Despite a slight improvement in April, hospitals struggled financially in May.

Despite an improvement in revenue and patient volumes in April, hospitals and health systems are still struggling with rising expenses and depressed margins, according to the latest National Hospital Flash Report from Kaufman Hall—which examined how organizations faired financially in May.

Total expenses rose 1.1% from April to May 2022, and climbed 10.7% from May 2021, according to the Kaufman Hall data. Inflation and labor shortages contributed to total costs climbing 10.4% year-to-date. Labor expenses per adjusted discharge were up slightly by 1% from April, but that figure has jumped 13.6% year-to-date, while full time employees per adjusted occupied bed is down 2.7% year-to-date. This suggests, according to the Kaufman Hall data, that hospitals are spending more on labor costs with fewer hours worked.

"While we begin to see a bit of a return in volumes and associated revenues, expenses continue to climb and so while the performance from the latest May data is compared with April is showing some improvement, it is still significantly below where it was last year in terms of overall profitability, and many of the metrics [are] still underperforming, relative to pre-pandemic levels," says Erik Swanson, senior vice president of data analytics at Kaufman Hall. "Halfway through the year and with the report the first five months, we still find ourselves and these organizations with cumulatively negative margins. That is extremely problematic and given the fact that there is effectively no additional stimulus funding that these hospitals are expecting to receive … hospitals are in a challenging position."

While depressed margins and increasing expenses spell trouble for hospitals and health systems, the May figures weren't all bad. Revenues saw a slight improvement in May. Gross operating revenue was up 3.4% from April, 7.6% year-over-year, and is up 6.9% year-to-date. Outpatient revenue rose 2.2% from April levels, 9.4% year-over-year, and is up 9.1% year-to-date. Hospitals and health systems must find a way to balance negative margins and expenses with rising volumes and revenues—it'll be a challenge, Swanson says, but there are strategies to utilize to get it done.

"While volumes have returned, we're also seeing an increase in the average length of stay, so the patients coming in tend to be sicker," Swanson says. "Those patients coming in will be greater utilizers of some of these resources than in the past. There are quite a few controls that hospitals can put in place and levers they can hold to help manage those types of patients and expenses. The reality is that labor expense is still quite elevated, relative to just about any time."

Pulling the right levers

Hospitals are seeing an increase in the number of FTEs per each adjusted occupied bed, Swanson says, which indicates that hospitals are hiring more than before. However, there is still a labor shortage and hospitals will need to act to manage labor expenses.

"Reevaluating the types of individuals and skill sets that they are hiring," is one tactic Swanson says hospitals can take. "Thinking about secure delivery models, having everyone work potentially at the top of their license and perhaps setting up structures in which more expensive, more technical resources are overseen. This is something that's proved to be quite beneficial without impacting the quality of care."

Contract labor is another expense that has been weighing on hospitals and health systems and anything organizations can do to ameliorate that burden will be valuable for a financial turnaround. Options include thinking about ways to optimize their workforce through data-driven workforce techniques, and the development and reevaluation of float pools, Swanson says. Hospitals can also look at patient demand unit by unit to get a better understanding of where they can appropriately flex individuals where needed.

There are several options to address the labor expense side of things, but labor isn't the only factor in the hospital expense challenge.

"There are quite a few levers on the non-labor side that hospitals and health systems can pull," Swanson says. "While some of these challenges—taking drug prices as an example—are not necessarily under the control of these organizations, that doesn't account for the vast majority of non-labor spenders on a variety of other components—supplies, purchase services, and other expenses."

Reevaluating non-labor contracts to get better pricing on products and services they are buying is 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.

Since the onset of the pandemic, people have wondered when things will return to normal, and it is no different for hospitals and health systems. They want to know when they'll see expenses ease and when they'll see a return to stabilized profitability.

"It is less of a question of when will expenses go back to normal and I couldn't even tell you what normal is anymore," Swanson says. "But it's thinking about the environment in which these organizations have been hit with these highly elevated expenses. I think what many hospitals are asking themselves and thinking is how do we operate and manage within that environment the best we can. Organizations are not expecting that these expenses will go back down anytime soon to pre-pandemic levels, they will remain elevated. And so, it's about choosing how care is being delivered, and optimizing the resources and the spending to their best ability and, ultimately, evaluating what is it that is necessary to provide for the patient and those areas that may be lower priorities than they can begin thinking about potentially rationing or not."

"We need to expand our emergency department so award-winning emergency medicine is provided in treatment rooms instead of hallways," the hospital said in a statement detailing the project.

Pullman Regional Hospital—a Washington State-based hospital with almost $130 million in net patient revenue and 25 total staffed beds—is investing $45 million in an 80,000-square-foot expansion as well as more medical equipment and remodeling of Pullman Regional Hospital and several of the hospital’s other properties.

The project will expand the hospital’s emergency department by 50% to 60% for more triage rooms and mental health services. The hospital will also add a fifth operating room, an additional GI lab, and expand its surgical recovery room. Several other plans are in the works including a specialty healthcare space for new services including endocrinology, dermatology, and rheumatology, according to Pullman Regional. The hospital is also looking to add more onsite practices and providers that will improve access to care and eliminate the cost of rented spaces.

"We need to expand our emergency department so award-winning emergency medicine is provided in treatment rooms instead of hallways," the hospital said in a statement detailing the project. "We need to recruit more specialists and provide more specialty care like psychiatry, oncology, neurology, dermatology, and rheumatology, but we do not have the physical space for these providers or patients. We need to better meet our patients’ needs through team medicine and co-locate practices like Palouse Pediatrics and Pullman Family Medicine on the hospital campus. We need to make mental health part of the patient experience so that we can address a crucial community need."

Potential funding sources for this project include tapping into the hospital’s reserves or borrowing, which Pullman Regional says will not exceed $10 million, taxpayer bonds between $22.5 million and $29.5 million, as well as philanthropy and grant sources between $6 million and $12.5 million.

"Over the course of 18 years, there has been more than 18 remodels projects, one minor addition, and each year, services are relocated off the main campus to make more room for patient care," the hospital says. "Every area of patient care at Pullman Regional Hospital has seen growth. The addition of 10,000 square feet in 2018 for same-day services is the only project which added to the footprint of Pullman Regional Hospital. During those 18 years, the city of Pullman has continued to grow and is projected to grow even more. Simply put, we are out of square footage to see and treat our growing community, and we need to expand patient care spaces."

Josh Repac assumed the role on July 1, 2022, following the retirement of former CFO Thomas Chan.

Meritus Health, the largest healthcare provider in western Maryland with 3,000 employees, 600 medical staff members, 240 volunteers, 300 beds, and over $440 million in net patient revenue, has promoted Josh Repac to the role of chief financial officer.

Repac assumed the role on July 1, 2022, following the retirement of former CFO Thomas Chan, who will remain with the organization as chief of treasury services during the next six months as Repac transitions into the role. Chan joined Meritus Health in 2015, bringing with him more than three decades of experience in the financial healthcare industry.

Prior to becoming CFO, Repac served as vice president of revenue cycle and clinical support services, and before that, as executive director of revenue cycle and reimbursement. Repac brings 15 years’ worth of healthcare and finance experience to the role. He has also served in leadership positions at health care consulting companies located in the Baltimore region.

"When you think about the patient experience, it’s doctors and nurses, but that’s not all," Repac said in a news release announcing his promotion. "In finance, we touch the aftercare of the patient path, and it’s an important piece."

Other recent healthcare CFO moves include Memorial Health Meadows Hospital. Interim CFO Jared Kirby recently took on the role permanently. Javier Vallejo was chosen as the organization's new CFO following an exhaustive nationwide search. And Kyle Vining will take over as the new chief financial officer of McLaren Port Huron.

Health inequities account for about $320 billion in annual healthcare spending, according to recent research from Deloitte.

The healthcare sector is facing enormous pressure to reduce spending while improving care, and one of the biggest contributing factors to this excessive spending is health inequity.

It's no secret that there are biases in healthcare related to race, socioeconomic status, and gender that prevent some patients from seeking and receiving care. It is critical for hospitals and health systems to address the healthcare industry's inequities, not only because it will provide patients with more options for care, but also because it can have a lasting, positive impact on the organization's bottom line. There are several strategies hospital leaders—particularly CFOs—can implement to eliminate bias and improve their hospital's financial well-being.

"Looking through a particular frame, you can argue that part of the stickiness around resolving these issues is because bias, unfortunately, has been profitable for the system as a whole," says Neal Batra, a principal in Deloitte's Life Sciences and Health Care practice. "When you get paid on a fee-for-service–type dynamic, more activities mean more money, and so poor care means more activity."

Health inequities account for about $320 billion in annual healthcare spending, according to recent research from Deloitte. If something is not done to address this problem, that figure could rise to over $1 trillion by 2040.

"If the United States reaches this threshold, we could see a direct impact on affordability, quality, and access to care beyond the challenges that already exist," the Deloitte report says. "The projected rise in health care spending could cost the average American at least $3,000 annually, up from today's cost of $1,000 per year."

The average person, family, or health system is not equipped to handle that kind of inefficiency, expense or the consequences that will inevitably result—even greater restrictions to healthcare, especially for already underserved communities and the additional loss of lives, according to Deloitte.

How can CFOs make a difference?

Planning to address the inequities within the healthcare system should be a key part of any organization's future planning, according to the Deloitte report. There are five areas where healthcare incumbents, industry disruptors, community organizations, and government agencies can come together to remove the barriers to healthcare and improve the financial health of patients and their own systems. The first is intentionality, make equity-based thinking part of the organization's overall business model. This also means removing any barriers that keep patients from accessing the services hospitals and health systems offer, eliminating unnecessary tests, and creating a welcoming environment for patients.

"Interventions to offset disparities cannot be imposed on a population," Pierre Theodore, vice president of health disparities for Johnson & Johnson Global Public Health told the Deloitte researchers. "Interventions should instead be designed collaboratively in direct consultation with representatives of the population experiencing health inequity."

The second area for hospital leaders to consider is forming cross-sector partnerships. True healthcare equality means collaborating with agencies, organizations, and coalitions that work on initiatives to address the root causes of health inequities.

"You need to look outside of healthcare for the mechanisms," Samantha Artigia, director of racial equality and health policy program at Kaiser Family Foundation, told the Deloitte researchers. "Understanding the drivers outside of healthcare and working with the partners and sectors outside health care, will be key."

Third, organizations need a concrete way to measure progress. There are significant data gaps when it comes to healthcare inequality because measuring healthcare inequality has not been a priority. But, if organizations want to truly tackle this issue, they will need to invest in programs and algorithms that will provide data, insights, performance indicators, and continuous evaluation of their progress.

"There is no agreed-upon framework on how to talk about bias in healthcare," Batra says. "There are no agreed-upon algorithms, there is no agreed-upon way to calculate it. So, teams have to develop a methodology that can stand up to the rigor and fairly calculate the cost of bias in the system."

Addressing bias can be uncomfortable, especially when it requires admitting your organization has been part of a larger systemic problem, but by addressing individual and community level barriers—Deloitte's fourth tip to healthcare leaders—organizations can advance health equity. Up to 80% of health outcomes are affected by social, economic, and environmental factors, according to the Deloitte research. This step is going to require further investments in data, technology, and public health infrastructure at the federal, state, and local level. 

"CFOs, it's time to put aside the shame and put aside that aspect of not wanting to know about it and measure this," says Andy Davis, a principal for Deloitte Consulting's healthcare practice. "Once you understand bias and can measure bias it allows you to then unpack where it occurs and why it happens. Because of the risk associated with consumer response and reaction, frame this as reducing risk, rather than an enterprise. The best case is this will enhance outcome and enhance quality. And that, frankly, should enhance your competitive positioning especially as virtual health and other options that are creating enormous leakages for hospitals, come online and become more accessible to consumers."

Finally, healthcare leaders must build trust. It will be difficult for organizations to rebuild the trust with the people and communities they serve. Being sure hospitals and health systems understand the different needs of the people in their communities, asking for consumer feedback, and making sure their employee population represents the patients coming through their doors can help organizations earn the trust of the people they serve.

"Having these conversations gives [CFOs] a reason for investment," Davis says. "It shows that this can now generate ROI. Oftentimes, [addressing bias in healthcare] feels like it's the right thing to do, but [CFOs] have to feel good about it because [they must] prove that [they're] managing the cost of care more effectively. This shows you that the dollars are worth the investment and that includes community investment outside of your four walls."