Hospitals face 'seismic shift' as margin compression continues

The balance between commercial and government payers has shifted as inflationary pressures mount and neither side wants to increase payments significantly.

The traditional cost shift between commercial and government payers is breaking down, said Dan Liljenquist, senior vice president and chief strategy officer at Salt Lake City-based Intermountain, during a panel at the Becker's CEO+CFO Roundtable in November. The breakdown, among other trends, has accelerated financial woes for hospitals. He cited a quote from Ernie Sway's book, The Sun Also Rises, where one character asks the other how he went bankrupt.

The answer? Gradually, and then suddenly.

"It feels like we've said healthcare is unsustainable for at least a decade, but if you look at the compression of margins and what's leading to that compression, and how that's flipped us upside down, I think you're going to see massive destruction in the hospital space in the next few years," said Mr. Liljenquist. "As healthy as Intermountain is, and I think we're one of the healthiest health systems in the country, it is the biggest challenge I think we will have faced as a health system in our 47 years."

Hospital and health system executives leading small hospitals and big systems can relate. In its 2024 outlook, Fitch dubbed 2024 the "make or break" year for many hospitals after making gains in the last 12 months to stabilize margins. The big challenge next year, Fitch says, will be labor. The ratings firm expects continued staff shortages and increased wage pressures, alongside inflation, to challenge hospitals.

Fitch estimates a "small percentage" of hospitals will be able to recruit and retain staff while also seeing increased patient demand; most will struggle to secure staff from a limited talent pool in hyper competitive markets.

Susan Huang, MD, chief medical officer of the south division of Providence and CEO of Providence Health Network, also sees a "seismic shift" in margin compression due to staffing shortages that started years ago and were exacerbated by the pandemic.

"I think about workforce shortages and also the burnout issues in the provider space, in the projections of the lack of capacity in doctors, but also nurses and ancillary providers as well as certain areas such as mental health and social issues as well that need to be addressed, and the need for payment transformation," said Dr. Hwang. "This move as the reimbursement rates really have not caught up with inflation, and we've seen those after effects of COVID with that rising inflation, that's causing the margin pressure."

She sees the current moment as a great opportunity to address the staffing and financial issues through innovation and strategic change.

"We have to really think about how to disrupt ourselves, because it's been a long time coming," she said. "How are we going to disrupt ourselves along the lines of payment transformation, care transformation and also cultural transformation because the way our systems were set up in the past, really I think in this day and age, are just not sustainable."

Providence and Intermountain have both taken steps to address the misaligned incentives in the fee-for-service world, and to overcome current reimbursement challenges. Intermountain aims to bring more patients under the "prepaid" model that will allow patients to access services quickly and easily, dieally avoiding preventable diseases.

Dr. Huang is optimistic about the opportunities for internal disruption outside of the traditional healthcare system, which could mean partnering with non-traditional healthcare companies.

"We think about potential partners who can really compliment what we have at Providence. We do have a lot, because we have our internal Digital Innovation Group, we have partnerships and spinoff companies as well," she said. "We have data scientists, we have a lot of data, and yet, one person can't do it all. So it's really honing in and understanding what your core competency is and then what are others that can come from big tech, or maybe from the payer realm, or maybe it comes from smaller nimble startups too."

The partnerships should complement the health system's competencies and share the system's values around data privacy and operations, she said.

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