers can realize the full potential of their investment.
Sharing risk is also a key benefit of effective partnerships. Partners willing to share the burden of risk with clients don’t just build trust or demonstrate confidence in their solutions; they infuse the organization with economic leverage that drives more sustainable financial viability.
Navigating the Road Ahead
Providers’ financial challenges are critical, creating difficulties that stretch across every facet of operations to inevitably impact patient care. But these challenges also bring opportunities for growth and transformation. As costs surge, reimbursements dwindle, and staffing shortages persist, providers are pushed to reimagine their operational and financial strategies. Those willing to adopt innovative, pragmatic solutions are well-positioned to emerge stronger.
The future of healthcare shouldn’t just be organizational survival. By embracing strategic partnerships and collaborative approaches, hospitals and health systems can stop surviving and start thriving, charting a path toward stability that scales.
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