Lower reimbursement linked to sagging margins, healthcare CFOs say

Photo: katleho Seisa/Getty Images

Eighty four percent of health systems cite lower reimbursement from payers as a top cause of low operating margins, according to a report published by the Healthcare Financial Management Association and Eliciting Insights, a healthcare strategy and market research company.

Further exacerbating health system margin struggles is the increased administrative burden placed on providers. Eighty-two percent of CFOs said payer denials have increased significantly since pre-pandemic levels. Nineteen percent of health systems have discontinued at least one Medicare Advantage plan and 61% are planning to or considering dropping Medicare Advantage payers – the top offenders of administrative burden, according to the survey.

Higher labor costs are the biggest drivers of margin pressure according to 96% of health system CFOs, with 99% of CFOs indicating that nursing is the top driver of labor shortages. Other roles such as lab technicians and radiology technicians are also experiencing shortages.

WHAT'S THE IMPACT?

Most systems are looking at traditional cost reduction methods such as reducing labor costs, optimizing supply chain and delaying technology implementations. But survey authors said these methods aren't enough to move the needle on margin, leaving health systems looking for other cost savings. The report finds health systems are paring back on capital and real estate investments (40%), reducing less profitable service lines (32%), and 26% are looking to outsource revenue cycle roles.

Reducing operational costs is one piece of the puzzle, but health systems need more revenue to truly improve margins, said HFMA Chief Partnership Executive Todd Nelson.

"Recovering from the pandemic, we have seen a slight overall improvement in average operating margins over the past three years," he said. "However, this study validates that there are many health systems still struggling to find a positive margin. While health plans are modestly increasing reimbursement, they are also ratcheting up prior authorization requirements and denials, which raises the overall cost to collect for health systems."

Ninety percent of health systems cite denials as the top challenge for revenue cycle teams. Sixty-two percent of health systems report Medicare Advantage as "significantly more difficult to work with" relative to Commercial or Medicare plans. Medicare Advantage plans often have different clinical policies than Medicare and other commercial plans, which leads to more denials, authors said. 

Health systems are frustrated; 19% have already dropped one or more Medicare Advantage plans.

When it comes to maximizing payer reimbursement, "It's all about denials," said Trish Rivard, CEO of Eliciting Insights. "We are hearing loud and clear that health systems are struggling with denials – 82% of health systems tell us their denial rate is up relative to 2019."

While margins remain tight, the survey reveals that more than 15% of health systems are expecting large budget increases for key areas such as cybersecurity and automation.

THE LARGER TREND

Research from the Urban Institute released in 2023 examined the financial vulnerability of hospitals and health systems throughout the pandemic. The study found that operating margins plummeted to negative 40% in April of 2020, underscoring how important federal support was for hospitals to remain financially viable during the pandemic.

Last year many hospitals faced cash shortages brought on in part by labor costs and inflation, according to Plante Moran's Duane Fitch. Plante Moran works with hospitals on creating Centers of Excellence in one or two service lines and making sure they are optimizing performance in those lines.
 

Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.