"This level of losses is unprecedented," says WSHA's CFO.

Hospitals in Washington state are facing unprecedented financial challenges, with significant operating losses and negative margins, says the Washington State Hospital Association (WSHA).

A study conducted by the association reveals that in the first six months of 2023, the state's hospitals collectively reported operating losses of nearly $750 million, representing a -4.6% operating margin.

This trend carries important implications for hospital CFOs not only in Washington state but across the country as it underscores the ongoing financial struggles that hospitals face across the country.

So, what is behind the struggling finances for the state’s hospitals, and what lessons can CFOs across the country learn? Luckily there are a few key trends from this report that all CFOs can focus on.

Expenses, expenses, expenses.

The study highlights that a substantial increase in expenses is one of the key drivers of these losses in Washington state, with expenses rising by 10% year over year. Hospital CFOs nationally should be aware of the impact of rising costs related to supplies, equipment, medications, and labor expenses.

"We are working closely with our suppliers to make sure they understand that we need to push back on cost increases, and they need to find ways to take cost out," Sam Banks, chief procurement officer and vice president of supply chain at Indiana University Health, told HealthLeaders. "In some areas and contracts, we have protection against inflation or at least a cap on prices. That has saved us in quite a few situations."

He added: "I am a firm believer that the better we understand how their products are made and their input costs, the better our ability is to push back on cost increases."

When it comes to labor, CFOs need to be particularly mindful of the wage pressures on the labor front. In Washington state, employee compensation has increased by an average of 8% per employee when comparing the first six months of 2023 to the same period in 2022.

In fact, Matt Minor, CFO of Columbia County Health System located in Washington state, recently shared with HealthLeaders that labor is his largest expense.

“Even before the pandemic, it was the number one issue. That has always been the highest cost. Before the pandemic, it was a problem that was somewhat unique to rural providers because there is just a smaller percentage of the population that wants to live there,” Minor said.

“Our closest major city is 45 minutes away by car. The next one from that is an hour away. So, it takes a lot to get people to want to come and live in Dayton. Then after the pandemic, when you have a much smaller pool to work with, it becomes even more difficult. So that has absolutely been our single greatest financial hurdle over the last few years,” he said.

This increase in labor expenses, coupled with challenges in recruiting and retaining staff, is significantly straining hospital budgets.

Non-operating revenue is not a sustainable solution.

The study notes that non-operating revenue, which includes investment income and COVID-related funds, helped reduce the overall losses. However, CFOs know that non-operating revenue is not a reliable or a sustainable solution for achieving positive operating margins in the long term.

“Investment income is not reliable and it is critical that operating margins are positive for long-term sustainability of hospitals in our state,” Eric Lewis, WSHA’s CFO reiterated in a statement.

“85% of the organizations responding to our survey had a negative margin. This level of losses is unprecedented,” Lewis said.

There’s a spotlight on the importance of cost control.

The study also emphasized the importance of cost control measures, including cuts in services and reductions in the use of contract labor. Luckily, HealthLeaders has seen that CFOs across the country are already considering similar strategies to manage contract labor expenses effectively.

The losses and negative margins in these Washington state hospitals emphasizes the financial challenges faced by healthcare organizations across the country—and highlights the fact that CFOs have a mountain to climb in 2024.

Hospital volumes for not-for-profits have largely recovered from the pandemic, however, expenses, particularly salaries and wages, remain stubbornly high.

Margin declines, expense growth, and an impending “labordemic” is spelling trouble for non-profit hospitals looking to claw their way to financial relief according to a new report from Fitch Ratings.

Median operating and operating EBITDA margins for not-for-profit hospitals declined significantly from fiscal year 2021 to 2022, and this decline, Fitch says, is primarily due to persistent high labor costs and the inelastic nature of hospital revenue.

The report also notes that hospital expenses grew in 2020, even as there was a significant drop in year-over-year volumes and revenues. This was partially offset by federal stimulus funds.

While outpatient visits gradually improved, inpatient admissions increased from pandemic lows in 2021, driving revenue growth. However, with stimulus funds tapering off, median revenue growth slowed, and expenses increased due to a reliance on expensive external contract labor and increased salary and wage costs.

The healthcare sector continues to experience staffing shortages for both clinical and non-clinical roles, leading to increased labor costs, the report points out. The report suggests that this “labordemic” is expected to persist through 2024 and possibly beyond. This is on trend with what we have been seeing, as CFOs have put more energy into retaining talent on a budget.

Consistent with the trends HealthLeaders has been reporting on, the Fitch report says hospitals have been tapering off more expensive travel nursing staff and are focusing on building their permanent staffing levels in-house.

Fitch says hospitals are achieving this by offering higher salaries and bonuses, leading to a decline in external contract labor utilization—but this may not be sustainable.

In fact, hospital payrolls have been rising for 19 consecutive months as of August 2023, the report says.

On the same note, Fitch says hospital employees' average hourly earnings growth has slowed to 3.75% from a high of 8.4% since the start of the pandemic. But while it has come down from its peak, it remains well above the 2.3% growth seen for hospital employees from 2010 to 2019.

This indicates that higher labor costs probably won't be going anywhere soon.

What does this mean for CFOs in 2024 and beyond?

There are a few key strategies that CFOs—from all hospital and health systems—should consider when planning for 2024.

Controlling labor costs: Hospital CFOs will need to prioritize controlling labor costs, as they continue to be a significant driver of expenses. This includes addressing recruitment and retention challenges, offering competitive salaries, and minimizing reliance on expensive external contract labor.

Revenue diversification: CFOs may need to explore strategies to diversify revenue sources. This could include expanding into services that can generate more revenue.

One way to do this is to develop and implement a strategy to expand the outpatient footprint. Stacy Taylor, CFO at Nemaha County Hospital, a top 100 a critical access hospital located in Nebraska, has done just that.

The hospital, which sits in the south-east corner of Nebraska, is a small critical access hospital that sees about 2,000 ER patients a year. On top of this, roughly 25,000 outpatients come through the facility in a year.

If you’re a smaller, critical access hospital, you need to capitalize on those outpatient services, Taylor said.

“As a critical access hospital, one thing that we have done to maintain financial stability is to make ourselves true to the critical access model of reimbursement. We've stayed true to that outpatient business,” Taylor said.

Cost efficiency and budget management: CFOs should focus on optimizing expenses and managing budgets efficiently. This may involve adopting technology solutions, streamlining operations, and scrutinizing spending to ensure financial sustainability.

Brad Archer, MD, chief medical officer of Rapid City, South Dakota-based Monument Health, said his organization had to rise to the challenge of not having government payers cover the totality of their costs.

“It is a challenge, and it got worse with COVID with the increase in supply chain costs and the increase in labor costs. We are having to be careful as we look at our expansion into different service lines,” Archer previously told HealthLeaders.

The payer mix has not kept Monument from launching new service lines, he said, but it is a consideration. Archer said Monument is becoming leaner in terms of efficiency, and as it continues to maintain and improve quality, the organization is looking to do so in a way that is most efficient and financially feasible.

“We are getting better with our revenue cycle—connecting our clinical teams to our revenue cycle and finance teams to achieve the best possible financial outcome,” Archer said.

Monitoring payer-mix and volume shifts: To piggyback on Archer’s payer statement, it's essential to closely monitor payer mix and shifts in patient volumes. Understanding how these factors impact operating margins and taking proactive steps to address challenges can be crucial—especially in light of the challenging payer/provider relationship.

In fact, as payer contracts agreed upon in a different financial climate reach their expiration, the two sides are being forced to come to the table and find new common ground during a new normal in healthcare.

"Those negotiations will be ferocious because once again hospitals have burned through their cash," Britt Berrett, managing director and teaching professor at Brigham Young University and former CEO with HCA, Texas Health Resources, and Scan Medical Center, told HealthLeaders. "Their biggest issues are salary, wages, and benefits. They don't see those going away. So this is going to be all-out battle between providers and payers."

CFOs could have more leverage in these talks than they think, but it requires willingness and preparation to pull levers that may be uncomfortable.

Strategic workforce planning: CFOs should engage in strategic workforce planning to address staffing shortages. This includes creating effective recruitment and retention strategies and potentially considering investments in training and development to cultivate a skilled and loyal workforce.

This will be even more important in 2024 as healthcare strikes are likely to continue. For example, the Kaiser Permanente strike—the largest healthcare workers’ strike in history—recently ended without a deal. Nonetheless, the three-day walkout set the stage for future workforce demands that CFOs will now need to be prioritizing.

Adaptation to market conditions: CFOs also know they need to continue to adapt to market conditions, especially in areas with high-growth potential. Understanding local labor markets and competition for healthcare professionals can help in developing tailored strategies.

In 2024, hospital CFOs will continue to face the challenge of weak margins and elevated labor costs due to ongoing staffing shortages, and successfully managing these challenges will be crucial for financial sustainability and positive credit ratings. CFOs need to remain agile, explore revenue diversification, and focus on cost efficiency to navigate these financial pressures effectively.

 

Hospitals and health systems aren't the only entities facing financial pressures from rising labor costs.

The recent announcement of American Physician Partners (APP) filing for bankruptcy has significant implications for hospital CFOs who are actively working to reduce their reliance on contract labor.

The APP's decision to wind down its business affairs reflects the challenges that healthcare staffing companies can face in a dynamic market. In fact, the APP cited financial challenges that are similar—if not the same—to what healthcare organizations have been facing for years: financial pressures from the COVID-19 pandemic, rising labor costs, and No Surprises Act burdens.

APP isn’t alone though, as these pressures are almost identical as what Envision Healthcare cited earlier this year.

At the time, Envision Healthcare said various challenges including declining patient volumes, reduced reimbursement, the No Surprises Act, and rising inflation played into its bankruptcy filing. Envision has since undergone a restructure.

So what does this mean for healthcare CFOs?

At a time when CFOs are trying to scale back their use of staffing firms and focus on bringing staff in-house, these bankruptcy filings underscore the importance of careful vendor selection and risk management.

[See: Stop Throwing Money at The Problem: 7 Ways Leaders Can Recruit and Retain On A Budget]

Aside from being a large expense, relying heavily on staffing firms can expose hospitals to financial vulnerabilities in the event of unforeseen circumstances, such as bankruptcy. Hospital CFOs may need to reassess their vendor relationships, diversify their staffing sources, and consider new strategies for recruiting and retaining home grown staff.

In fact, this is exactly what Scott Wester, president and CEO of Memorial Healthcare System, a South Florida-based nonprofit system, prioritized for his organization.

“COVID changed the landscape of how we dealt with the workforce, predominantly the reliance on agency nurse travelers, outside contractors, and not having enough personnel to meet the demand that was out there, mostly on the clinical side,” Wester said.

“We spent almost $280 million a year utilizing outside contract or incentive pay and heavy reliance on nurse travelers. We recognized we needed to get people back to wearing our Memorial badge. Over the course of 12 months, we've dropped about 80% of use of outside contract labor. We're now about a $200 million savings just on that perspective,” Wester said.

So how did Memorial pull it off? The organization did it by bolstering its talent acquisition team, making sure to play more offense than defense, and by reaching out to the work community to try to figure out what was limiting people from joining the organization.

[See: The Exec: How Memorial Healthcare System's CEO Slashed Workforce Turnover]

As for future trends, CEOs and CFOs are likely to continue exploring alternative staffing models, not only for financial reasons, but for risk-management as well. As we know, the COVID-19 pandemic accelerated the adoption of telehealth, and this trend is expected to persist as hospitals seek innovative ways to optimize their workforce and reduce costs.

Additionally, CFOs may increasingly invest in workforce management tools and data analytics to make more informed decisions about staffing needs, ultimately enhancing operational efficiency and financial stability in the face of these industry challenges—which probably won’t be going anywhere anytime soon.

The fiscal year 2024 ICD-10-CM codes are now effective, and they will impact your reimbursement.

Earlier this year, CMS announced the addition of 395 new diagnosis codes, 25 deletions to the diagnosis code set, and 13 revisions—all of these updates were implemented October 1.

An ample amount of the code changes pertain to reporting certain diseases, accidents and injuries, and social determinants of health (SDOH).

This 2024 diagnosis code update comes at a time when hospitals and health systems are working more diligently than ever to address their patients’ social needs and the broader SDOH in the communities they serve.

When it comes to updates to SDOH, there are 30 new diagnosis codes for factors influencing health status and contact with health services. There are also a host of new guidelines for reporting these codes.

For example, there is a new code for reporting an encounter for HIV pre-exposure prophylaxis. A “code also” note instructs coders to report risk factors for HIV, when applicable.

An extensive “code also” update for “other specified problems related to upbringing” says codes for the following diagnoses should also be reported when applicable:

• Absence of a family member
• Disappearance and death of family member
• Disruption of family by separation and divorce
• Other specified problems related to primary support group
• Other stressful life events affecting family and household

Robust data related to patients’ social needs is critical to hospitals’ efforts to improve the health of their patients and communities. One way to capture data on the social needs of patient populations is through proper documentation and keeping revenue cycle staff up to date on code changes, which will help to better identify non-medical factors that may influence a patient’s health status.

The other new diagnosis codes are spread throughout the code set, with several dozen pertaining to osteoporosis with fractures, retinopathy and muscle entrapment in the eye, and disease of the nervous system—including Parkinson’s disease and epilepsy.

Of the 395 new codes, 123 of them reside in the external causes of morbidity chapter of the ICD-10-CM manual, specifically new codes to capture accidents and injuries.