Most of the nation’s leading nonprofit healthcare providers reported progress toward financial recovery during earnings for the quarter ended March 31.
However, improvements varied widely by health system, and the industry at large has a long way to go before it is back to profitability levels enjoyed pre-pandemic — if it fully rebounds at all, analysts told Healthcare Dive.
Nonprofits struggled with cost challenges, confirming reports from analysts at credit rating agencies Moody’s Ratings and Fitch Ratings that predicted expenses, particularly labor costs, would continue to vex providers in 2024.
Analysts also expected this year to bring a bifurcated financial recovery for the sector, where health systems that could successfully contain costs would recover more quickly.
With early financial data now in for 2024, that expectation appears to be playing out.
The most well-resourced and diversified systems that addressed headwinds early, like healthcare giant Kaiser Permanente, are enjoying returns similar to those seen pre-COVID, while smaller systems, like Providence and Mass General Brigham are recovering at a slower pace, according to analysts.
During the quarter, many of the nation’s largest nonprofit health systems, including Kaiser Permanente, Advocate Health, Mass General Brigham, Providence, Cleveland Clinic and Mayo Clinic, reported positive operating margins. Yet only Kaiser and Mayo Clinic posted margins greater than 3% — the “magic number” necessary to guarantee systems’ financial health, according to Kevin Holloran, senior director of credit rating agency Fitch Ratings.
Meanwhile, CommonSpirit and Ascension failed to post positive operating margins at all.
During a recent call with investors, CommonSpirit CFO Daniel Morissette nodded to the challenges dogging the sector.
“Momentum stalled a bit [during the quarter] despite our efforts to offset the headwinds on the revenue and inflation front,” Morissette said, adding that financials were “not where we need them to be,” in part due to disrupted patient volumes and high labor and supply costs.
Labor expenses down from peaks, but still a pain point
While providers’ labor spend was down during the quarter compared to 2022 highs, most health systems continued to report labor costs that accounted for more than 50% of total expenses, according to Mark Pascaris, senior director and analytic lead of nonprofit healthcare at Fitch Ratings.
Mayo Clinic is investing the most in salaries, with benefits, wages and costs representing 58.7% of total expenses. The Rochester, Minnesota-based health system said the increase was used to hire additional staff.
Rising labor spend comes even as health systems have spent multiple quarters attempting to curb costs.
“We're just in a different environment now. The fundamental cost structure of the industry has shifted higher to a certain extent,” said Matt Cahill, credit analyst at Moody’s Ratings. “And while we think the rate of growth of those expenses going forward will come down, the fact that we're at this higher level [of spend] is something that cannot be easily reversed.”
Nonetheless, nonprofit systems have made some progress on reducing their pricey contract labor spend.
During the pandemic, contract labor served as a critical resource in a hard-to-hire market to meet demand. However, since volume trends have stabilized and it has become easier to recruit staff, health systems have been less inclined to pay high rates for services.
Providence, for example, reported a 42% decrease in contract labor year over year during the quarter. Trinity Health said it cut contract labor spend by 25% over its nine-month period ended March 31, in part through building its own internal staffing agency and increasing virtual care options.
Though Ascension’s salaries and wage spend increased during the quarter, the system cut costs 2.1% over nine months by outsourcing lab services beginning in the second quarter of fiscal year 2023 and working to reduce turnover and vacancy rates.
These costs could drop even more in the coming quarters, particularly as they invest in efficiency strategies, according to Cahill.
Still, progress is only relative to the starting point — the industry’s historically high, unsustainable labor spend observed since the pandemic, said Fitch’s Pascaris.
“We're not out of the woods yet. If you improve from a low point, that’s not the same thing as saying we’re back to normal,” Pascaris said. “Most hospitals are still using more agency staff now than they were before the pandemic. And it's still at a higher price. It's still difficult to recruit nurses and that's going to be a theme for the next number of years.”
Supply costs, payer challenges are next hurdles
While organizations attempt to wrap their heads around the labor challenge, pharmaceutical and supply costs have increased.
At Cleveland Clinic, pharmaceutical costs jumped nearly 15% year over year, in part due to an uptick in specialty pharmacy spend as well as inflationary trends and increased utilization of retail pharmacy.
A part of the conversation are GLP-1’s — expensive diabetes management medications that are increasingly prescribed for weight loss, and providers and insurers have yet to satisfactorily hash out who will foot the bill.
“It's a topic of most of the conversations I have with health health management teams right now — the pharma issue,” Pascaris said. “It’s still early days as to… whether this is a one time or [whether] it is something that is going to continue for the next three or four years.”
The higher pharmacy spend comes amid a longstanding battle over reimbursements, where providers argue that payers routinely delay or improperly deny reimbursement for services, deflating their revenues.
As operating margins remain depressed below historic levels, “almost everyone is talking about revenue cycle, decreasing denials and bumping up that top line,” according to Daniel Steingart, vice president and senior credit officer at Moody’s.
While providers have seen “slightly higher reimbursement” rates this quarter than in years past, reimbursements “certainly [are] not making up for the inflation we’ve seen in the past couple of years,” said Moody’s Cahill.
Providers are expected to play hardball during contract negotiations with insurers to ensure higher reimbursement rates and timely payments, according to Moody’s analysts — a move that’s likely to be met with equally aggressive tactics from insurers who also claim to not be netting their fair share of profits from current contracts.
CommonSpirit’s Morrissette echoed that resolve to investors, vowing on last week’s call to do more in the revenue cycle area and get “paid appropriately for the care that we provide.”
“The delta between cost inflation and revenue is not sustainable for providers. We're focused on this as well as the heightened level of denials from the various health plans,” Morrisette said. “We need to be paid consistent with our contracts. And we're also taking a very firm stance on contract renewals so payers absorb a share of inflation and the processes, and terms are improved so we get paid appropriately and in a timely way.”
