1. Margins for health systems improved in 2023 after a disastrous 2022. At the end of 2022, it looked like we would see massive health system failures. Systems rebounded in 2023 far better than many of us expected. The median hospital margin was -0.5% in January 2023 and 2.3% by year's end, according to Kaufman Hall.
There is still much variation between systems' 2023 results, with Mayo Clinic reporting a 6% operating margin for example and Cleveland Clinic at 0.4% or Kaiser Permanente at 0.3%. It should be noted that while systems improved overall through 2023, the median margin is still too thin for comfort and 40% of U.S. hospitals continue to lose money from operations, with more than a dozen hospitals and health systems closing or filing for bankruptcy or otherwise reducing services in the last year.
2. The physician shortage in primary care and specialties is getting worse. The Association of American Medical Colleges issued a forecast in 2019 that the U.S. will face a shortage of up to 124,000 physicians by 2033. Numerous data points, albeit delayed, can paint a picture of how we are trending in the trajectory toward that end date, although more data — such as a national estimate of annual physician turnover — would certainly help the cause.
The percentage of physician searches filled has fallen despite the number of active searches rising for five years straight. Definitive Healthcare found 71,309 physicians left the workforce from the beginning of 2021 through the end of 2022, according to its analysis of medical claims, an estimate that outnumbers the AAMC's estimated 30,000 physicians who join the U.S. workforce each year. New medical schools, educational partnerships, and philanthropic movement are laudable and needed, but holistic, national-level action is needed to address healthcare's growing numbers problem: there are not enough doctors to take care of a larger and older population.
3. The nursing shortage and reliance on contract labor seems to be easing one bit. Health systems have made great strides in reducing or, in some cases, nearly eliminating their reliance on the contract labor that was a source of financial disruption throughout the COVID-19 pandemic. Contract labor expenses for hospitals and health systems increased 258% from 2019 to 2022.
For systems, easing contract labor reliance has required salary raises and labor investments. While costly, systems that are doing this right are seeing the returns with improved retention and recruiting. Tenet attributed "best-in-class contract labor cost management" for its financial health in 2023, with contract labor making up less than 3% of its labor expenses. Mayo Clinic issued salary raises, hired 14,000 employees and largely eliminated the contract and temporary labor expense to lift its 2023 results for a $1.1 billion net operating income.
4. Supply, pharmaceutical and device inflation remains quite high. Hospital drug and supply expenses per calendar day were up 6% and 5%, respectively, in 2023 compared to the year prior. This exceeds the rate of inflation but marks lower increases than hospitals saw through 2019 and 2022, when supply expenses per patient increased 18.5%, outpacing increases in inflation by nearly 30%.
5. Ransomware and cyberattacks are surging. Health system ransomware attacks nearly doubled in 2023, with 141 U.S. hospitals affected last year and data stolen in 32 of 46 of the events. These attacks can wreak havoc and cause harm to entire healthcare infrastructures across state lines, and the actors behind them have grown more emboldened and nefarious. The ongoing ransomware attack against Change Healthcare is "the most serious incident of its kind leveled against a U.S. healthcare organization," according to the American Hospital Association, and is prompting hospital leaders to consider changes like doubling their cybersecurity spending and investments.
6. Consolidation continues among large and mid-size health systems. There were 65 hospital and health system M&A deals announced in 2023, an increase from 53 in 2022. The year has begun with systems announcing more deals or closing on their plans.
Northwell Health and Nuvance Health announced their plans to merge by year's end into a combined $18 billion, 28-hospital enterprise. In the upper Midwest, Duluth, Minn.-based St. Luke's and Wausau, Wis.-based Aspirus Health combined this year into a 19-hospital system as did Milwaukee-based Froedtert and Neenah, Wis.-based ThedaCare, forming an 18-hospital system. St. Louis-based BJC HealthCare and Kansas City, Mo.-based Saint Luke's Health System finalized their merger at the start of the year. Short of mergers, large systems are also considering or actively working toward hospital sales, including Franklin, Tenn.-based Community Health Systems and Dallas-based Tenet Healthcare.
7. Hospitals and health systems are making new bets with suppliers. Lots of hard lessons have been learned about the global supply chain in healthcare in recent years. As drug shortages continue to change weekly and product availability ebbs and flows based on environmental or economic factors, hospitals and health systems are seeking to make their supply chains less susceptible to external changes. AdventHealth and Medline co-developed a 375,000-square-foot Consolidated Service Center in Apopka, Fla., to enable a more resilient inventory strategy, for one. Mark Cuban Cost Plus Drug Co. is also expanding its services with a new marketplace for hospitals that offers thousands of critical drugs in shortage to healthcare providers.