Healthcare organizations are facing a myriad of difficult decisions driven by margin pressures. Approximately half of U.S. hospitals finished 2022 with negative margins due to increased labor, supplies, and pharmaceutical expenses.1 However, organizations that have disciplined expense management and revenue cycle best practices have an opportunity to rebound. As the industry moves towards a value-based care model, it is imperative to have balanced operating margins that support a Value-Centric Enterprise. Tackling this financial crisis and reaching a sustainable financial future requires ingenuity and perseverance as we look to put our organizations on solid footing. However, financial sustainability is not simply about wiping out the red in the margins. Healthcare CFOs define financial sustainability as an organization’s possession of sufficient resources to pursue value-based initiatives and serve its community while also making strategic decisions and capital investments over time.2 As a critical capability, maintaining a financial sustainability focus to combat eroding margins will support healthcare providers on their transitional journey to becoming a Value-Centric Enterprise.
To learn more about pursuing a Value-Centric Enterprise, read our Healthcare Market Point of View.
Essential Business Objectives
The road to financial sustainability has two lanes—cutting costs and generating revenue. To rebuild balance sheets and achieve the stability and prosperity needed in healthcare, FORVIS recommends focusing on the following business aspects:
Expense Management: Supplies, purchased services, and employee benefits showed double-digit increases for many providers over the last two years. Pharmaceutical costs showed the highest percentage of growth since 2019,3 impacting both self-funded health plans and patient care costs. Surfacing potential savings for rebates inside pharmacy benefits management (PBM) contracts and redesigning benefit packages to manage high-cost claimants is complex and typically beyond the capabilities of internal HR. Brokers can help navigate these complexities if commission-based compensation from carriers will not influence recommendations. However, benchmarking spending data to other hospitals in similar markets is the most objective way to identify savings and negotiate from a position of strength. For 2023, providers should consider benchmarking the following:
- Medical supplies and implantable devices
- Pharmaceutical costs and PBM rebates
- Ancillary benefits such as life, AD&D, and LTD
- Stop Loss insurance
Workforce Productivity: Faced with increased staffing and financial demands, as well as the need for an efficient labor force, the staffing abilities of healthcare organizations remain significantly challenged. While the need for contract labor has decreased significantly from the early days of the pandemic, hourly rates for regular employees have risen on average 15% from pre-pandemic levels and must be accounted for. Post-pandemic labor ratios range from 50% to 60% on average.4 Healthcare systems cannot operate without clinicians and administrative professionals to deliver patient services—emphasizing the importance of calculating labor ratios to identify and address inefficiencies while garnering efficiencies to convert to potential savings. Reevaluating departmental benchmarks for productivity and regular measurements will help create an efficiency culture driven from the bottom up. Considering site of care transitions from inpatient to outpatient settings as new cost structures may offset reduced reimbursement.
Insurance Claim Denials: In the past six years, the average rate of healthcare insurance claim denials has risen by 33%. Denied medical claims cost approximately $118 per denial or $4.9 million per hospital annually.5 With such a high price tag, reducing insurance denials is a top priority for the majority of healthcare providers. This process is complicated by the increasing volume of healthcare reimbursement changes, such as the No Surprises Act that will go into effect this year. The time and money that go into managing claim denials can have a huge, negative impact on an organization’s net revenue and margins, and are exasperated by revenue cycle staffing challenges, insurance claim denial and write-off visibility, and regulatory audit “denials.”
FORVIS’ Denials Management Monitoring platform can help you reduce revenue loss and collection re-work costs. This efficient platform provides actionable data that allows for deeper analysis to help shape an effective denials prevention strategy.
Managed Care Assessment
Understanding existing payor contracts and reimbursement terms is key to developing a comprehensive managed care strategy. The managed care assessment provides insight into an organization’s current payor relationships and evaluates potential opportunities to enhance those agreements. In evaluating these relationships, organizations can find new revenue-generating opportunities and position themselves for long-term success.
Conclusion
The Healthcare Practice at FORVIS has identified financial sustainability as a critical accelerant for an organization’s transformational journey toward becoming a Value-Centric Enterprise. Successful provider organizations must place value-based initiatives at the core of their strategic, operational, and financial activities. However, as the level of complexity in the healthcare landscape continues to expand, organizations will need talent, technology, and best practices to keep pace with insurance companies, suppliers, and vendors seeking a stake—identifying and implementing cost-savings and revenue-generating opportunities are an ongoing effort in margin improvement initiatives. Receiving help from industry experts will help fill talent gaps, supply technological advancements, and accelerate efforts to rebuild margins and achieve financial sustainability in the pursuit of value.
If you have questions or need assistance, please reach out to a professional at FORVIS or submit the Contact Us form below.
- 1“Half of hospitals ended 2022 with negative margins: 4 takeaways,” beckershospitalreview.com.
- 2“The Road to Financial Sustainability for Hospital CFOs,” beckershospitalreview.com.
- 3"Costs of Caring," aha.org, April 2023.
- 4“The State of Claims Survey 2022,” Experian.com, February 15, 2023.
- 5Change Healthcare analysis shows $262 billion in medical claims initially denied, meaning billions in administrative costs, healthcarefinancenews.com, June 16, 2017.