Impact Advisors’ Randy Notes: Choppy Sailing for Hospitals for the Foreseeable Future

Financial issues continue to plague U.S. hospitals, as we near the fourth quarter of 2022. As the Chicago-based Kaufman Hall firm of analysts noted in its August “National Flash Report,” “U.S. hospitals and health systems are experiencing some of the worst margins since the beginning of the pandemic, and 2022 continues to be on pace to be the worst year of the pandemic in terms of financial performance. The gains hospitals saw in recent months reversed themselves in July, as lagging outpatient volumes shrunk revenues and expenses jumped up from June,” the report stated. Indeed, it noted, “Inpatient revenue dropped 0.7 percent from the previous month and is down 1.5 percent from July 2021.” Meanwhile, surveys of senior hospital and health system executives continue to reveal anxiety over a combination of staffing (especially nurse) shortages, high staffing costs, high supply costs, and concern over reimbursement issues.

In the context of such concerning news and developments in U.S. healthcare, Healthcare Innovation Editor-in-Chief Mark Hagland spoke late last month with Randy Notes, managing director of margin improvement at the Naperville, Ill.-based Impact Advisors consulting firm. Below are excerpts from that interview.

Let’s begin at 40,000 feet, and look at the overall financial landscape for hospitals, medical groups, and health systems; what do you see right now?

It’s almost the worst I’ve seen in 15 years; it’s really bad, it’s as bad as I’ve ever seen, in 30 years. There are pressures on margin from everywhere. There are inflationary issues, which are causing problems for providers on supplies; and then you’ve got the labor issues, which are starting to get better, but some of these increases are going to be permanent. You don’t take wages away from people; once you give them, it’s almost impossible to take them down. And you can make an argument that they should have been raised all along.

We are seeing some slowing down in the use of agency nurses. And people are taking a dual approach. So one of the first things they did was to create these incentive-compensation plans for nurses, to retain them; and to some extent, that’s been helpful. And when you include both agency and staff nurses involved—it’s higher than it has been since the pandemic. You would have expected it to go up but then also to go down, once the crush of the pandemic had left; it’s an endemic now.

One of the things we’re hearing from everyone is that, once hospitals and health systems sent as many staff members home to work remotely in the spring of 2020 as they could, obviously because of infection concerns early on in the pandemic, what ended up happening was that, fairly soon, hospital-based organizations found they were competing not just with the hospital down the street to attract health IT, revenue cycle management, and other staff who can work remotely, but in fact competing nationwide, for talent. What have you been seeing, in that regard?

Yes, that’s all correct; in fact, as an industry, we’ve moved to this hybrid-remote environment, and I don’t see that going away anytime. There will be savings on the real estate cost side, but on the other hand, people in smaller markets are being courted from across the country; so it’s difficult to retain those people, and you’re going to have pay them more.

So the prevailing wage level of your own region won’t matter much any longer?

Medicare does calculate a regional wage reset [and makes mild reimbursement adjustments as a result]. But Medicare is usually a couple of years behind, also. So it’s still troubled times for at least a few years going forward.

What are CFOs’ and other c-suite executives’ biggest concerns right now?

We have historically enormous gaps between what our forecasted margin needs to be, and what it actually is. You’re seeing health systems around the $2 billion net revenue level looking to get $200 million in costs out of their systems per year—that’s 10 percent of their net patient service revenue, and it’s huge. You have to look at your corporate services, your IT spend; everything has to be brought into equation.

Do you see hospital systems letting go of some service lines over time?

It’s situational, of course; you certainly see in the press that someone’s closing their OB or pediatrics, or whatever; but first, you’ll see service rationalization, the consolidation of service locations. You might have had numerous locations for infusion. But one location might be losing money, and one might be making money; and you can’t afford for that semi-rural outpost to be losing that much money over time.

Do you see clinic locations being closed over time also?

That will be on the table; at the same time, clinics are the feeders for getting patients into the system. So in some cases, they’ll say they need locations in order to continue to capture market share. But in some cases, they’ll have to cut their losses.

Let’s look at the combined landscape of policy/payment and finance. How do you see the policy and payment landscape intersecting with the financial and operational landscape?

I could see access becoming a big deal—I could see some sort of mechanism built into policy to retain access. It will be very interesting to see what the government negotiation over prescription drugs, what the ripple effect will be for non-Medicare, non-Medicaid patients. We always talk about the 340B program closing, for hospitals serving high levels of indigent patients, getting breaks on prescription drug costs; perhaps that could be expanded. But any new policy will be focused on access.

How will automation and technology fitting into this landscape over the next few years? Will it particularly help in the patient care delivery area? In revenue cycle management? Elsewhere?

I see that becoming more and more into the EHR [electronic health record] platforms themselves. More and more, the Epics, Cerners, Meditechs, are going to be trying to imbed as much of that into their platforms. Nurses and doctors still have to do too many clicks, and that’s a problem. A lot of that repetitive inputting, even higher-level repetitive inputting—I see a lot of companies chasing those goals. But it’s easier to talk about it than it is to do it. You see companies like Olive, which made a huge investment in automation, having to do a pretty ambitious reduction in force.

How do you see the disruptors impacting traditional health systems?

You’re going to end up seeing hospitals and health systems partnering with organizations that used to be competitors. Hospitals have not been big fans of private equity; but you’ll see more of that kind of partnering; take the ambulatory surgery center world. I predict that anything done in outpatient surgery will be done in an ambulatory surgery center five years from now. They’ll be shifting to ASCs. And also, they’ll be discharging patients earlier and remotely monitoring them, so that if they do start to fail, they’ll be brought back into the hospital. You’ll see a lot of that stuff happening. But fundamentally, people who you’ve seen as competitors, will increasingly be your partners.

What would your main pieces of advice be for c-suite leaders in hospitals, medical groups, and health systems, in the next couple of years?

This is complicated: when you’re trying to create a ten-percent improvement in your net margin or your EBITDA, you’ll likely need help, because this is too critical and too important to do it alone. I know that’s self-serving, but I really believe it.