Did you know that the healthcare industry’s revenue leakages cost billions annually? So much so that hundreds of hospitals face closure this year and the greatest number of hospitals since 2011 face breach of their bond covenants? A financial crisis so severe, the healthcare landscape will be fundamentally changed. In this blog post, we will explore the pressing challenges faced by the healthcare industry in today’s uncertain economic times and present six proven strategies to ensure revenue integrity. By examining the intricate relationships between government policies, financial dynamics, and healthcare delivery, we seek to provide evidence-based insights that empower healthcare organizations and investors to navigate these challenges successfully. Our objective is to offer practical solutions rooted in sound economic principles, devoid of political bias, and supported by relevant data and case studies.
The Healthcare sector has a distinctive challenge wherein it is experiencing unsustainable financial losses attributed to an impractical cost structure exceeding its revenues. The severity is poised to necessitate consolidation, divestment or hospital closures as well as spurring an increased level of mergers and acquisitions. This will materially change the healthcare delivery infrastructure in our nation, driving major expansion into urban centers as they grapple with increased volume, high acuity, trauma, and surgical care, with a stronger emphasis on varying payer sources.
The migration of lucrative surgical and specialty services such as cardiology, spine, and orthopedics as well as vascular will continue the migration to the suburbs. With a twist. The pandemic escalated the adoption of telemedicine and virtual care, giving rise to online and retail care options in non-traditional settings, including homes. Technological advances in remote monitoring, wearables, and Artificial Intelligence, as well as an increase in retail and wellness-based offerings further shift the location of care away from traditional hospital spoke-and-wheel hubs.
The Healthcare Industry is currently grappling with transformative pressures. On on side, it’s dealing with the economic aftermath of the pandemic and a looming Medicare Insolvency in the face of unprecedented inflationary pressures and labor shortages. On the other side, it’s witnessing unprecedented innovation and free market forces that are pushing out outpatient care out of traditional hospitals into community centers, retail car hubs, concierge services and homes. These forces are also driving the adoption of telemedicine and virtual care, thereby creating a new, non-traditional setting for care delivery while opening a path for alternative revenue streams.
The resulting financial burden is such that The Center for Healthcare Payment and Reform reports a staggering “632 hospitals are at risk for closure this fiscal year alone.” In addition, Bloomberg reports first quarter 2023 reflected “the highest number of bond defaults since 2011.” Covenant breaches will force course corrections, and will drive tough, strategic decisions as struggling hospitals seek shelter.
In addition, there is a dark outlook for Hospital organizations reliant on Medicare Part A reimbursement. The Medicare Hospital Insurance Trust Fund that pays the Medicare Hospital Part A Benefit, faces insolvency between 2028-2031. Anti-growth policies that have had, and will continue to have, a direct impact on reduced payroll tax revenues which account for 90% of the Hospital Insurance Trust Fund dollars. Meanwhile, Medicare spending grows as the population ages. Medicare benefit payments topped $744 billion in 2022 compared to just $200 billion in 2000. Medicare Hospital Insurance Trust Fund insolvency will trigger reductions in coverage amounts, leaving higher patient out of pocket expenses which often lead to bad debt.
An inconvenient truth is about to be violently exposed: The money is simply not there to fund the healthcare industry as we’ve known it. We are about to witness a major transformation of where, and how care is delivered and paid for. Are you ready?
Let’s explore at a high level the key drivers of margin erosion in healthcare: Volume, price, and operating costs.
Volume: The Pandemic was the proverbial Trojan Horse for Healthcare and the harbinger of cataclysmic volume shifts. Lockdown policies resulted in immediate cancellations of elective diagnostic and surgical interventions over a prolonged period. The initial hospital surge in patient volumes in certain centers across the nation with high viral penetration were impacted by lack of intensive care unit beds and emergency rooms which were at capacity with patients. The acuity levels, as well as variation in admission protocols for post-acute providers drove higher patient length-of-stay against as patients could not be discharged to lower levels of care. Frenetic, ever-changing community COVID-19 threat levels and corresponding protocols drove a revolving open/close/open sequence for elective procedures. Many patients cancelled or delayed elective care altogether, citing viral exposure risk concerns. As the pandemic timeline continued, unprecedented staffing challenges caused additional business disruption, with burn-out a major driver even today as many have left the acute care setting all together.
Price: Volume decreases in elective, and specialty hospital admissions impacted surgeons as well as hospitals. As COVID lockdowns loosened in many states, a clear shift of the payor mixes from the hospital to the outpatient community settings, and ASCs emerged, creating an increased government payor mix at the hospital. The impact of unemployment during the lockdowns increased self-pay and unfunded patient volumes further diluting net revenue. Many hospitals Medicaid Disproportionate Share (DHS) payment ratios were also impacted as Medicaid volumes dropped during this same period, impacting revenues. An additional challenge is retroactive payer “take-back” schemes” tied to increasing insurance denials.
Operating Costs: While Pandemic losses to hospitals in 2020 were reported to be $328 million, 2022 was “the worst year since the pandemic” according to the Kauffman Hall Hospital Flash Report. Staffing shortages and supply chain were the top two cost drivers with inflation driving costs of care in nearly every expense category.
Labor Costs: Labor costs according to a Kaufman Hall report, led to a $49 billion one-year expense increase for hospitals and health systems. That’s a staggering 258% increase in total contract labor expenses for hospitals in 2022 compared to 2019 driven by lock-down policies which varied by state. Labor costs will continue to impact hospitals driven by burn-out, turnover and union activity. In addition, increases in “insurer specific documentation” have increased significantly during this same period, causing incremental FTE creep. Administrative and labor hour creep continues to erode margin, as the insurance and regulatory documentation requirements are met with the most expensive badge in the room, physicians, and nurses.
Supply chain – Hospital supply costs outpaced inflation by 30% in 2022, with critical supplies such as ventilators reflecting a 33% increase in costs according to an AHA report. Drug costs increased by 19.7% per patient between 2019 and 2022. With drug shortages continuing, and six Pharmacy Benefit Mangers (PBMs) owning 95% of the market with vertically integrated pharmacy chains and insurance companies. While there seems to be bi-partisan support for controlling healthcare consolidation, the lack of transparency and anti-competitive nature of Pharmacy Benefit Managers is unlikely to drive significant cost savings.
Block-and-tackle strategies to mitigate revenue leakage.
The following strategies can be deployed to mitigate revenue leakage:
Strengthen your revenue cycle process – Conduct a 12-month minimum detailed retrospective review of your contractual reimbursements to analyze and understand your business. Identify underpayments or non-compliant denials and trigger appeals to immediately recover what is owed to bolster your cash on hand.
Negotiate better payor contracts – Instead of a market-basket “5% price increase”, be strategic. To negotiate well, you must first understand what you have in your contracts versus what you need to have. In advance of contract negotiations prepare a comprehensive comparison by payer with top revenue codes and service lines to understand your position, payer compliance, and the market.
- Analyze high, average, and low reimbursement thresholds by payer.
- Break down reimbursements by service line, code, and payer in ranking order of revenue. Compare to your costs.
- Prepare a comprehensive assessment of contractual compliance, identifying underpayments.
- Trend your data continuously, establishing Key Performance Indicators (KPIs) to determine if there is a shift in reimbursement that requires action.
Stabilize your workforce – Recognize that our nation’s economic policies have directly contributed to fewer physicians accepting Medicare and Medicaid, so employment has increased, and the market highly competitive. Staffing shortages directly linked to pandemic era policies will continue to be a driver of nursing labor throughout 2024. The Bureau of Labor and Statistics projects a staggering 2 million openings a year in healthcare through 2031 with nearly 21% of physicians reaching retirement age by 2026.
Beyond a market competitive wage and benefit offerings, leverage technology and artificial intelligence. Utilize predictive analytics to drive advancements in throughput and patient flow for maximum efficiency. Create elasticity in the workforce. Consider augmenting your teams with virtual staff in smart care settings. Scribes are another investment who can greatly assist physicians and other healthcare providers by performing administrative functions.
Cut non-essential operating costs – Consider converting your accounts payable department into a revenue center though automating payment. Audit your credit card processing fees for reductions, as well as your linen contracts for billing errors, overpayments, or unapproved rate hikes. Maximize tax incentives. Ensure that you have completed a cost segregation study, property tax recovery and energy tax audits.
The block-and-tackle strategies above can have a very positive impact on the balance sheet.
Additionally, here are some examples of investment opportunities in the aforementioned areas. It is important to note that investing in any business involves risk, including liquidity, lack of dividends, and dilution, and should be done only as part of a diversified portfolio. Additionally, public market investments are subject to market volatility and other factors. Always perform your due diligence and consider getting advice from a qualified financial advisor.
- Embracing Technology and Telemedicine: American Well Corporation (AMWL), listed on the NYSE. This is a telehealth platform in the United States and globally.
BioTelemtry, Inc. (BEAT), listed on the NASDAQ. This is a remote medical technology company focused on the delivery of health information to improve quality of life and reduce the cost of care.
- Workforce Development: Grand Canyon Education, Inc., (LOPE), listed on the NASDAQ. This company provides education services for the healthcare sector, including healthcare management and nursing degrees.
2U, Inc. (TWOU), listed on the NASDAQ. 2U, Inc., is a company that partners with non-profit colleges and universities to offer online degree programs, including in the healthcare fields.
- Healthcare Infrastructure and Real Estate: Healthcare Trust of America, Inc. (HTA), listed on the NYSE. This company acquires, owns, and operates medical office buildings.
HCA Healthcare, Inc. (HCA) listed on the NYSE. It is one of the largest healthcare services providers in the U.S., owning and operating hospitals and surgery centers across the country.
- Revenue Cycle Management Solutions: Companies like R1 RCM (NASDAQ:RCM) offer solutions to combat escalating issues and insurance denials in healthcare.
MedNax, Inc. , listed on the NYSE. They offer revenue cycle management and other business management services to hospitals and physician groups.
- Investment in Mergers and Acquisitions Consultancy: Morgan Stanley (MS), listed on the NYSE. This is a multinational investment and financial services company that has been involved in numerous healthcare sector mergers and acquisitions in the healthcare sector.
Lazard, Ltd (LAAZ), listed on the NYSE. This is an investment bank with a strong record and financial services company that has been involved in numerous healthcare sector mergers and acquisitions.
For non-publicly traded solutions, investors could consider equity crowdfunding platforms such as Crowd Cube and AngelList, or they could potentially direct approach venture capital firms specializing in the healthcare sector. Examples include Kleiner Perkins and NEA (New Enterprise Associates). These opportunities typically carry more risk and require more extensive due diligence. As always, consult with a financial advisor before making investment decisions.
In closing, the healthcare sector stands on the precipice of transformational change. As it grapples with severe financial constraints, born out of unsustainable losses and inefficient cost structures, a metamorphosis is being fast tracked by necessity. The catalysts for change are wide-ranging, from a surge in new mergers and acquisitions to sweeping technological advances that are reshaping how healthcare is delivered. Simultaneously, pressures from a post-pandemic economic fallout and a looming Medicare Insolvency have intensified the strain on an already embattled industry.
We’ve presented five key strategies to counter these challenges.
- Embracing Technology and Telemedicine: As care moves out of traditional settings, companies like Teladoc Health (NYSE: TDOC) and Butterfly Network (NYSE: BFLY), pioneers in telehealth and innovative medical imaging respectively, represent opportunities for investors to capitalize on this trend.
- Workforce Development: The demand for healthcare workers outstrips supply, leading to opportunities for companies like AMN Healthcare Services (NYSE: AMN) and Relias, a private company offering online training solutions for healthcare professionals.
- Investment in Healthcare Infrastructure and Real Estate: As healthcare delivery models evolve, Progyny (NASDAQ: PGNY), a provider of fertility benefits for employers stands out. For real estate, Ventas (NYSE: VTR) and Health peak Properties (NYSE: PEAK), both REITs focusing on healthcare facilities are well-positioned to benefit from and expansion in healthcare real estate.
- Revenue Cycle Management Solutions: Companies like R1 RCM (NASDAQ: RCM) offer solutions to combat escalating issues and insurance denials in healthcare.
- Leveraging Mergers and Acquisitions: With an expected increase in M&A activity, investment banks such as Goldman Sachs (NYSE:GS) will likely benefit from advising on these complex transactions.
In the face of uncertain economic times with inflation that is clearly not transitory, these strategies and investment opportunities point to a roadmap that can stabilize the healthcare sector, ensuring revenue integrity, and maintain a focus on high quality patient care. However, navigating the healthcare investment landscape requires due diligence and a well-informed approach. It is advised that investors seek the counsel of a financial advisor when considering these investment opportunities.
The future of healthcare is brimming with complexities, but with these challenges lie immense opportunities as well. The healthcare landscape is evolving at an unprecedented pace, but with a strategic focus on these key areas, investor and healthcare organizations alike can not only weather the current storm, but potentially emerge stronger and more resilient, making it an attractive arena for investment and development.
The Financial Policy Council (FPC) with whom I am affiliated with, is steadfastly committed to the advancement of sound public policy rooted in the principles of free enterprise and wealth creation, as envisioned by our founding fathers of the United States. They advocate economic policies that enhance healthcare resilience and efficiency. Furthermore, the FPC promotes free enterprise as a key driver of economic growth and supports free market business strategies and innovations that bring true solutions to the healthcare industry. Simultaneously, pressures from a post-pandemic economic fallout and inflationary economy have intensified the strain on an already embattled industry.
Engaging with the FPC, I’ve had the chance to understand how the connection between the economic policies of our nation, and the stabilization of the American Healthcare System really are.
Call to Action:
I encourage us all to become actively involved in solving the challenges healthcare is facing. Here are a few ways you can help:
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Get involved. Join the Financial Policy Council and become part of a community dedicated to promoting economic growth, and wealth creation. Attending our events, webinars, and round table discussions.
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Learn more: Explore the FPC’s other resources and blog posts to deepen your understanding of Healthcare economic issues.
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- https:\www.aha.org \09\The-Current-State-of-Hospital-Finances-Fall-2022-Update-KaufmanHall.pdf