Hospitals’ new Normal and Health Tech’s Opportunity
By Blake Madden
Today we’re diving into recent nonprofit hospital financial results, the new normal for hospitals, and what that might mean for health tech operators.
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Key Takeaways – the New Normal
Hospitals are struggling in 2023. Financial and operating data from recent nonprofit financial disclosures, Kaufman Hall, and state hospital associations support this claim.
As these struggles continue, hospitals will merge, partner, outsource, and do whatever they can to diversify revenue while containing expenses.
The acute pressures (ha) hospitals are facing present growth opportunities for health tech firms that offer solutions with clear ROI potential for hospitals – e.g., staffing and labor retention, scheduling tools, workflow tools, burnout prevention, length of stay management, those that can help with new forms of revenue generation, and more.
The New Normal is Way Worse for Hospitals
My continued theory is that traditional hospital models are struggling, which will lead to gradual changes in healthcare delivery as they squeeze margins.
To test this theory out, I took at look at recent large nonprofit health system financial and operating performance. CommonSpirit, Providence, and Ascension all recently disclosed full-year 2022 results with a combined $89 billion in revenue.
I compared 2022 results against 2019 results. Now, they’re not perfectly apples to apples – these health systems bought and sold hospitals & other assets – but it’s still directionally correct to understand what’s going on at the largest organizations with the latest financial data possible.
Hospital financial performance from these 3 health systems – which, obviously, is not representative of everyone – deteriorated substantially. These rapid changes indicate operating challenges even among the largest nonprofits. Inpatient admissions are down, expenses are up, margins are compressed. For example, from 2019 to 2022:
- Inpatient admissions for Providence, CommonSpirit, and Ascension dropped 16.1%, 6.6%, and 12.3% respectively;
- Labor as a percentage of total net revenue rose in all 3 nonprofits:
- Providence: 48.6% to 54.2%;
- CommonSpirit: 49.0% to 53.4%;
- Ascension: 47.9% to 51.9%;
- Operating margins for Providence, CommonSpirit and Ascension dropped from 1.5% to -5.5%; -0.8% to -1.9%; and 2.1% to -0.9%, respectively;
- All 3 nonprofits experienced a decline in commercial (higher reimbursement) payor mix and a flat to increase in Medicare as a percentage of net patient revenue.
Phase 2 of this hypothesis is currently playing out: hospital pressures will continue. Medicare Advantage and emerging value-based care players are focused on decreasing ED and hospital admissions as much as humanly possible for their targeted populations. Meanwhile, new retail players are capturing primary care patients, putting strain on downstream hospital volumes.
How the new Paradigm is affecting Hospitals
The message is clear: adapt or get squeezed. Hospitals are facing a new paradigm post-Covid, and I wrote about these dynamics in September (albeit maybe a bit dramatically). My thoughts there around hospital operations seem to be tracking.
Here’s what’s different in the ‘New Paradigm’ of healthcare:
Labor is the Top Issue: In our discussion on the topic last month, Kyle Kirkpatrick characterized the current situation perfectly. “It’s hard for hospitals to look past labor challenges right now.” Many state hospital associations including Alabama and Connecticut have sounded the alarm on the state of hospital finances. Community and rural hospitals are underwater. Even the largest nonprofits are hemorrhaging under their legacy bloat and inpatient business models.
Payor Mix Isn’t Helping: The secular shift in payor mix to Medicare is a double whammy. Not only do health systems receive lower reimbursement on Medicare (as opposed to employer-sponsored, or commercial contracts), the continued, unyielding rise in Medicare Advantage plans tends to be net-negative 5% to traditional Medicare services due to administrative conflict that includes burdensome tasks like prior authorization and denials. MA plans also avoid hospitals and facility based care if at all possible. Finally, many systems can’t rely too heavily on commercial rate lifts – payors will only budge so much.
New competition: Along with MA plans and vertically integrated players holding more power to steer patients away from hospital facilities, emerging risk-based players are treating specific populations as granular as sickle-cell disease. Meanwhile, there’s more investment than ever into population health / enablement players and new business models are emerging around outpatient bundled payments in areas like orthopedic cases.
Inability to merge: Many health system mergers are getting shut down or cancelled due to heavy stipulations placed on the acquisition or state / FTC involvement. Inpatient pipelines are weak with most new IP growth coming from new hospital builds. The only mergers making it through are between cross-market, non-overlapping systems where the benefits are a bit fuzzier and the governance gets complicated.
Health Tech Startup Areas that are Positioned Well in the New Normal
So hospitals need partners & vendors to support areas that optimize costs and diversify revenue.
Health tech solutions that are prepared to offer fast implementation, turnkey solutions, and health IT offerings that provide an immediate and clear ROI to leadership are poised to do well to work with systems in 2023.
Based on the dynamics described above, I’d expect the following spaces and companies to receive plenty of attention from health systems:
- Clinical documentation solutions like Augmedix, Nuance, Abridge (all of whom have struck deals with major systems), clinician engagement tools, workflow management tools like Awell or Dock Health;
- New staffing platforms that match clinicians into permanent employment arrangements like Incredible, Vivian, or Clipboard;
- Population health / enablement platforms like Privia or Agilon to begin the slow, slow grind toward risk in an increasingly competitive physician employment market;
- Turnkey offerings including virtual care companies like KeyCare (which has its own telehealth Epic instance that plays nice with hospital Epic platforms) or companies that help systems stand up MA plans;
- Hospital-at-home programs that alleviate length of stay and observation visits (e.g., the new launch of Maribel Health and its partnership with Mercy); other firms that use machine learning and social determinants to decrease length of stay in hospitals and avoid readmission;
- I could see hospitals going even further outside the box by partnering with venture firms on new service line pilots (e.g., all of the recent General Catalyst partnerships, which was responsible for the Maribel Health announcement) or data analytics / licensure to life sciences and other organizations.
Bottom line – we’re entering an interesting new era for hospital operations and care delivery, and my hope is that amidst all of the activity, models emerge that ultimately result in better patient care and lower clinical burnout.
Resources & Footnotes:
High expenses, job cuts — hospitals are still struggling in 2023 (Advisory)
National Hospital Flash Report (Kaufman Hall)
Connecticut hospitals see expenses rise $3.5 billion post-pandemic (HFMA)
Report: Tremendous Financial Impact of the Pandemic on Alabama’s Hospitals (AHA)