Analysts are expecting these organizations to have a rocky rest of the year.
Fitch Ratings has revised its outlook for U.S. not-for-profit hospitals and health systems to "deteriorating" as these organizations continue to be hammered by labor issues, expenses, and "macro inflationary pressures."
"While severe volume disruption to operations appears to be waning, elevated expense pressure remains pronounced," Fitch Ratings Senior Director Kevin Holloran said in the report. "Even if macro inflation cools, labor expenses may be reset at a permanently higher level for the rest of 2022 and likely well beyond."
Several hospitals and health systems reported lackluster earnings results for the most recent quarter, as these factors, particularly labor issues and expenses, don’t show any signs of abating anytime soon.
"Hospitals are in a challenging position," Erik Swanson, senior vice president of data analytics at Kaufman Hall, recently told HealthLeaders. "Organizations are not expecting that these expenses will go back down anytime soon to pre-pandemic levels, they will remain elevated."
Stressors in the labor sector will be most felt in the nursing units, according to the Fitch Ratings report. Hospitals and health systems had been dealing with a nursing shortage well before the pandemic started, however, COVID-19 has only exacerbated this problem.
Fitch Ratings had anticipated these macro headwinds heading into 2022, but they have been stronger than expected, the credit rating agency said. Fitch Ratings is preparing for the event it will downgrade ratings for several not-for-profit hospitals throughout the remainder of the year.
"While liquidity growth through much of 2021 provides a good cushion for many providers to weather the current environment, ongoing macro pressures will result in elevated volatility," the report says. "Moreover, the sector is facing asset price corrections that are compressing balance sheets from previous highs. As a result, deteriorating conditions will be present for the rest of 2022 and into 2023, as labor expenses remain elevated."
Moving to a value-based care model from fee-for-service doesn't mean hospitals will be financially successful right away, but it's a journey CFO Andrew DeVoe says will eventually pay off.
When TriHealth, a Cincinnati-based health system with $2.5 billion in net patient revenue, needed to find a way to expand its population health capabilities so it could provide better care to its patients and maintain a stable balance sheet, leaders at the organization realized switching to a value-based care model was the way to go.
TriHealth partnered with a third-party vendor that helps deliver value-based care services, and as a result, the health system achieved notable clinical and financial outcomes across a variety of payer contracts. TriHealth saw a change in revenue with a 70% rise in ambulatory settings and 30% in acute settings. The health system also grew its primary care access by 25% across more than 230 primary care physicians and advanced practitioners. TriHealth says it now ranks near the top decile in cost and utilization as the top-performing ACO nationwide. with a larger payer—$7 million-plus in shared savings.
TriHealth CFO Andrew DeVoe recently connected with HealthLeaders to discuss the system's move to a value-based care model, the success it has seen so far, and the ever-evolving role of healthcare CFOs.
HealthLeaders: How has the shift to value-based care impacted TriHealth's overall financial well-being?
Andrew DeVoe: We're in a transition, and we have been in transition for probably the last 10 years—I started six years ago. We're incredibly focused on ambulatory access, ambulatory facilities, sites of service, and how we can deliver care in the most convenient manner possible. Over the last five or six years, what we've done is developed the infrastructure related to care management capabilities and other aspects of care management to help push us along that value-based curve.
We've had partial [financial] success so far. We generate between $40 million and $50 million in excess revenues per year, which is directly tied to our value-based efforts—so that is substantial. One of the things that have helped substantially is positioning TriHealth from a balance sheet perspective, and from a financial perspective, to accommodate the dip in fee-for-service revenues as we transition to that value-based care.
HL: How can hospitals and health systems deliver high-quality care, without sacrificing their balance sheet?
DeVoe: What we have done is purpose-driven. We've prepared ourselves for diversifying our margin stream. We've entered many ventures; we have half a dozen robust joint ventures with independent providers [in areas of care] where we might not have the best practice yet. We recognize these providers have the highest quality, the best outcomes, and the most efficient means of delivering care. We've also done that with other sites, and support organizations for the business.
In 2019, which is the last free COVID-19 year that we had, 40% of our bottom line came from investment returns related to these joint ventures, not our fee-for-service revenue generation engine. We have the cheapest alternative to refer patients to a more cost-efficient, better outcome, lower-cost care environment. It's kind of a win-win. We win money because of the joint venture; we share profits with them, and we also win because we're lowering our cost of care.
HL: What would you say are the biggest challenges facing healthcare CFOs today?
DeVoe: The single biggest challenge is intentionally walking away from HOPD reimbursement and moving to ASC, which is a 40% to 50% payment cut, but it is something that certainly the patients want, and it helps lower the cost of healthcare.
If you are getting $10,000 for one case and $4,000 for another, and your costs are $4,500 and you're in an ASC, [the hospital] is losing money, but in an HOPD you're making a lot of money, so it's a hard transition. It's one that we haven't completely done, but we've started that journey. The bet is that you're going to make more money on the value side than you're losing on the fee-for-service side.
The other challenge is if you were spending $4,500 on a generic case, and you're only getting paid $4,000, you've got to make sure you get your cost down to at least $3,000. So at least you're making something in contributing to your overhead with $4,000 in reimbursement. It forces you to become more efficient.
HL: How would you say the role of the healthcare CFO has evolved over the last few years?
DeVoe: I've been in this game for 30-plus years, and I've spent most of that time as a CFO—I've been a CEO several times. I think more and more the CFO needs to get away from the financial acumen and focus more importantly on the strategy. The CFO understands the makeup [of the hospital] and the balance sheet better than anybody who could best recommend and best advise on what can either strengthen or weaken the balance sheet. Now, of course, it's not all about the balance sheet. We have a mission, and our mission is to take care of our community. But I think one of the ways you take care of the community is making sure you have an asset that is there in perpetuity and can continue to support the community, which is what we're trying to do here at TriHealth.
"U.S. hospital financing effectively assigns a lower dollar value to the care of Black patients," says a study in the Journal of General Internal Medicine.
According to a recent study, hospitals participating in Medicare coverage that are also treating a majority of Black patients have received the lowest payments between 2016 and 2018.
The study, written by a group of MDs and PhDs in the Journal of General Internal Medicine, concluded that "U.S. hospital financing effectively assigns a lower dollar value to the care of Black patients." Hospitals serving Black patients typically receive smaller payments for patient care and accrue lower profits and surpluses in comparison to other hospitals. This continuing disparity reinforces inequities in resources and care that already severely impact the Black community.
Patient care revenues and profits averaged $1,736 and negative $17 per patient day respectively at Black-serving hospitals versus $2,213 and $126 per patient day at other hospitals, according to the study. When adjusting for patient case mix and hospital characteristics, mean revenues were $283 lower per patient day, and mean profits were $111 per patient day lower at Black-serving hospitals. To equalize the reimbursement levels would have meant an additional $14 billion in payments to Black-serving hospitals in 2018, which works out to a mean of approximately $26 million per Black-serving hospital.
"Hospitals, where Black patients account for a large share of inpatients, have relatively modest facilities (as measured by the dollar value of their buildings and equipment), and they are less likely than other hospitals to offer some lucrative higher-tech services like cardiac catheterization lab," the study says. "These asset deficits reflect longstanding disparities in funding: decades- and even centuries-long paucity of donations, government subsidies, and operating surpluses to finance hospital construction in Black neighborhoods."
To address the inequities facing Black serving hospitals, the authors of the study are petitioning that greater investments be made in hospitals serving Black communities and that hospitals and health systems take a harder look at their treatment requirements and policies, which may be discriminatory, regardless of intention.
"We find evidence of disparate impact, indicating that the current system of hospital financing is a form of structural racism," the study says. "Health financing reforms should assure that hospital payment reflects patients’ care needs rather than their race and repair the damage of past policies by preferentially directing new capital funds to resource-starved facilities that have long served Black communities."
Hospitals and health systems have been struggling with the ongoing repercussions of the COVID-19 pandemic.
Hospitals and health systems have posted lackluster earnings for the second quarter, which proved to be financially challenging for organizations, and Kaiser Foundation Health Plan isn’t immune to these issues, having posted a net loss of $1.3 billion for the quarter versus $3.0 billion net income in the second quarter of 2021.
Hospitals and health systems have been struggling with the ongoing repercussions of the COVID-19 pandemic, which has resulted in a continued labor shortage and increased expenses for organizations.
"While the unprecedented effects of the pandemic will be felt for years to come, Kaiser Permanente’s focus on our mission remains steadfast as we continue to adapt to an ever-changing landscape," CEO Greg Adams said in the earnings report.
Kaiser reported total operating revenues of $23.5 billion and total operating expenses of $23.4 billion, compared to total operating revenues of $23.7 billion and total operating expenses of $23.3 billion in the same period of the prior year. The organization also posted a decline in operating income of $89 million, compared to $349 million in the second quarter of 2021.
"Much like the entire healthcare industry, we continue to address deferred care while navigating COVID-19 surges and associated expenses," Kaiser executive vice president and CFO Kathy Lancaster, said in the earnings report. "Kaiser Permanente’s integrated model of providing both care and coverage enables us to meet these challenges as demonstrated by our moderate increase in year-over-year operating expenses for the second quarter. As we work through the ongoing uncertainty of the pandemic, we continue to manage rising costs, supply chain challenges, labor shortages, and escalating demand for COVID-19 testing while fulfilling our mission to improve the health of our 12.6 million members and the communities we serve."
Howard Brown will begin his tenure leading the organization’s financial initiatives at the end of August.
Orlando Health—a Florida-based healthcare provider with over $3 billion in total revenues—has appointed Howard Brown as the chief financial officer for its south-central region.
The south-central region includes Orlando Health—Health Central Hospital, and Orlando Health Horizon West Hospital. Brown—who has almost two decades of financial healthcare experience—will begin his new role on August 29, 2022, where he will oversee the daily operating expenses, and develop key performance indicators for the organization.
Before joining Orlando Health, Brown spent six years as CFO for Palm Beach Gardens Medical Center. He also served as CFO for North Shore Medical Center in Miami, and financial controller for St. Mary’s Medical Center in West Palm Beach.
"Howard is an established healthcare leader with a strong financial acumen," Philip Koovakada, senior vice president, Orlando Health South Central Region and president, Orlando Health—Health Central Hospital, said in a release announcing Brown’s appointment. "His experience and ability to build strong relationships will help the team continue driving toward excellence."
"Our results in the second quarter were affected by challenging operating dynamics," says CEO Tim Hingtgen.
Financial analysts are losing faith in Tennessee-based Community Health Systems, which operates 83 hospitals across 16 states with over $11 billion in total revenue, ever since it reported a decline in revenues and admissions for the second quarter of 2022.
Community Health Systems finished the three months ended June 30, 2022, with a net loss of $326 million compared to a net income of $6 million for the same period in 2021. Community Health Systems also reported a 3.4% decline in admissions, compared to the same quarter in 2021.
"Our results in the second quarter were affected by challenging operating dynamics that included lower than anticipated volume, lower net revenue per adjusted admission, and significant contract labor costs driven by the labor market and inflationary pressures," Tim Hingtgen, CEO of Community Health Systems, said in the earnings report. "We have initiatives underway intended to actively address these pressures by accelerating strategic growth opportunities in key markets, aggressively working to recruit and retain permanent staff to replace contract labor, achieving incremental expense reductions, and leveraging our centralized resources to achieve improved results."
Following the discouraging earnings report, several financial analysts downgraded their ratings on the for-profit organization's stock including Fitch Ratings, which revised its outlook to negative from stable.
"The negative outlook reflects a deterioration in operating performance in 1H 2022, with significant increases in labor costs and weakness in volumes and acuity mix driving a downturn in the company's revenue and margin levels, resulting in a sizeable reduction in its 2022 financial guidance and elevating leverage to levels posing increased downgrade risk," Fitch said in its analysis.
Financial news organization TheStreet downgraded its rating on Community Health Systems to a D from a C-. CitiGroup has decreased its target price on Community Health Systems to $6 from $14, and Bank of America has downgraded its rating to neutral from buy. Credit Suisse lowered its price target to $6.50 from $8, and Loop Capital initiated coverage on Community Health Systems with a hold rating and a $5 price target.
"The company's strengths can be seen in multiple areas, such as its reasonable valuation levels and solid stock price performance," TheStreet report said. "However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity, and poor profit margins."
Community Health Systems CFO Kevin Hammons acknowledged that the organization's second-quarter results came in "well below" expectations on the earnings call.
"Lower than anticipated volume and net revenue per adjusted admission impacted the top line," Hammons said. "As the quarter progressed, the return of non-COVID-related patient volumes was lower than we anticipated."
Community Health Systems isn't the only healthcare organization to recently report lackluster earnings. HCA Healthcare—a for-profit hospital system based in Nashville—posted a year-over-year decline in net income of $1.16 billion from $1.45 billion. Same facility admissions for HCA dipped by 1.2% year-over-year for the second quarter. Labor costs, supply chain issues, and workforce disruptions all contributed to an increase in expenses for the quarter. Sacramento-based nonprofit health system Sutter Health reported an increase in total operating expenses for the second quarter of $3.55 billion from $3.41 billion.
Hospitals and health systems across the U.S. have been struggling with rising expenses as the cost of care continues to increase. Community Health Systems wasn't immune to this—particularly when it comes to labor costs. The organization experienced an 8.5% year-over-year increase in its average hourly employee rate. Contract labor has been an expense burden for hospitals that have continued to rely on this type of workforce. Community Health Systems saw a significant year-over-year increase in contract labor of $150 million from $50 million.
"Hospitals are in a challenging position," Erik Swanson, senior vice president of data analytics at Kaufman Hall, recently told HealthLeaders. "Organizations are not expecting that these expenses will go back down anytime soon to pre-pandemic levels, they will remain elevated."
Swanson shared some solutions CFOs could consider to alleviate some of the financial pressures on hospitals and health systems, including optimizing their workforce through data-driven workforce techniques, and the development and reevaluation of float pools. Hospitals can also look at patient demand unit by unit to get a better understanding of where they need the most staffing.
CFOs can also reevaluate their non-labor contracts to get better pricing on products and services they are buying as one key way hospitals and health systems can get a hold of their spending, Swanson says. Examining their supply chain to allow a more efficient flow of these materials across the systems and eliminating redundancies and waste across the organizations can also help contain non-labor expenses.
"We remain focused on our plans to retain our workforce, recruit new clinical employees and reduce contract labor," Hingtgen said on the call. "The number of nursing hires increased by more than 30% compared to the first quarter and our turnover rate declined 20%. These are clearly favorable trends as we work to reduce contract labor and create sufficient permanent staffing for key services and market share gains as healthcare demand strengthens."
Looking ahead, and despite the commentary from analysts, the Community Health Systems leadership team is hopeful they'll see a turnaround in the organization's financial results for the rest of the year.
"We believe the stronger return of deferred care, the execution of our growth and strategic initiatives, our successful expense management, and continued focus on cash flow and capital structure management will allow the company to achieve its medium-term financial goals," Hammons said on the call. "[This] includes targets for 16%-plus EBITDA margin, positive annual free cash flow generation, and reducing our leverage below five times."
The healthcare provider admitted to no wrongdoing in the settlement.
Salinas Valley Memorial Healthcare System—a Salinas, California-based healthcare provider with 263 hospital beds and over $660 million in total revenue—has agreed to settle a class action lawsuit over claims its security system failed to protect patient information from a data breach.
According to the settlement, between April 30, 2020, and June 5, 2020, the healthcare system found that employee emails had been compromised and patients’ personal information, including names, hospital account numbers, medical record numbers, attending physician information, services, and other medical information, was hacked. The breach was reported to the Department of Health and Human Services on June 29, 2020, and impacted 2,384 patients. Patients have until August 26, 2022, to file a claim.
"On May 7, 2020, and June 5, 2020, respectively, SVMHS subsequently determined that email accounts of a contractor and three other employees were also compromised," the hospital wrote in its initial disclosure of the breach. "These five email accounts were compromised through Outlook Web Access, SVMHS’s browser-based email access solution. Based on our review of the emails within the compromised inboxes, we determined that certain emails containing personal information was present in one of the inboxes. Our investigation to date has suggested, however, that the unauthorized person(s) only had access to the inboxes for a matter of hours before we disabled access to the accounts."
Healthcare data attacks hit an all-time high of 45 million individuals affected in 2021, according to research from cybersecurity firm Critical Insight. That’s a rise from the 34 million individuals affected in 2020, and triple the number of people impacted in 2018.
Salinas Valley Memorial Healthcare System agreed to settle the lawsuit to avoid a more costly litigation process but did not admit any wrongdoing in the settlement. As part of the settlement, the healthcare system agreed to implement improved data security practices, including third-party auditors to conduct regular penetration tests, better maintenance of firewalls and access controls, improved data security training, and regular computer system scanning and security checks.
Jake Halstenson will lead the hospital's financial initiatives going forward.
River's Edge Hospital—a Minnesota-based healthcare provider with over $80 million in total revenue and 25 total staffed beds—has appointed Jake Halstenson as its new chief financial officer.
Halstenson has over a decade of experience in healthcare leadership, having worked with Kaiser Permanente in Denver, Vancouver Clinic in Vancouver, Washington, and Twin Cities Orthopedics in Edina, Minnesota.
"After an extensive search to fill our CFO position, I am so pleased to have Jake join our team," the hospital said in a release announcing Halstenson’s appointment. "His professional experience and background are a great match for the work being done at River’s Edge, and his leadership style is a great fit for the organization."
Halstenson has experience overseeing the accreditation of facilities by regulatory bodies, and has led the design, and planning for new and expanded service lines, and the design and build of new facilities. He has worked to better healthcare operations to improve patient experiences and outcomes and enhance provider and staff engagement through process improvements.
CFOs have a chance to help their organizations move forward in a way that syncs with their overall financial goals.
The role of a chief financial officer is often linked to conservative thinking, financial prudence, and being cautiously skeptical when it comes to annual budget meetings—this mindset can lead to CFOs being seen as a hindrance when it comes to company innovation, according to a research article from McKinsey & Company.
CFOs have a chance to shake off these old perceptions and become innovation allies, helping their hospitals and health systems move forward in a way that syncs with their organizations' overall financial wellness and strategic growth initiatives.
"At base, the innovation process is about allocating resources toward initiatives that create value for a company and, ideally, change an industry," according to the McKinsey research. "To innovate successfully, companies must identify the most promising projects and set clear goals for realizing them, regularly measure progress in reaching those goals, and change hearts and minds—internally and externally."
McKinsey researchers say CFOs can become champions of innovation through these five steps:
Step 1:Incorporate innovation goals into company growth plans. Through greater collaboration with the C-suite as well as hospital staff, CFOs should answer two questions critical to building innovation: Where, and how does the company expect to find growth? And what role should innovation play in securing that growth?
By establishing a "green box"—or what McKinsey describes as "an effort to quantify how much growth in revenue or earnings a company's innovations must provide in a given time frame," the CFO can establish new objectives that center on innovation.
Step 2: Explore and validate new and untested innovative ideas. CFOs should focus less on cost and more on "creating a new mechanism to explore the most promising ideas," according to the McKinsey research. Once identified, the CFO and other leaders can test ideas, learn their merits, and move forward with the innovations from there.
Step 3: Accelerate the typical budget process. Innovation can't be limited to once a year. There is often a delay between the budget and innovation cycles, and that means changes in the market or technology could hurt the innovation project.
Step 4:Clearly establish performance metrics for each innovative project. One issue that can creep up when attempting to innovate and establish new initiatives is trying to report and measure the performance of new projects. Frequent communication about the status of innovative projects will help CFOs and other leaders understand the value of these initiatives better than sporadic reviews.
Step 5:"Upskill and empower the finance team." Teams may be hesitant to bring innovative ideas to the CFO because of the assumption the CFO will be too focused on the numbers to approve projects. Therefore, CFOs need to make it clear that they are allies of innovation and that they understand strong innovation can have a positive impact on the organization's overall financial well-being. The CFO should be willing and eager to get involved with projects at their earliest stages, so they can incorporate those needs into their financial plans, and help the project succeed.
Carol Bean became CFO for the non-profit addiction treatment system on August 1, 2022.
Centerstone, a Nashville-based nonprofit health system providing mental health and substance use disorder treatments with close to $300 million in revenue per year and over 5,000 staff—has promoted vice president of finance and assistant treasurer Carol Bean to the role of chief financial officer.
"Carol has always excelled at every facet of financial business and leadership here at Centerstone, and I’m excited to have her taking on the CFO role," David Guth, Centerstone’s chief executive officer, said in a release announcing the promotion. "She has the experience and knowledge required to help our organization continue growing and serving communities."
Bean, who holds a Master of Business in administration from the University of Phoenix and a Bachelor of Science in business administration, and accounting from East Tennessee State University, joined Centerstone in 2014 as assistant corporate controller, quickly moving up the ranks to director and vice president positions. As CFO she will oversee the organization’s revenue and lead a finance team of 225 professionals, including those working in financial planning and analysis, accounts payable, accounts receivable, procurement, and payroll. Bean will also work alongside Centerstone’s chief information officer to have oversight of Centerstone’s information technology department.
"I feel blessed to be part of an organization that does such important work, especially with the current national focus on mental health," Bean said in the release. "Being able to serve alongside our staff to champion our noble purpose of delivering care that changes people’s lives motivates me every day. We have a very experienced group of finance professionals at Centerstone, and I look forward to leading the team."
