May 3, 2022
Post Q1 Woes – Picking Future Winners and Losers
The Big Story: Rising expenses at hospitals are unsustainable, AHA says
Prior to the pandemic, hospitals spent about 4.7 percent of labor expenses for nurses on contract travel nurses. That figure grew to about 39 percent in January, according to AHA report. The current trajectory for hospital expenses isn’t sustainable.
“The dramatic rise in costs of labor, drugs, supplies and equipment continue to put enormous pressure on our ability to provide care to our patients and communities,” AHA President and CEO Rick Pollack said in the statement.
What Comes Next
It was a dismal first quarter for healthcare providers. Of course there are some hospitals and health systems that are in a better spot, getting good marks from Fitch and Moody’s. But on the whole, the numbers have been bleak.
Today, we’re looking at forces currently pushing and pulling the industry and inevitably reshaping the provider landscape. The definition of success here is both idealistic and practical. It is both financial viability and the ability for a system to appropriately deliver on its mission to care for patients. We know the balance sheet must add up, and your CFOs need a clear path to sustainability, but ideals are also good.
So, let’s put the numbers aside for a moment. What will it take for healthcare providers to evolve successfully for the future?
- The hospital becomes the center of acute care, and little else.
- Delivery of care takes place in varied settings, from specialty outpatient clinics to the local grocery to the patient’s home to the patient’s texting app.
- Specialization and expertise will become the watchwords, with health services companies stepping in with innovative, flexible services and private capital contributing resources and a keen operational eye.
- Partnerships will also become more varied and collaborative, with the new hospital working in tandem with other types of healthcare organizations to provide a distributed, yet efficient and high-quality patient journey.
Certainly, there’s a long way to get from today’s messy Point A to an idealistic Point Z, but a shift in what constitutes risk and a willingness to undertake hard change will be critical to sustainability – and maybe allow your CFO to sleep better at night.
Here are our bets on what factors will contribute to a system winning or losing in the new healthcare ecosystem.
The core trait of a healthcare organization that will make it through is a recognition that creative transformation is less risky today than taking a defensive posture. Remodeling, not rearranging furniture, is needed to establish sustainable models of care going forward. Other aspects the winners should consider:
- Value-based care. Fee for service is predicated on, well, services. No volume, no revenue. The decade-long push towards value has likely reached a tipping point when there’s no other option.
- Alignment, not employment. Hospitals are looking at offloading physician groups to PE-backed companies and entering operating partnerships to ensure continuity of care without having their employment contracts on the books. It’s one form of streamlining the labor issue where each entity can focus on managing that which it is best at.
- Private capital. Beyond just staffing models, many traditional provider organizations are looking to sell non-core services like labs and even some specialty practices like orthopedics and cardiology to get them off the balance sheet. Meanwhile, PE is ready with capital to deploy and operational expertise to ensure quality of care and financial sustainability.
- Scale. Certainly, the ability to centralize operational departments – revenue cycle and the like – and standardize others is helpful. In addition, a smaller hospital that aligns with a large system will obviously have access to resources that can help them to stay open. Deals were down in Q1, but assuming the financial pressure continues to build, that trend could very well reverse.
- Low debt. Enough said.
Here, it’s largely the opposite traits. If flexibility and risk-taking wins, rigidity loses. Yes, there are some factors that are tough to control or change – like serving largely susceptible populations. But doubling down on the way things have always been done will only compound those concerns.
- Rigid care models. Better develop that VBC playbook.
- Susceptible populations. Serving a population with a high proportion of at-risk patients is problematic when reimbursement is difficult. The caveat is that this challenge is greater in a fee-for-service mindset. Flexibility and creativity in what it means to provide care can help mitigate this point.
- Being all things to all people. Trying to do too much and spreading the organization too thin when resources are scarce rather than focusing on core expertise.
- Stay the course. All told, continuing to view the hospital as the core of healthcare delivery is a surefire bet for a slide into unsustainability. Defensiveness and cost-cutting can only go so far before quality suffers and the organization is forced to offload services or shut down. Why not do that proactively and productively from a position of relative strength rather than hold a fire sale?
- High debt. Enough said.
This piece was originally published over the weekend in our Sunday Quick Think newsletter. Fill out the form to get that in your inbox every week.