A Kaufman Hall Expert Looks at Hospitals’ Longer-Term Financial Concerns

As Healthcare innovation reported on October 24: “Even as operating margins are increasing slightly and financial performance shows signs of stabilization, a number of factors related to staffing, the shift toward outpatient care and patient experience issues continue to cause concerns, according to a new report from the Chicago-based newspaper Kaufman Hall qualified consulting and advisory firm ‘Improving health care performance in 2023: signs of stabilization emerging.’

Kaufman Hall shared a press release with the media on that date that began: “Hospitals and health systems are seeing some signs of stabilization and improving margins, but challenges around workforce, expenses and Patient access persists according to Kaufman Hall’s ‘2023 State of Healthcare’. Performance improvement report. Patient access to care is a growing concern as hospital and health system leaders work to figure out what sustainable operations will look like following a complete transformation in how patients interact with the system and providers. of medical care. The report found that 66 percent of respondents’ institutions have operated at less than full capacity at some point over the past year due to shortages, and 32 percent of respondents say concerns or complaints from patients about access to doctors are increasing.”

The challenges facing hospital organizations in the US are having other impacts as well; Certainly, the financial difficulties of some hospital organizations are contributing to the increase in mergers and acquisitions. As Kaufman Hall’s “Quarterly M&A Activity Report” for Q3 2023 found, “announced transaction activity remained high in Q3 2023, continuing the year’s trend of activity returning to pre-pandemic levels. Eighteen transactions were announced, well above the seven transactions announced in the third quarter of 2021 and the 10 transactions announced in the third quarter of 2022.”

Recently, Healthcare innovation Editor-in-Chief Mark Hagland spoke with Eric Swanson, senior vice president of data analytics at Kaufman Hall, where he leads the company’s data and analytics group, for his perspectives on these important, distinct but interrelated trends. Below are excerpts from that interview.

How would you characterize the modest financial recovery you’re seeing among hospital organizations in the U.S. right now? Like a slow and moderate recovery, perhaps?

Overall, what we’re seeing is a very, very modest improvement over time and overall we’re seeing better performance than the last three years, although still down from pre-pandemic levels. Now when we look at hospitals, they are divided into different categories or types. Some see performance improving at a moderate rate; others, barely, and then some that are still diminished. And we continue to see a widening gap between the best and worst performers.

What percentage, approximately, is found in the three different groups?

Most are in the middle group, maybe two-thirds in the neutral zone, so to speak, and maybe a sixth in the upper and lower groups. And there is no single set of features, but rather there are some general themes. Firstly, in general, there is the size aspect. When looking at larger hospital organizations, we find that greater size tends to protect a hospital organization from some of the greatest financial vulnerabilities. Along with this and in correlation with it, is the mix of payers. Those hospital organizations with a poor payer mix or much higher percentages of government versus commercial may fall into that difficult category; also those in areas with high salaries.

Importantly, rural healthcare matches many of these characteristics and, as such, tends to fall into that third group: not all, but many. Given some of those operational issues, if you think about some of those smaller rural hospitals, they began to navigate the pandemic with weaker balance sheets. And now we are seeing violations of covenants and those types of problems that can increase their problems. All still face higher wages, inflationary pressures and mixed volumes.

What will happen in the coming years in this complex panorama?

Number one, we will continue to see overall improvement in the industry as a whole, due to some of the conditions stabilizing. And now organizations (the median has a positive margin) will be energized by the ability to think about how to deploy capital strategically to achieve long-term success. But organizations in the lower category will face difficulties and some may be acquired. In fact, the size of those M&A deals continues to increase. It is very possible that organizations will return to the historical margins prior to the pandemic, but it will not be next year. Organizations with a significant outpatient presence and implementing it effectively will be a winning strategy; and manage your resources strategically. In general, barring external factors, we will generally see a slow and gradual improvement.

You are seeing travel/agency nurse costs moderate a bit, correct?

Yes, we are. Utilization and the rates at which hospitals pay travel/agency nurses have decreased, but still remain dramatically above pre-pandemic levels. And in early 2022, around January 2022, travel nurse utilization was two to three times what it was before the pandemic, the same in terms of cost. Therefore, most organizations had between 400 and 700 percent of the total cost of contracted labor, compared to pre-pandemic levels.

Do you see greater flexibility over time?

Maybe. And that leads us to find solutions. So one of the ways we think about the requirement to use outsourced labor is to cover variable volumes. One of the things we’re seeing among organizations that are doing better is that they are using more advanced analytics to predict their volumes throughout the year so they know how to hire nurses. And by using some analytical techniques for optimization, they are deploying resources more effectively. Therefore, organizations are increasing the size of their internal floating nurse pools and nurses are moving from unit to unit. And to some extent, that allows organizations to mitigate the use of agency or travel labor. And that becomes a strategic deployment. And those organizations that pursue those strategies outperform others. And they can create in-house white label agencies, where they can effectively deploy nurses even across states in their own systems.

That said, even so, the average number of FTEs per average occupied bed overall has declined in recent years, highlighting how tight the market is, so organizations are also creating connections with local nursing schools to develop talent pipelines and are developing pipelines. And how do we make sure everyone is working at the top of their license? And that involves technicians, assistants, etc.

Do you think M&A activity will continue to accelerate over time?

Yes, I see that continuing. That said, regulatory scrutiny is increasing over such combinations. And the types of acquisitions are changing.

What kind of advice would you like to share with our audience about all of these trends?

Number one, now is a time when organizational leaders cannot lose sight of longer-term strategic considerations. Strategic capital, so they are creating access points while meeting community needs and setting themselves up for long-term success. Ambulatory surgery centers, shopping centers, expansion of outpatient access. And when it comes to short-term challenges, costs must continue to be monitored. And in terms of workforce optimization, how can they implement advanced analytics, rather than just eliminating jobs? Reduce variable costs. And consider minimizing vulnerability in these domains: appropriate access to capital, long-term strategic thinking, and day-to-day management. And there are dozens of levers that can be pulled and adjusted. Don’t lose sight of the long term because of current challenges, but don’t neglect what’s happening today.

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