There’s no denying it, things are pretty bad (for hospitals)
Things are rarely as good or bad as they seem in the moment.
I have long believed this to be true, and then I heard it said by one of my favorite business minds, Scott Galloway. I cannot think of a better phrase to capture the strange times we live in right now and the circumstances hospital leaders must work through to prepare their organizations for an uncertain future and a very difficult present.
The truth is things seem bad right now for the hospital industry. Yet, hospital leaders proved their value and leadership during the pandemic, and they showed the world that they will do the right thing no matter the cost or the impact to their organizations’ finances. Now we must devote the same resolve to fixing our hospital financial foundations and setting ourselves up for a sustainable future.
The Modern Healthcare article “Providers, insurers poised for ‘bloody’ negotiations amid inflation” that appeared June 28 captured the sentiment we are hearing all over the industry. The highest inflation of our professional lives, combined with weak volumes caused by COVID-induced deferral of care, are devastating hospitals financially. We aren’t talking about the difference between a 5% margin and a 3% margin – we’re talking about the threat of survival for many organizations.
“National hospital labor expenses jumped 13.6% in May year-to-date, according to the latest data from Kaufman Hall.” Simple math leads us to this conclusion: if 50 to 60% of your costs are labor, and those costs are going up 13.6% (or more), your margin opportunity will be impacted by negative 7 to 10%. Add rising supply costs, drug costs, and all other vendor costs, and you’re talking about an impact of negative 10 to 15% for an industry with margins that, at best, hover around 3%. No matter what the payors say, this is simple math – and the question we should be asking is why can’t health plans accept slightly lower profits and divert some of those dollars to hospitals and physicians?
The Modern Healthcare article also touched on a theme we have explored in our research, “Vertical integration among these large insurers will give them greater leverage over health systems when it comes to negotiations, leading to more public contract disputes and out-of-network providers.” This may be the most perverse aspect of our current healthcare system – payors are diverting funds from hospitals and other providers to pay their own physicians and other providers so they can hit their MLR targets and avoid rebates. This internal cost-shifting by payors has come at the expense of hospitals and independent physicians across the country.
Of course, the one aspect of payor/provider relations that was not covered in the article, or the Wall Street Journal’s coverage, or really anywhere else is the enduring and never-higher profitability of the nation’s health plans. Why is it okay to expect margin loss and financial distress from hospitals at the same time that we find it perfectly acceptable for health plans to reap record profitability? Why are health plan profits sacred but, hospitals are expected to cut access, reduce services, and do more with less even after all the impacts of COVID?
We shouldn’t. Health plans should not extract more from the healthcare dollar in aggregate than what we pay physicians for all the care they provide. This is a case of misplaced priorities, and proof that our system is broken. We need payors to step up and support hospitals and physicians in this time of unprecedented inflation and operating challenges. We cannot dishonor the heroes of the pandemic by telling them their contributions don’t matter, by letting hospitals starve to death while payors extract more and more profits from every healthcare dollar.
I have worked in healthcare for 27 years, and I have never met a hospital CEO or board member who was eager to raise prices. After more than 1,250 engagements working for every type of provider dealing with every imaginable negotiation or revenue challenge, we are at a pivotal moment for our entire healthcare system. No one wants to make healthcare more expensive. Yet, we must accept that a system largely designed by payors, with payors as the most powerful players in the industry, is not benefitting anyone except those payors and their shareholders. The time is now. Revive won’t stop until hospitals are treated fairly and payors step up to do what’s right. Then, we can finally say things are as good as they seem in that moment.
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