CFOs are feeling optimistic about the financial outlook, but there are three large challenges that will need to be navigated.

A majority (79%) of healthcare CFOs expect a revenue increase this year, yet 78% cited profitability as an area of improvement, according to a healthcare CFO outlook survey conducted by BDO.

While CFOs remain optimistic, BDO warns that healthcare organizations may face challenges in achieving higher revenue and profitability due to three main reasons: regulatory pressures, clawbacks of COVID-19 funding, and challenging bond and loan covenant agreements.

A look at the numbers

The survey, which included responses from 100 CFOs, found that 11% of respondents reported their organizations had violated bond and/or loan covenants in the past year, and 30% expressed concern about violating them in the future.

Furthermore, only 35% of healthcare organizations represented in the survey had more than 60 days cash on hand. This highlights the need for more strategic conversations around economic resilience, as identified by 44% of CFOs.

What’s the solution?

In response to these challenges, CFOs are shifting their strategies.

The survey found that 39% of CFOs are adjusting revenue cycle management to improve liquidity, while 37% are engaging in strategic cost reductions, including staff. Another 34% are focusing on transforming operating models. These approaches reflect the need for cash flow optimization, cost optimization, and risk management to ensure the continuity of care for patient communities.

Efforts to optimize revenue cycles through roles and workflows, denials, and post-payment audits, as well as the implementation of AI and robotic process automation, are also expected to increase efficiency and financial performance, the survey noted.

Dealmaking is also a priority for healthcare CFOs this year, with nearly three-quarters of respondents including it on their to-do lists. However, challenges such as navigating due diligence, finding the right target or buyer, and addressing valuation gaps are still top concerns for healthcare finance leaders.

What about investments?

CFOs are starting to recognize the potential of new advancements in AI, particularly generative AI.

Almost half (47%) of surveyed CFOs expect to increase technology implementation spending this year, with 98% piloting generative AI and 46% building a proprietary generative AI platform.

These investments are focused on improving front- and back-office operations, including digital investments in patient-provider communications and remote patient care. Use cases for generative AI include treatment plan generation, clinician-to-patient communications, and diagnostics and medical imaging.

In addition to AI, CFOs are investing in predictive staffing, financial reporting software, and enterprise data analytics to enhance their organizations' performance and financial decision-making capabilities.

What does it all mean?

Overall, the survey highlights the cautious optimism of healthcare CFOs for the financial outlook of their organizations in 2024.

While there are challenges to be addressed, CFOs are taking a proactive approach by revisiting strategies and making investments in revenue cycle management, cost optimization, and technology. By focusing on cash flow, efficiency, and risk management, CFOs aim to ensure the continuity of care and resiliency of their operations.

A strong, collaborative relationship with payer partners is essential for one CFO.

At a time when providers can feel like they are at a crossroads with payers, Bridgett Feagin, CFO for Connecticut Children's—a level 1 pediatric trauma center with roughly $600 million in net patient revenue—says building a strong relationship with payers is the key to reducing administrative burdens and denials, and ensuring payment.

But how it is done? Leveraging its payer mix, putting pressure on its commercial payers, and keeping communication open has been key Feagin previously told HealthLeaders.

“It's a collaborative relationship, meaning that [payers] understand our needs and we also understand their business needs as well. So, if it costs $100 to take care of this patient, we at least need to cover our costs,” Feagin said.

Connecticut Children's is a payer mix with close to 60% of Medicaid, and Medicaid does not cover Connecticut Children's costs, Feagin says.

“So, we need our commercial payers to give us a little bit more than the costs. So, we can shift some of that liability over to our commercial payers. And that's just the way it works. They understand that but we are working with the state as well to increase our reimbursement to cover our costs,” Feagin says.

Feagin also explained that a good payer partnership also reduces administrative burdens, such as a denial. “When a payer denies a claim, it creates more administrative work for my team. On the front end, we're talking to payers about what we need to do, to make sure we don't get a denial in the first place.”

But how can you collaborate to ensure that a claim won't be denied?

Having monthly team meetings and keeping communication open with the payers helped ensure claims don’t get denied she says.

“One example would be with our NICU babies. Typically, we're supposed to notify our payers within 48 hours, that the baby is admitted to the hospital,” Feagin said. “However, those parents are not thinking about providing the information, because they have a critically ill child that's been admitted to the ICU.”

“We need to be compassionate and work with the family to get the information and find out who their insurance company is. Sometimes that takes over 48 hours. So, say if it goes to 72 hours, we'll contact the payer and say we'll have this information beyond the 48 hours,” Feagin says.

“Now they'll have it in their system, and they get the authorization done. So that's an example of working with the payer to make sure we don't get a denial on the back end.”

The payer/provider turmoil has been heating up, and now there are numbers to show that it's not just all in our heads.

A not-so-unexpected trend has emerged: a notable uptick in payer/provider disputes year over year.

In addition, according to research by FTI Consulting, disagreements over reimbursement rates and contract terms have also garnered more media attention in the last year, consistent with what HealthLeaders has been reporting.

Even more, among these payer/provider disputes there seems to be a clear opponent for providers: Medicare Advantage (MA).

Let’s look at what it all means and how CFOs can better address these challenges.

The numbers

According to the research, over the past two years negotiations between payers and providers have increasingly resulted in disputes that have captured the attention of the media. The coverage of these disputes has grown significantly, with a remarkable increase in 2023 compared to the previous year.

The study found that in 2023, there were 86 publicly reported disputes covered by media outlets, showing a 69% surge from the 51 disputes witnessed in 2022. These conflicts have spanned across 34 states, emphasizing the widespread impact.

"I think you're going to see an acceleration in the public town square, the competitiveness and the negotiating in the public opinion space," Britt Berrett, managing director and teaching professor at Brigham Young University and former CEO with HCA, Texas Health Resources, and SHARP, previously told HealthLeaders.

"I think moving forward, you're going to see a tremendous amount of public awareness on contract negotiations. Payers and providers are going to be arguing their cases in the town square," he says.

Interestingly, out of the total disputes covered by the media in 2023, 44% failed to reach an agreement. This failure to establish timely agreements mirrors the trend observed in 2022 when 45% of disputes remained unresolved.

As mentioned, the data shows that MA plans have emerged as a focal point in contract disputes between payers and providers.

In 2023, 59% of the disputes reported in the media involved MA plans, with 12 disputes exclusively focused on MA plans. This trend aligns with the previous year, where 56% of disputes referenced MA plans.

What does it mean for hospital and health system CFOs?

We know that payer/provider relationships are only becoming more complex, and these disputes are starting to take center stage among the challenges faced by hospital and health system CFOs.

The surge in media coverage of these differences underscores the need for proactive measures to navigate the evolving payer landscape.

Here are key strategies I have gathered from some of the best CFOs in the game:

Strengthen negotiation tactics: As reimbursement rates become a more contentious issue, CFOs need to enhance their negotiation strategies to secure favorable agreements with payers.

And CFOs need to remember they have more leverage in negotiation talks than they think, but it requires willingness and preparation to pull levers that may be uncomfortable yet necessary for financial survival.

One option is to collaborate with legal and financial teams to develop a well-informed bargaining position can help ensure fair reimbursement.

A second option? Consider contact termination.

Dropping a payer is “absolutely an important strategy,” Berrett says. “Providers are becoming more capable in measuring the impact of the slow or rejected payments, and providers are looking at the actual cost of care by patient. Payers need to be aware that.”

There are two important considerations for providers when negotiating, Berrett says. “Are we able to collect our negotiated rates, and are the patients covered by this payer more expensive to treat?”

Develop robust communication channels: Establishing effective lines of communication with payers is crucial to resolving disputes promptly. CFOs should work closely with their revenue cycle management teams to foster open dialogue with payers, enabling timely negotiation and dispute resolution.

Focus on your patient impact: Hospital and health system CFOs must prioritize patient experience and minimize disruption amidst disputes. Developing contingency plans and early communication with patients can alleviate concerns and ensure seamless access to care.

Monitor the regulatory environment: Stay abreast of regulatory changes and proposed legislation that may impact payer-provider relationships—for example, CMS’ attempt to better regulate MA. Understanding evolving regulations can inform negotiation strategies and help CFOs navigate potential roadblocks.

The financial outlook for not-for-profit hospitals and health systems is once again under scrutiny.

With operating margins at risk of a permanent reset, concerns have been raised among investors as it may lead to widespread downgrades, a new report by Fitch Ratings says.

While we are not expected to face a "sector-ending incident," hospitals and health system CFOs must carefully manage their liquidity and capital spending to navigate these challenges.

What is Happening with Operating Margins?

Traditionally, healthy operating margins for hospitals have ranged from 3% or higher.

In fact, even Kaufman Hall has reported that the median calendar year-to-date operating margin index was 2.0% through the end of this past November, “still well below the 3%-4% range often cited as a sustainable operating margin for not-for-profit hospitals and health systems.”

Now, Fitch Ratings predicts that the ideal range will likely reset to 1%-2% for not-for-profit hospitals in the future. While a significant reduction, the report suggests that widespread downgrades are unlikely due to the robust balance sheets and capital spending discipline demonstrated by many health systems.

Despite this, individual hospitals may face downgrades if they are unable to defer capital investments and fail to improve operational efficiencies.

What is the Cause?

One of the critical factors contributing to the financial uncertainty ahead is the aging population Fitch says.

By 2030, the last of the baby boomer generation will reach the age of 65, leading to a larger population in need of heightened healthcare services.

This scenario may strain healthcare providers' resources, potentially impacting their profitability. The need for increased staffing and the associated costs, the report says, may offset any gains made in operational efficiencies.

Another area of concern in the report is the days' cash on hand ratio. It questions whether the current range of 200-250 days may be too high, given the ongoing struggles of the sector.

However, the data shows that the ratio has consistently remained above 200 days in nine out of the last ten years, with a median of 216 days based on 2022 financials. Despite potential improvements in profitability and investment gains, the report suggests that this metric may see little improvement.

So how can CFOs prepare?

There are a few strategies hospital and health system CFOs can use to stay ahead.

Maintain a robust balance sheet: The report highlights the importance of building and maintaining a robust balance sheet to withstand potential financial challenges. CFOs should focus on healthy liquidity cushions to protect against unforeseen circumstances and maintain financial stability.

Optimize capital spending: As the industry faces financial headwinds, CFOs should evaluate capital spending carefully. Prioritizing investments that directly contribute to operational efficiency and improved patient care will be crucial to ensure long-term success.

Plan for the aging patients: With the incoming surge of the baby boomer generation requiring increased healthcare services, CFOs must develop strategic plans to support the growing demand. This may include proactive workforce planning, optimizing processes, and leveraging technology to enhance efficiency.

Monitor days' cash on hand ratio: While the current days' cash on hand ratio range may be appropriate given the sector's challenges, CFOs should continue monitoring this metric. A robust ratio can provide a buffer during economic downturns or unforeseen circumstances, safeguarding against potential financial instability.

While moving in a positive direction, the outlook for not-for-profit hospitals and health systems presents challenges that demand careful financial planning and strategic decision-making. While the reset of operating margins and the pressure to improve profitability may not result in widespread downgrades, it is essential for CFOs to maintain strong financial foundations.