With tougher times ahead, hospitals need to be planning now

Some hospitals are struggling financially, and some are holding their own, but even stronger health systems need to be looking toward the future.

Hospitals are expected to face continuing cost increases in labor and supplies, and Medicaid cuts unfolding over the next several years are going to create more pressures.

Joe Kight, head of healthcare for the U.S. Bank Institutional Client Group, says hospitals need to be planning ahead now more than ever to deal with growing headwinds. He tells Chief Healthcare Executive® that hospitals need to be looking at their cash and debts differently.

When hospitals and health systems are thinking about capital structure, “they really need to be thinking about how to be strategic around that,” Kight says.

Millions of Americans are expected to lose Medicaid coverage due to changes emanating from the massive federal tax package approved last year. Medicaid spending is projected to drop by about $1 trillion over the next year, and hospitals are expected to be treating more patients without insurance and ending up with more uncompensated care. Some changes in Medicaid programs, including work requirements, take effect in 2027.

Health systems should be devising strategies now, and Kight says those conversations are happening in hospitals.

“It's really about creating optionality for these health systems, really thinking about what does the next year, three years, five years, 10 years look like, and creating what I would call strategic flexibility around your capital structure,” Kight says.

Being strategic

In Kight’s view, treasury management in hospitals is moving from an operational back office function and “has absolutely moved to the boardroom.”

“What we're finding is some of the really forward thinking health systems are really thinking about their maturities, not just as a refinancing exercise, but really as a strategic capital exercise,” he says. “And it's really important because if you wait for the maturity to happen, right, then you're sort of forced into a certain window. But if you think about it strategically, then you're really evaluating your liquidity, you're evaluating the covenant flexibility, you're thinking about duration, you're thinking about different funding sources.”

Now more than ever, hospitals need to view cash as a strategic asset. Kight says he sees health systems being more deliberative about pursuing significant capital projects.

Some stronger systems are pushing ahead with construction projects and other major initiatives, especially projects that may have been put on the back burner during the COVID-19 pandemic.

“You are seeing a much bigger diligence go on to like major capital projects,” Kight says. “It’s coming under much more scrutiny from either boards or the management of that health system, around, you know, is this the right move? What does this look like today? What's it going to look like five years from now?”

“You're going to see those pockets where you absolutely are going to need to put off a potential big strategic investment, because the volatility and the unknown around what 2027 is going to bring is causing a little bit of delay,” he says.

Kight says he is seeing hospitals taking a more coordinated approach in managing finances. Instead of various departments billing and financial departments working in silos, more hospitals are bringing those departments together in a more coordinated way.

“What you're seeing now is a much more robust conversation across all those groups working together,” Kight says. “And they have to, because they have to create a much more ‘tied together’ structure, so they create better cash forecasting. They can make better decisions. They can make real time decisions.”

“And that's really, really important today, especially when margins continue to be under pressure with the health systems,” he says.

Cutting costs and easier payments

Hospitals generally are tracking expenses more carefully. Kight sees health systems working to reduce spending on staffing agencies, including travel nurses, as much as possible.

‘That labor cost is pretty sticky right now. So you are seeing a much bigger, I would say, belt tightening with the health systems,” Kight says.

Hospitals are also focusing on “the patient pay experience,” Kight says. Especially as patients are seeing higher costs, health systems are focused on making it easier to pay bills.

“Health systems, at least the front end ones, the ones that are forward thinking, are really prioritizing the patient pay experience, because that's important,” Kight says. “It helps them collect. It helps create more clarity for the patient on how to pay and how much to pay.”

Hospitals need to offer patients multiple ways to pay, including apps and texting, along with more traditional methods.

“It's really trying to accelerate the collections, bringing that revenue in sooner and easier, and making it easier for the patient,” Kight says. “And so, that's another real big focus for health systems right now.”

Potential with AI

Like other analysts, Kight sees AI as transforming the healthcare industry. More health systems are using AI-powered documentation tools to make it easier for patients to update patient records.

Kight says he sees the potential for hospital systems to use AI to help project and manage costs more effectively.

AI can help health systems get better insights out of all their data, which Kight says is a common challenge for hospitals.

“AI will be a helpful tool around synthesizing a lot of that information,” he says.