By John Seetoo
Hospitals are facing fresh, previously unknown financial challenges in the post-Covid era. The double whammy of high inflation and the pandemic have combined to impact the insurance, investment, and preventive care industries, leading to a slippery slope that has placed many hospitals in the economic crossfire.
Jefferson Regional Hospital CEO Brian Thomas estimates hospital costs have risen over 20% nationwide, and as a result, some are facing monthly losses running into seven and eight figures, due to a number of factors:
Inflation and Costs
The American Hospital Association (AHA) reported this April that hospital cost increases have skyrocketed since 2019 to the present. Some examples include:
- Total Contract Labor Expenses : +258%
- Drug Expenses per Patient: +19.7%
- Hospital Supply Expenses per Patient: 18.5%
Combined with inflation rising by a conservatively estimated 8.5% over the same time period, the bar for most hospital CEOs to merely break even has become an even more daunting task. Deloitte’s 2023 Outlook for Health Care noted that 76% of health system leaders expected the unstable inflationary environment to significantly continue to impact their industry if it remained unabated.
Personnel shortages
Despite recent hiring increases, personnel shortage continues to be one of the biggest stumbling blocks for hospital CEOs. A 23,500 respondent survey by Ipsos Global Health Monitor found that understaffing and limited access with prolonged waiting times as the top hospital issues at 42%, with treatment costs next at 31%.
A McKinsey report cited an exodus of over 18% of the medical care workforce started in 2021 and that trend has continued. Rural hospitals are especially undermanned since they cannot match payscale rates offered by those in urban locations. A number of them wound up being acquired by other companies outside of the healthcare sector, such as South Arkansas Regional Hospital at El Dorado, earmarked by a Murphy Oil led consortium.
Nurse burnout is another topic of concern. MedPage Today reported that 100,000 nurses, or 3.3% of US total, have left the industry in the last two years, with an estimated one in five, or up to 800,000 nurses possibly quitting by 2027. A survey of 54,000 nurses found the following results:
- 50.8% feel emotionally drained
- 56.4% feel used up
- 49.7% feel fatigued
- 45.1% feel burned out or “at the end of their rope”
The quitting nurses skew young:41% of the post-pandemic flameouts had an average age of 36and fewer than 10 years on the job.
Reimbursement Hurdles
In a Deltaplex Media radio interview in April, Thomas also pointed out that hospital CEOs are stuck between a rock and a hard place. Unlike in retail, where a Walmart can simply raise its prices, hospitals lack that degree of latitude, since their reimbursement rates are essentially mandated. Insurance companies are disinclined to raise their rates and risk their premium income streams. Medicare rate changes are incremental at best, while Thomas observed that Medicaid rates haven’t changed meaningfully in two decades.
To add fuel to the fire, the AHA report found that a number of drug manufacturers have been illegally denying discounted drug pricing under the Federal 340B Program. This has impacted rural hospitals especially hard, and calls to the Department of Health and Human Services have been futile.
Increased Patient Acuity
The increased costs of medical insurance and rationed care have led to an upswing of patients who delay early preventive detection and treatment. They subsequently go to hospitals when their conditions are much more severe. The increase in patient acuity creates a domino effect: greater demands on hospital resources due to longer stays lead to less available beds, which lead to longer waiting times.
Meanwhile, the current cost prospects for new breakthrough treatments and early detection therapies are bleak.
The AHA report cited that the average cost of a new drug is more than triple the average US median household income. To make matters worse, the widely perceived bureaucratic overreach by the Federal Trade Commission, for example, is preventing a new early detection cancer drug from Grail from coming to market over a hypothetical monopoly that doesn’t yet exist. Until these factors change, rising treatment expense rates are expected to continue.
Market Downturns in Healthcare Debt
The healthcare sector has taken some very public, heavy body blows. With the announced high profile closures of Atlanta Medical Center and comparably sized hospitals in Ohio, the market for healthcare institution debt has descended into high-yield, or junk status.
Bay Area Hospital, one of the largest on the Oregon Coast, lost $61 million in 2022, thus violating terms of its $47 million loan from Bank of the West. The hospital was able to renegotiate terms at a higher 4.5% interest rate with a turnaround plan to stem the bloodletting that might include a tax levy scheme. However, it was indicative of the hospital industry’s woes that only one alternative lender in the market was willing to make an offer, and it was for interest of 15-17%.
According to Morningstar’s High Yield Bond Index, the Healthcare sector now tops their list of distressed bonds and loans. With a par value of $113.5 billion out of a total index of $1.4 trillion, healthcare holds the largest collection of bonds with OAS (option adjusted spreads) of 1,000 basis points or greater — the tipping point for “distressed” categorization. $24.7 billion falls into “distressed” status, equating to 36 out of 134 bond issues.
Poor Hospital Management Investment Decisions
While personnel, drug and reimbursement costs have been unquestionably significant, some fault for the current financial bleeding can probably be attributed to hospital C-level executives.
Apart from the responsibilities of managing hospital operations and costs, less attention is given to executive fund management. Hospital CEOs and CFOs are required to grow the hospital investment portfolio to serve as a cushion during lean times and to fund expansion or repairs when needed.
A RAND Corporation analysis found that the ten largest not-for-profit hospital investment portfolios went from +9% to -6% in a single quarter. Return to total revenue ratios collectively fell -184.6% year-over-year. Since patient care revenues rose nearly 1% in the same period, 85% of the overall losses could be attributed to investment losses. When such companies as Ascension report a -$4.7 billion loss or CommonSpirit loses -$3.7 billion, that would ordinarily cause heads to roll in other industries.
It’s Not All Doom and Gloom
Beth Zborowski, Sr. VP of Membership Engagement & Communications for the Washington State Hospital Association, detailed some of the proactive steps being taken to address these issues.
On the Nursing shortage
“Nursing shortages have been among the most impactful, with Washington State hospitals reporting a shortfall of more than 6,000 registered nurses in 2022. The association is spearheading work on behalf of all the hospitals in the state to address the shortage, successfully passing two major bills during the 2023 legislative session allowing Washington State to join the multistate Nurse Licensure Compact (letting nurses from an alliance of other states practice in Washington with a single license) and creating more transparency among agencies that place traveling nurses (as traveling nurses are very expensive). We also successfully advocated for the state to fund a preceptorship grant program (incentivizing working nurses to be actively involved in new nurse training), increase clinical training slots, increase the number of student slots in community college nursing programs and better fund several existing collegiate nursing programs in the state,”
On Insurance Reimbursement
“At the state level, WSHA has advocated for additional Medicaid funding. The legislature this session approved a new Safety Net Assessment Program, which will provide the first Medicaid rate in decades for some Washington hospitals. We expect this to bring in $1 billion in federal matching funds per year, and bring reimbursement rates up to about 80 percent of cost for Medicaid services,” Zborowski said.
A number of other hospitals have addressed the personnel issues head-on with the introduction of 4-day weeks, more schedule shift flexibility and other amenities to prevent burnout.
While the financial problems have forced many hospitals to dig into their reserves to keep their doors open, switching to further digitization and value-based models are expected to be a big boost in returning the healthcare sector to profitability. As a result, the Private Equity market is optimistic on the Healthcare sector. Bain Capital reported that PE acquisitions of healthcare companies held upside potential if they could weather the inflation, workforce, and other challenges at present. Several PE companies have been hedging the hospitals in their portfolios with biopharma or other acquisitions to offset negative returns during the interim period.
