How The C-Suite is Battling Inflation's Effects on Healthcare

Hospitals and health systems must be proactive instead of standing pat and waiting for inflation to ease.

Since hitting record highs during the pandemic, inflation has continued to wreak havoc on the economy. Every industry has been affected in some way and healthcare is no different.

Hospitals and health systems, however, are in the precarious position of being susceptible to inflationary pressures during a time when margins are thin. That reality has tasked CEOs and CFOs to adeptly maneuver to keep finances afloat and doors open.

It's no wonder then that most healthcare CFOs view the current economic situation as their top organization concern, a survey by Deloitte revealed.

The good news? Medical prices are growing at a similar rate as past years, but are being outpaced by prices in other parts of the economy, according to analysis by KFF. The opposite has typically been the case, but using the consumer price index, KFF found that medical prices grew by 0.1% year over year in June 2023, below the 3.0% overall annual inflation rate.

Meanwhile, the producer price index, which represents inflation from the producers' perspective, has increased 3.5% for overall health services during that same period, illustrating the toll inflation is taking on healthcare organizations' costs, even if it is showing signs of cooling.

The c-suite now has no choice but to evaluate every single financial decision in the context of how it will be affected by inflation.

"The biggest part of that is just reassessing any plans for growth and major capital, just like anybody would normally do with their personal decisions with regard to major purchasing. Health Systems must do the same," Matthew Arsenault, CFO at Baptist Health South Florida, told HealthLeaders.

"So, we want to make sure that we provide care, but deciding which projects happen when and evaluating the cost of those projects and inflationary environment is something that we're constantly doing more of now, and more frequently than we have been historically because of the current inflationary environment."

Ultimately, fighting inflation means finding ways to reduce expenses and improve efficiencies. The c-suite needs to work together and place focus on a few areas of contention including labor costs, revenue cycle, and the supply chain.

Lower labor costs

Arguably the biggest challenge hospital and health system leaders have had to face since the onset of the pandemic has been the workforce. Specifically, the decline in staff coupled with the increase in labor costs.

The KFF analysis on inflation found that since mid-2021, health sector wages have increased slightly faster than overall average weekly earnings. While average weekly wages for employees of private organizations increased by 16.9% from $982 in February 2020 to $1,148 in May 2023, healthcare employee average wages rose by 19.3%, from $1,039 to $1,239 over that span.

Skilled nursing employees have seen the highest average wage increases, with average weekly earnings rising by 23.7% from $671 in February 2020 to $830 in May 2023. Skilled nursing, of course, has also experienced significant turnover and burnout over that period, forcing organizations to rely more on contract labor.

Bringing those contract labor costs down has been a priority and several hospitals have made encouraging progress doing that this year. For example, HCA Healthcare for the second quarter reported a decline of 20% in contract labor costs year over year, which allowed the health system to net $1.193 billion for the quarter, compared to $1.15 billion for that period last year.

How can CEOs and CFOs keep contract labor in check? By investing in their staff to both retain employees and attract new ones. That means offering competitive salary and bonuses, as well as improving staff wellbeing.

Strengthen revenue cycle

Investment, however, shouldn't be limited to just the workforce. Executives need to review revenue cycle management (RCM) processes and assess ways to implement technology to cut down on administrative tasks and collect money in a timelier manner.

"To tackle financial challenges in healthcare, hospitals typically look at strategies such as optimizing operational efficiency, implementing new payment models, exploring partnerships, and investing in innovative technology," Stephen Forney, senior vice president and CFO of Covenant Health, told HealthLeaders. "At Covenant, we've seen how AI can play a crucial role in addressing financial challenges by streamlining workflows and improving revenue cycle management."

Whether it's pursuing an end-to-end solution or a bolt-on vendor to fill in the gaps, hospitals can benefit greatly from embracing automation in their RCM. The key is to find the right technology or vendor to invest in.

One of the greatest areas of need in RCM right now is denials management. Only 38% of hospitals and health systems currently automate any component of denials management, according to a survey by AKASA, while Plutus Health found that 30% of surveyed providers said AI and robotic process automation resulted in faster cash flow and collections.

Despite tight budgets, hospitals and health systems can save on costs in the long run by strategically devoting resources to create the most efficiency as possible in RCM.

Optimize supply chain

Another area where inflation has created issues is supply chain, resulting in disruptions and product price increases.

Ideally, hospitals will choose not to pass the price increases on to their patients, but that requires engaging with suppliers to understand the actual costs of products to ensure reasonable prices.

"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."

Organizations can also cut down on unnecessary costs by identifying opportunities for standardizing equipment and supplies, allowing for less reliance on multiple vendors. Technology can also be utilized to improve inventory management and reduce waste.

Inflationary pressures are still high, and healthcare is still in a place where the c-suite has to pull necessary levers to avoid getting swept up by relentless waves.