Health systems face ‘perfect storm' of financial challenges

Inpatient admissions and emergency department visits are still well below pre-pandemic levels—and patients who are coming into the hospital are staying longer, driving up costs. Even as demand slowly rebounds, providers have been limited by worker shortages that have led to double-digit percentage increases in labor expenses.

These headwinds have fueled a perfect storm that will dent hospitals’ financial performance for at least two years, providers said. While health systems will fare differently based on their size and business diversification, organizations of all types will continue to retool their revenue streams and staffing strategies.

“If you add the challenges of the COVID-19 pandemic with the macroeconomic challenges of the world, it will take at least a couple of years for the healthcare industry to stabilize and turn around,” said Dr. Luis Garcia, president of the clinic division of Sanford Health, a not-for-profit integrated system. “We’ll be dealing with these challenges for years to come—a lot of what we are seeing right now has become the new normal.”

Nationally, at the end of March, inpatient admissions were 15% lower than they were in March 2019, and ED visits were down 17%, according to Collective Medical data from more than 1,000 hospitals in nine states across the country provided by Glenn Melnick, a health policy and economics professor at the University of Southern California.

“I expected 2022 hospital volumes to be close to normal. They are not,” Melnick said. “At the same time, there appears to be more structural wage cost pressure. That cost pressure on labor and supplies will stretch out in the healthcare sector.”

Outpatient admissions, which are reimbursed at lower rates than inpatient admissions, have rebounded much more quickly than ED visits and inpatient admissions. But the uptick isn’t expected to offset the revenue gap, and all hospital departments—as well as their skilled-nursing and long-term care referral partners—are constrained by worker shortages.

While inpatient admissions at Seattle-based Virginia Mason Franciscan Health are moving in the right direction, they have yet to return to pre-pandemic levels, said Ketul Patel, CEO of the not-for-profit health system and president of CommonSpirit Health’s Pacific Northwest division.

“We are never going to be where we were before the pandemic, but we expect it to normalize over the next six months,” he said. “The challenge is staffing.”

Strength in size

The financial impact varies based on the size of the organizations. Larger health systems generally have stronger balance sheets, although they are expected to weaken as coronavirus aid funding and investment income wane.

“The public health emergency support has been key to helping solve for the negative financial impacts resulting from the stressed labor market,” Mercy Health, a 30-hospital system based in the St. Louis area, wrote in the 2022 Modern Healthcare Hospital Systems Survey. “Provider Relief Funds and waivers that helped enable patient access were key to helping us meet the challenges associated with the pandemic.”

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Smaller organizations, like Guadalupe County Hospital in Santa Rosa, New Mexico, are feeling the pinch. The rural hospital’s inpatient admissions have taken a deep dive, administrator Christina Campos said.

“Even a small decline is very concerning, especially to small hospitals, considering the steep increases in supply and human resources (costs),” she said, adding that the hospital will dig into its reserves, if necessary. “However, many hospitals—especially small rural hospitals—have no reserves, and this is quickly developing into a ‘perfect storm.’ ”

Rural hospitals helped sustain Sanford, chief physician Dr. Jeremy Cauwels said. The system’s rural affiliates freed up capacity at Sanford for the most acute patients, he said.

“Two years after they were unsung heroes, they’re now going through some of the biggest trials,” Cauwels said.

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While COVID-19 relief grants helped providers manage volume volatility, the funding wasn’t allocated evenly, said Bill Kramer, executive director for health policy at the Purchaser Business Group on Health, a coalition of large nonhospital employers. Not enough went to smaller community hospitals and physician practices that were more affected by the immediate loss of volume, he said. Coronavirus rescue funds were disproportionately allocated to hospitals that were in a stronger financial situation prior to the pandemic, a 2021 study published in the Journal of the American Medical Association Health Forum found.

“Some smaller hospitals and independent primary-care practices felt the only way to survive was to be acquired by larger health systems,” Kramer said. “The misallocation of CARES funds accelerated consolidation.”

M&A moves

Health systems pursued mergers and acquisitions in the physician group and outpatient spaces in an attempt to mitigate the decline in ED-driven inpatient care referrals.

Physician group transaction activity nearly doubled in the first quarter of 2021 and has continued at a higher pace since, according to the PricewaterhouseCoopers mid-year deals report. Health systems and private-equity groups were among the top acquirers, contributing to 482 deals made from May 2021 through May 2022 with a total value of $5.7 billion—representing 5% and 4% year-over-year increases, respectively. The report found an 8% increase in the number of transactions involving other services, which includes ambulatory surgery centers.

“There is more movement to the high-margin ambulatory surgery center market,” said Richard Bajner, a partner at the management consulting firm Guidehouse. “The progressive payers have a better value proposition for physician partners, who are getting picked off faster than these health systems recognize. That market is going to be strong for quite some time—the biggest risk taker is a hospital-based health system that doesn’t have an appropriate ambulatory-based strategy to compete for physician loyalty.”

Philadelphia-based University of Pennsylvania Health System has a long-term advantage because it owns parts of the inpatient, outpatient, home and virtual care continuum, CEO Kevin Mahoney said. UPHS’ two specialty pharmacies allows the health system to provide 70% of its chemotherapy and infusions at the patient’s home, freeing up its outpatient capacity, he said.Health systems are also trying to be more efficient. Sanford has tried to increase its operating room utilization, limit medical waste, renegotiate vendor contracts and standardize supplies, Garcia said.

Adding incentives for staff

To help retain more staff, most health systems are offering premium pay and bonuses to their employees, the Modern Healthcare Hospital Systems Survey found.

Sanford is expanding its scholarship programs at medical schools and investing more in graduate medical education, Garcia said.

“When it comes to short-term strategies, flexible hours and working from home, when possible, are big deals,” he said. “We need to support our people in a more holistic way.”

Guadalupe County Hospital is offering targeted raises and providing more tuition support, Campos said.

“We’re trying to beef up some of our niche outpatient services, but it comes back to staffing. We have to be careful not to increase our operating costs so much that we dig ourselves into a deeper hole,” she said.

Danville, Pennsylvania-based integrated health system Geisinger offers free tuition to students at its medical school, as long as they go into behavioral health or primary care and stay at the health system for as many years as students received financial aid, executives said. Geisinger is also implementing more technology solutions to common workforce processes that take staff away from patient care, representatives for the not-for-profit system said in the survey.

The Northern California integrated system Sutter Health last year tripled the capacity of its educational program for training new graduate nurses and experienced nurses who have chosen to move into critical care and certain high-need specialties, the organization’s representatives said.

Edward-Elmhurst Health, a Chicago-area integrated system that merged with NorthShore University HealthSystem in January, said in the survey that it placed employee support coordinators at its Linden Oaks Behavioral Health campus to mitigate burnout.

“Even though the public health emergency (is set to end this year), we continue to experience ongoing financial and staffing challenges related to the pandemic,” health system representatives said.

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