Impact Advisors Expert: Facing Up to Staffing, Other Financial Challenges

Aug. 16, 2022
John Klare, a managing partner at the Impact Advisors consulting firm, shares his perspectives on the current financial struggles of hospitals and health systems—and what comes next

In our July/August cover story, we interviewed a broad range of experts and of leaders in the field, regarding the current state of finances in hospitals and health systems nationwide. As everyone understands, the financial distress partly emanating out of the COVID-19 pandemic has become a real and medium-term threat to many hospital-based organizations nationwide. And what are finance leaders in hospitals, medical groups, and health systems doing right now? Leveraging the best technology they can acquire to optimize their revenue cycle management (RCM) systems, rethinking staffing and other resource-intensive issues, thinking about alternative sources of revenue, and above all, readjusting their perspectives to be able to plan for instability and unpredictability going forward into the future.

As the July issue of Kaufman Hall’s “National Hospital Flash Report” notes, “U.S. hospitals and health systems are now halfway through an enormously difficult year. While margins were up in June compared to May, expenses remain at historic highs, leaving hospitals with cumulatively negative margins. In June, operating margins rose from the previous month, but remained significantly lower than pre-pandemic levels and May 2021. Outpatient volumes were up from the previous month, and expenses were generally down from May, but remain extremely elevated from pre-pandemic levels. Decreases in acuity, escalations in outpatient volume and easing costs in June show that hospitals are faring better month-over-month but are nowhere near before March 2020. Halfway through 2022, hospital margins are still in the red. Although hospitals are seeing improved volumes and reduced expenses month-over-month, they will likely end up with historically low margins for the remainder of the year.”

Among that report’s findings: “The median Kaufman Hall Year-To-Date (YTD) Operating Margin Index reflecting actual margins was -0.09 percent through June. The median change in Operating Margin was up 30.8 percent from last month but down 49.3 percent from June 2021. The median change in Operating EBITDA Margin was up 23.5 percent month-over-month, but down 35.0 percent from June 2021.” Meanwhile, “Outpatient volumes rose in June, with Operating Room Minutes up 2.4 percent from last month but down 4.8 percent year-over-year (YOY). Length of Stay (LOS) dropped 2.1 percent from May but is up 2.8 percent compared to June 2021.” And inpatient revenues are still struggling: “Inpatient revenue dropped 0.9 percent from the previous month but is up 2.2 percent from June 2021 and is up 4.6 percent YTD.”

One industry expert who has been watching the trends very closely is John Klare, a managing partner at the Impact Advisors consulting firm, which is based in the Chicago suburb of Naperville, Ill.; Klare is a partner of Impact Advisors along with Pete Smith, Andy Smith, and Sandeep Sabharwal (and Pete Smith and Andy Smith are co-founders of the firm). Earlier this summer, he spoke with Healthcare Innovation Editor-in-Chief Mark Hagland regarding all the current trends. Below are excerpts from that interview.

Where are hospitals and health systems right now in terms of their finances, overall? The COVID-19 pandemic has impacted a whole range of issues, including labor.

That’s the number-one challenge facing health systems today: it’s labor. And it’s a combination of factors all coming together, to create a really drastic problem for most organizations. It’s a combination of factors. Yes, COVID created wear and tear and burnout and attrition. Another factor is inflation: as supply tightens and demand doesn’t change, price goes up. And people are realizing that they need to do something about this. Another factor that might be a bit more subtle is—look at that recent case of where a nurse was convicted when a patient died (Vanderbilt?)—it might have been a one-off kind of situation, but it makes people question, am I in the right profession? So it’s a combination of factors, and I don’t really see that changing significantly.

What about the challenge that peaked late last year and earlier this year, around paying premiums for traveling and agency nurses? Hospitals and health systems have been paying hefty fees just to keep staffed up.

There’s a peak, and who knows when we’ll hit the peak? But some organizations are starting to see some reductions in the premium pay; but I don’t think it will come down all the way, per nurse fees. I’ve heard of two health systems in Chicago, that are having to provide 7-10-percent increases in nurse pay. So that whole factor of inflation is a fundamental element, and will continue. So we’re sort of stuck where we are.

Will leveraging robotics make any difference, in terms of maximizing productivity with existing workforces, such as in the revenue cycle management area?

Qualitatively, there’s no question that automation will have some impact; but as of today, I really have heard very few anecdotal stories. Often, it’s in areas like revenue cycle. But you don’t typically see a reduction in the revenue cycle management workforce; you do see some redistribution of people in terms of their roles. I just don’t think we’ve seen that have a significant impact to date. One area that I think is really interesting is the deployment of remote monitoring of patients in inpatient beds. Often, we’re seeing 10 patients to one nurse as a typical ratio, but imagine how many times per day that is, in terms of nurses checking vital signs. Perhaps if you could reduce the need to do rounds on patients and apply some technology and AI on patients, through continuous monitoring, for example, that could possibly make a difference. That’s the change I’m most excited about—remote patient monitoring in the inpatient environment to reduce the pressure on the clinical staff.

Will hospitals get back to healthier margins in a few years from now?

To be honest with you, I think it’s going to be a struggle. It sure doesn’t feel as though inflation will end in the next couple of years. And let’s even take COVID out of it. And let’s say you start to apply annual 5- to 10-percent increases year over year in clinical staffing costs; you’ll see margins tanking. And I think it’s going to be here for a while, and I don’t think we’ll see much of a change for several years ahead. There was an interesting conference a couple of months ago where we had an expert come in from India who said, I looked at inflation from the 1970s; and he said, you’ve just got to raise their prices. And that speaker was not a healthcare-specific speaker; but honestly, patient care organizations can’t simply raise their prices in the way they’d want. I suspect that prices and rates will go up a bit, but not to the extent that providers would like to. In other words, I suspect that costs and prices will be going up and outstripping any raises for some time. Also, larger organizations have been able to weather cost increases better than smaller organizations; and I suspect that that will continue forward. And one impact has been restrictions and changes in service offerings recently.

One factor that is increasingly being discussed is this one: smaller, independent hospitals won’t be able to manage costs like cybersecurity, for much longer. Some observers are saying that that factor alone will accelerate acquisitions of standalone hospitals by larger and larger integrated health systems.

I couldn’t agree more. All the trends from the past are becoming amplified; the extended cost of cybersecurity is one example; and on the rate side, your ability to negotiate rates—you lack the leverage as a smaller hospital.

Will this situation accelerate value-based contracting?

I do think that we’re going to see an acceleration of value-based contracting, though I’m not sure it will be related to inflation and cost factors. The leading cause will probably be additional, non-traditional competitors entering the marketplace. You’re seeing that everywhere—people getting into that MA space, for example. And so many providers across the country have almost an allergic reaction to getting into value-based contracting, based on unpleasant experiences from the past. But if VBC, particularly MA, really takes off, and patients get involved, that will create even more pressure on providers. And you’re seeing private equity investors get involved, and that will push things.

You’re referring, of course, to the so-called disruptors, such as CVS Health, with its minute clinics, and other companies that are not traditional bricks-and-mortar hospital systems, coming in and competing for patients?

Yes, exactly: CVS Health, the Walgreens Boots Alliance, and others. The VillageMD practice management model is the cornerstone of some of the strategies being evolved forward.

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