Health systems need to balance their service offerings against dwindling financial resources

Martin McGahan, left, and Peter Urbanowicz are managing directors with the consulting firm, Alvarez & Marsal.

Photo: Courtesy Alverez & Marshal

Peter Urbanowicz and Martin McGahan, managing directors with consulting firm Alvarez & Marsal, are not optimistic that the financial challenges facing health systems will improve anytime soon. Both are advisers to CEOs and CFOs.

The financial landscape has changed significantly since COVID-19, and health systems know this, said McGahan, a restructuring advisor who has worked 30-plus years in healthcare. But nonprofits have been slower to react than the for-profit health systems.

"For-profits have to react more quickly when shares drop," Urbanowicz said. "The pressure comes when it comes to liquidity problems. Then, they get pressure."

McGahan said, "Access to capital has shifted dramatically in the last three months in the public and private sector. We've seen an uptick in sales lease-backs." 

Or simply selling assets, such as when Steward Health in Utah agreed in 2021 to sell the operations of five of its hospitals to HCA Healthcare. Steward Health Care Chairman and CEO Ralph de la Torre said at the time that the transaction would free up additional capital.

In today's climate, McGahan said, "The first thing I would do as a CFO is make sure I don't have a capital plan that's more than three months old."

WHAT'S THE IMPACT?

The bottom line is CEOs and CFOs must determine how to balance their service offerings against dwindling financial resources, they said. 

Nonprofits operate with their mission in mind, which often means being all things for all people. "The service line rationalization is that hospitals are like department stores," Urbanowicz said. "It's hard to be all of those things."  

When a health system closed its trauma center, it got tremendous political and community pushback, with opponents saying it would impact access to care. "How do you rationalize that?" McGahan said.

Maternity care deserts have been well documented. A March of Dimes report shows a 5% increase from 2020 of counties that have less maternity access. This includes hospitals, birthing centers and obstetric providers.

The lack of access is not all attributed to health systems shutting these services at multiple hospitals in a region in favor of offering them at one hospital. It is rather due to hospital closures, especially in rural areas – and a shortage of obstetric providers. Dr. Heidi Altman, a professor of anthropology at Georgia Southern University, has been interviewing women in Georgia about the effect on care and health equity of long-distance travel to see a provider.

THE LARGER TREND

Health systems, McGahan said, are "just entering the storm" of realizing their current business model has got to change. The first thing executives talk about is labor costs and the current nursing and clinical shortages, he said. Recruiting costs are up 20%.

Staff represents the largest percentage of expenses. Usually for a business this means layoffs if expenses can't be trimmed elsewhere, but hospital staff can't be cut if the doors are to remain open, McGahan said.

Other issues for hospitals include the competition – which has been ongoing since before the pandemic – from ambulatory surgery centers encroaching on outpatient services, to Walmart, Walgreens, CVS and Amazon, UnitedHealth Group and others buying up physician practices or opening primary care clinics.

COVID-19 disruptions in the supply chain and inflation are affecting expenses.

Reimbursement by Medicaid remains low. Medicare rates are slightly better, but there's much cross-subsidization going on, Urbanowicz said.

In recently released final rules, reimbursement for physicians and hospital outpatient services has fallen short of what these providers say they need to operate. The end of the public health emergency (PHE), currently scheduled for mid-January 2023, would unwind add-on payments and regulatory flexibilities that have benefited hospitals. 

"We need to make some of those permanent," Urbanowicz said.

The Department of Health and Human Services has promised providers a 60-day notice before ending the PHE. That deadline was Friday, according to CNBC.

During COVID-19, hospitals received financial aid from the federal government in the $175 billion Provider Relief Fund established under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Politically, Urbanowicz doesn't believe there's an appetite for increased federal spending. Urbanowicz is a former executive vice president and general counsel for Tenet Healthcare and a former deputy counsel for the Department of Health and Human Services. He served as chief of staff under HHS Secretary Alex Azar.

Beyond looking at service lines, hospitals can ease the financial pain by having clinicians work at the top of their license and creating strategies around automation, which would help free up staff. Value-based care contracts would help hospitals get paid should another pandemic keep people away from elective care. Hospitals that relied on fee-for-service at the height of the pandemic didn't get paid.

Executives should also look at vendor pricing and the footprint of the system, such as going deeper into a lower-cost ambulatory surgical structure. 

"Many are going in that direction," McGahan said.

"The pressure is on a revenue stream that's declining," he said. "You have your biggest cost rising dramatically at unprecedented levels. Add a declining volume situation. Revenues are going down; costs are going up; that is a short-term disaster."

Twitter: @SusanJMorse
Email the writer: SMorse@himss.org