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

As Healthcare Innovation reported on Oct. 24, “Even as operating margins are ticking up ever so slightly and financial performance is showing signs of stabilization, a number of factors related to staffing, the shift towards outpatient care, and patient experience issues, are continuing to cause concerns, according to a new report from the Chicago-based Kaufman Hall consulting and advisory firm entitled ‘2023 State of Healthcare Performance Improvement: Signs of Stabilization Emerge.’”

Kaufman Hall shared a press release with the media on that date that began thus: “Hospitals and health systems are seeing some signs of stabilization and margin improvement, but challenges around workforce, expenses and patient access persist 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 look like following a complete transformation in how patients interact with the healthcare system and providers. The report found that 66 percent of respondents’ institutions have run at less than full capacity at some point during the past year due to shortages, and 32 percent of respondents say that patient concerns or complaints about access to physicians are increasing.”

The challenges facing hospital-based organizations in the U.S. are having other impacts as well; the financial distress of some hospital-based organizations is undoubtedly contributing to the increase in mergers and acquisitions. As Kaufman Hall’s “M&A Quarterly Activity Report” for the third quarter of 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 Q3 2021 and the 10 transactions announced in Q3 2022.”

Recently, Healthcare Innovation Editor-in-Chief Mark Hagland spoke with Erik Swanson, senior vice president of data analytics at Kaufman Hall, where he leads the firm’s Data and Analytics Group, to get his perspectives on these important and distinct yet interrelated, trends. Below are excerpts from that interview.

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

Generally, what we are seeing is very, very modest improvement over time, and in general, we’re seeing better performance than in the last three years, albeit still diminished from pre-pandemic levels. Now, when you look at the hospitals, they’re split into different categories or types. Some are seeing performance improving at a moderate clip; others, just barely, and then some that are still diminished. And we continue to see a growing gap between the top and bottom performers.

What percentage, roughly, are in the three different groups?

Most are in the middle group, maybe two-thirds in the neutral zone, if you will, with maybe one-sixth in the upper and lower groups. And there is not a single set of characteristics, but there are some general themes. First, generally, is the aspect of size. As we look at hospital-based organizations that are of larger sizes, we’re finding that larger size tends to protect a hospital organization from some of the greatest financial vulnerabilities. Alongside that and correlated with it, is payer mix. Those hospital-based organizations with poor payer mix or much higher percentages of government versus commercial, can fall into that difficult category; also ones in high-wage-rate areas.

Importantly, rural healthcare matches a lot of those 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 started out going into the pandemic with weaker balance sheets. And so now you’re seeing covenant violations and those types of issues that can add to their troubles. All still face higher wage rates, inflationary pressures, mixed volumes.

What will happen over the next few years, in this complex landscape?

Number one, we’re going to continue to see a general improvement in the overall industry, because of the stabilization of some of the conditions. And organizations now—the median has a positive margin—the ability to think about how to deploy capital strategically for long-term success, will buoy them. But for the organizations in the lowest category, they’ll face struggles, and some may be acquired. Indeed, the size of those M&A deals is continuing to increase. It’s entirely possible that organizations will get back to historical pre-pandemic margins, but it won’t be next year. Organizations with substantial outpatient footprints, and deploying those footprints effectively, will be one winning strategy; and managing their resources strategically. Overall, barring external factors, we’ll generally see some slow, gradual improvement.

You’re seeing traveling/agency nurse costs moderating somewhat, correct?

Yes, we are. Utilization and the rates at which hospitals are paying travel/agency nurses, have both declined, but still remain dramatically above pre-pandemic levels. And in early 2022 around January 2022, the utilization of travel nurses was two to three times pre-pandemic, the same, for cost. So most organizations were between 400 and 700 percent in total contract labor cost, compared to pre-pandemic levels.

Do you see further easing over time?

Perhaps. And that gets us into solutions. So one of the ways in which we think about the requirement for use of contract labor is to fill for variable volumes. One of the things we’re seeing among organizations doing better is that they’re using more advanced analytics to predict their volumes over the course of the year, so they know how to staff nurses. And using some analytic techniques for optimization, they’re deploying resources more effectively. So organizations are growing the size of their internal nurse float pools with nurses moving from unit to unit. And to some extent, that allows organizations to mitigate the use of travel/agency labor.  And that becomes a strategic deployment. Nd those organizations that pursue those strategies, outperform others. And they can build internal, white-label agencies, where they can effectively deploy nurses even across states in their own systems.

That said, still, the average number of FTEs per average occupied bed, has generally seen declines over the last few 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 ensure everyone’s working to the top of their license? And that involves techs, aides, etc.

Do you see M&A activity continuing 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, around all of these trends?

Number one, now is a time in which organizational leaders cannot lose sight of longer-term strategic considerations. Strategic capital, such that you’re creating access points while serving community needs, and such that you’re setting yourselves up for long-term success. Ambulatory surgery centers, retail centers, expanding outpatient access. And as it relates to near-term challenges, continued vigilance over cost. And in terms of workforce optimization, how can they deploy advanced analytics, as opposed to just cutting jobs? Diminish variable costs. And consider the minimization of vulnerability across these domains: appropriate access to capital, thinking long-term strategically, and managing day to day. And there are dozens of levers that can be pulled and adjusted. Don’t lose sight of the long term because of today’s challenges, but don’t neglect what’s going on today.