Analysts say the recovery remains slow. Health systems are seeing higher costs due to battles with payers, and more leaders are worried about meeting debt obligations.
Many hospitals and health systems find themselves in a better place financially than a year ago, but most say their recovery remains slow.
For many hospitals, 2022 proved to be the most difficult year financially in recent memory, with half of hospitals having negative volumes. Hospitals continue to wrestle with higher costs, particularly for labor, and also continue to deal with staffing shortages.
While analysts see many hospitals improving, most healthcare leaders say they expect to see modest operating margins in the future, according to a recent report from Kaufman Hall, a healthcare consulting firm. Most nonprofit hospital leaders project a slow climb back to operating margins of 3% to 4%.
Hospitals are also seeing a slow rebound in volumes, and rising claim denials have emerged as a major cost driver for health systems, analysts say. In addition, more hospital leaders are expressing concern about their debt covenants, which suggests continued unease about their finances.
“Maybe we're at this new normal, which is a lower level compared to pre-pandemic performance,” says Lisa Goldstein, a senior vice president with Kaufman Hall.
Some hospitals are seeing more success in their recovery, she says, while some systems are continuing to face difficult headwinds.
“The question is, what is the new, durable, sustainable level of margin? That's what I don't think we know yet,” Goldstein says.
‘Missing projections on volumes’
Analysts express some surprise that health systems aren’t seeing a higher rebound in volume. While health systems are treating more patients, particularly in outpatient facilities, they aren’t seeing the same volumes as they did during the years before the arrival of the COVID-19 pandemic.
Mark Newton, a senior vice president for Kaufman Hall, heads the firm’s performance improvement practice.
“We still have a lot of clients that are still missing projections on volumes,” Newton says. While some hospitals may be faring better than others in seeing a higher number of patients, Newton says, “We're still seeing lots of mid-size hospitals really still struggling with the volumes.”
Now, Newton isn’t sure health systems will return to pre-pandemic volumes.
“Personally I would have thought it would come back to normal … but it obviously has not and isn't going to, I don't believe,” Newton says.
“I mean, if it hasn't by now, I don't know what's going to be the instigator or the catalyst to cause that to happen,” he adds.
Health systems may be seeing reduced volumes because patients are choosing urgent care services or services “outside of the hospital ecosystem,” Goldstein says. More nontraditional rivals, such as Amazon, CVS, and Walmart, are expanding their efforts in healthcare delivery.
More health systems are wrestling with payers over claims denials, and it is affecting their costs. Nearly three out of four hospital executives (73%) surveyed by Kaufman Hall said they have seen an increase in claims denials.
More hospitals are seeing insurers contesting treatment plans or procedures, such as admitting patients to hospitals when payers suggest they could be treated on an outpatient basis, Newton says. Hospitals and health systems have denounced the process of prior authorization, which requires payers to sign off on treatment or procedures. Payers say the process is designed to curb wasteful spending and unnecessary procedures.
Hospitals are engaging in lengthy battles after insurers deny approval for some treatment, and in some cases, the payers are issuing denials because the claims weren't filed on time. And providers end up writing off those claims.
Hospitals are seeing higher costs with claim denials. Health systems are seeing more headaches with denials coming from Medicare Advantage plans, Newton says.
Some health executives say they are tracking denial rates by payers and bringing up those issues in contract negotiations. Newton also stresses the importance of proper clinical documentation for procedures and treatments to reduce the chances of denials from payers.
Concerns about debt
More healthcare executives are also expressing concerns about their systems meeting their debt obligations, a finding Goldstein says is concerning.
Roughly one in four executives (24%) said their hospitals had problems meeting the obligations of their debt covenants in the past year.
However, more executives project they will have challenges in the future. One in three (34%) hospital leaders said they could fail to meet their debt covenants or come very close to falling short over the next year. Goldstein described that number as “astounding” in a blog last week.
With debt covenants, organizations agree to repay some of the money they have borrowed, and they also commit to maintaining a certain level of financial performance. As Goldstein notes, if health systems are turning the corner, then why are so many health executives worried about failing to meet their debt covenants, or near misses?
“It signals to us that we're clearly not out of the woods yet,” Goldstein says. “The headwinds from the pandemic may be over but the illness is still with us.”
In addition to modest volumes and higher expenses, health systems are also seeing more patients shift to Medicare or Medicaid, which typically reimburse at lower rates than commercial insurers.
Health systems that fail to fulfill their debt covenants, or come close to missing their obligations, could see risks of downgrades from ratings analysts.
“We advise, do everything you can to make your covenants,” Goldstein says. “If you have a breach, it's time consuming, it's expensive. And investors have long memories … who made the covenants, who didn't.”
First and foremost, hospitals should focus on paying debts, but they also must build and maintain liquidity, Goldstein says.
“Maintaining and preserving liquidity, time and time again, proves to be the ultimate cushion during very difficult times,” she says.
Now more than ever, health systems and hospitals need to be managing their finances carefully.
Stakeholders want to know hospitals have good planning not just for the coming year but in the following year or two, Goldstein says.
“The importance of strong, thorough financial planning is something that we advise and suggest to hospitals of all sizes,” Goldstein says. “It doesn't matter if you're big or small, but you really need to have strong acumen around understanding the near term future.”