Healthcare providers have kept an eye on rising costs as nationwide labor shortages, inflation and dried up COVID-19 relief funds have pushed health systems’ operating margins into the red.
But, despite hospital executives’ best efforts at cost management, 2024 will not bring a reprieve from razor-thin operating margins for most systems, experts warn.
“2024 will not be markedly better and certainly not the V-shaped recovery we’re hoping for,” said Kevin Holloran, senior director at credit agency Fitch Ratings. “Not-for-profit hospital margins are still below both pre-pandemic levels — but more importantly they will trend below the ‘magic number’ operating margin of 3%.”
Analysts are split on how bleak the picture is for the provider sector. The major three major credit agencies — Fitch Ratings, Moody’s Investor Services and S&P Global Ratings — have forecast negative to stable conditions for the year.
However, neither credit agencies nor industry experts predict a full financial turnaround for the embattled industry in 2024. Providers’ individual outlooks hinge on their ability to pull the right combination of levers that lift revenue and shrink costs, experts said.
Providers to invest in outpatient care, divest from expensive service lines
Health systems will increase investments in ambulatory care centers this year, continuing a trend that began in the back half of 2023 as hospitals sought to grow their geographic footprints at relatively low costs and appeal to evolving patient preferences.
Hospitals may be even more tempted to invest in 2024 as advances in technology make additional outpatient procedures possible and systems begin to see returns from initial investments, experts said.
“Healthcare is moving to where the patient wants to be,” said Danny Schmidt, healthcare senior analyst with management consultancy RSM US. “Setting up free-standing sites in convenient locations that are able to adopt emerging technological trends can attract recurring patients and can be less capital intensive than the traditional large hospital brick-and-mortar setting.”
Major health systems have announced plans to expand. HCA placed a multi-billion dollar bet on emergency services last year, including acquiring free-standing care sites. Ascension announced plans to pivot focus to outpatient services.
Health systems may choose to purchase existing facilities, like HCA, or build facilities from the ground up depending on their strategy, said Fitch’s Holloran. In November, nonprofit Kaiser Permanente purchased land adjacent to its San Jose, California facilities for a possible outpatient expansion.
On the flip side of the coin, struggling hospitals may make the painful decision to shutter or reduce underperforming service lines this year, Holloran said.
Closures — in maternity services, inpatient rehabilitation services or behavioral units — are most likely to occur at smaller hospitals or rural facilities in 2024, experts said.
Nationwide, rural hospitals have begun to shutter more expensive service lines in a bid to keep facility doors open. Hospitals that shut services have cited inadequate financial reserves to staff service lines with low volumes.
Though hospitals would like to keep service lines open, economic conditions and fee-based reimbursement models may force more hospitals to follow suit this year.
Closures can prove disruptive for patient care — particularly for patients of color — forcing some patients to drive hours to another facility, according to research from Alecia McGregor, assistant professor of health policy and politics at Harvard T.H. Chan School of Public Health.
Patients may have to rely on non-traditional venues — such as free-standing emergency centers — for services, according to a spokesperson for the Center for Health Quality and Payment Reform.
Hospitals will insource where it counts, but outsource where they can
Hospital executives acknowledged on earnings calls this year that elevated labor expenses are the new normal post-pandemic.
But, while executives said they will pay a premium to attract nurses and physicians moving forward, hospitals are not ready to give up on initiatives aimed at controlling labor spend.
In 2024, health systems will further invest in grow-your-own nursing programs, where systems partner with or acquire a nursing college to develop a direct recruitment pipeline, according to experts.
Executives at HCA, Tenet and CHS said nursing programs were instrumental in helping to increase recruitment last year.
Nursing program partnerships will become “the norm” across the industry this year as hospitals further invest in grow-your-own nursing programs. However, health systems will be less inclined to spend on their IT and administrative departments.
There was a wave of IT and administrative layoffs in late 2023, including at Kaiser Permanente and Mass General Brigham, when providers cut, automated or outsourced roles.
Multi-state systems in particular will move to consolidate administrative and tech operations in a bid for efficiency, experts said.
“We can expect an increase in outsourcing to third parties — especially for IT and revenue cycle services this coming year,” said Wiggins. Possible candidates for offshoring include “highly repeatable” tasks such as medical billing and coding, transcription services and telehealth support services, she added.
But health systems may have their hands tied by union contracts when they attempt to lay off employees. This fall, 75,000 Kaiser Permanente workers negotiated for outsourcing protections in their employment agreements. When Kaiser later announced a reduction in force, no union members were impacted.
Future labor organizers are likely to take note of the win and negotiate similar clauses, said John August, program director at Cornell University’s School of Industrial and Labor Relations.
Consolidation continues — despite regulatory and physician pushback
Providers will continue to explore consolidation as economic pressures shine light on the operational upsides of combined management. However, experts disagree on the avenues health systems are likely to pursue.
Because healthcare mergers are more likely to face heightened scrutiny this year — after the Federal Trade Commission and Department of Justice announced new guidelines for merger and acquisition oversight in December — some experts are betting that health systems will pursue “roll-ups,” in which they acquire market share over a series of transactions.
Health systems may partner with non-traditional partners, including tech giants, retailers or telecom companies as “the industry experiences more pressure toward convergence,” according to Wendy Gerhardt, senior manager for the Deloitte Center for Health Solutions.
Large system-to-system mergers in noncontiguous markets will continue. However, they are likely to face closing delays due to antitrust scrutiny, according to Suzie Desai, sector lead of the U.S. not-for-profit healthcare group at S&P Global Ratings.
Merger activity dipped during the pandemic, however larger mergers are expected post-pandemic, according to Kaufman Hall.
But not all physicians will be happy with consolidation. Nearly 60% of physicians employed by hospitals and other corporations said in a survey conducted by the Physicians Advocacy Institute last year that non-physician ownership harms care quality. The physicians pointed to decreased time with patients, and 44% of respondents said they would consider joining a trade union if one was available.
Cornell’s August said he’s fielded inbound interest from physicians looking for guidance on how to organize or leverage their professional affiliation memberships to affect change as healthcare consolidation continues.
“I'm not sure I've ever seen anything quite so radical happen in an industry so quickly as it has among doctors,” August said. “But I think that we're at a tipping point where the conversations are just fast, furious and almost identical everywhere in the country.”
Consolidation may also put pressure on existing health unions, according to August. Mergers can introduce new players into decades-old labor relations partnerships and potentially compromise trust between parties, he said.
“I think that what we're [going to] be seeing in the coming year and years ahead is continuing acrimony in major negotiations on healthcare,” August said. “I'm very concerned that conflict is going to override resolution.”