After posting mixed results during the first three quarters, the majority of the nation’s largest for-profit hospital systems by revenue — HCA Healthcare, Tenet Healthcare and Universal Health Services — closed out fiscal year 2023 with net gains on strong demand for outpatient services and rebounding investments. Community Health Systems, however, reported losses for the year.

Analysts said 2023 was a make-or-break year for the industry, after rising expenses — including costs of salaries and wages — pressured hospitals’ profitability post-pandemic.

Operators continued to report headwinds from external pressures on earnings calls throughout 2023, including rising physician costs related to the implementation of the No Surprises Act.

However, most executives projected optimism by the fourth quarter, noting positive returns from investments in ambulatory care and improvement on cost containment efforts. 

Shift toward ambulatory care

For-profit health systems began to divest from inpatient facilities and beefed up their outpatient and ambulatory offerings to adapt to changing healthcare delivery models in 2023. 

Hospital operator Tenet spent approximately $200 million to $250 million on ambulatory care investments in 2023, according to CEO Saum Sutaria. He told investors the company added 30 ambulatory surgery centers last year and has an additional 30 centers in the works. 

Sutaria said the operator could use proceeds from its planned divestiture of three hospitals to Novant Health to reduce its leverage and free up cash flow for capital spending priorities, which could include investments in its ambulatory care offerings. 

Tenet’s competitors — HCA, UHS and CHS — also identified outpatient services as a key growth area last year.

HCA spent $4.7 billion on capital spending in 2023 and has earmarked an additional $5.1 billion to $5.3 billion for future spending, according to chief financial officer Bill Rutherford. Much of that money will go to HCA’s freestanding emergency services business, CEO Sam Hazen said during the company’s investor day this fall. The operator plans to grow the unit “consistently” in 2024 and 2025 to meet rising patient demand for services, Hazen said.

The operator will also grow the business through acquisitions. In May, HCA announced plans to acquire 41 urgent care clinics in Texas.

For UHS, the decision to invest more heavily in outpatient services moving forward is partially attributed in part to a change in Medicare reimbursements. 

Medicare recently moved to reimburse for Intensive Outpatient and Partial Hospitalization Programs, according to CFO Steve Filton. The move reimburses services offered by UHS’ outpatient behavioral services business unit, which was responsible for the majority of the company’s growth in patient services revenue during the fourth quarter.

CHS already derives 54% of its net revenue from outpatient services, according to CEO Tim Hingtgen. During the fourth quarter, CHS looked to increase its outpatient portfolio by opening a site in Birmingham, Alabama, and acquiring an ambulatory surgery center in La Porte, Indiana. 

Hingtgen told investors CHS would further invest in outpatient facilities in 2024 because they typically require less “high of a spend” to become operational compared to inpatient facilities. 

Industry experts have said hospital operators will continue to pivot toward outpatient care models in 2024. Health systems will likely be attracted to outpatient services because they typically come with lower overhead costs compared to inpatient care and require less extensive staffing, infrastructure, equipment and ongoing operational expenses. 

The shift away from inpatient facilities can also allow health systems to streamline their operations, reduce debt burdens and enhance financial flexibility, experts said.

Budget tightening for ‘cautious’ growth

Some expenses that plagued health systems post-pandemic showed signs of decline in 2023.

Contract labor costs — which were elevated during and after the COVID-19 pandemic as health systems tried to stem labor shortages — fell 20% year over year at HCA and was reduced by $260 million at CHS in 2023 compared to the year prior.

However, executives said other expenses emerged as some abated, and most health systems remained in the weeds coping with costs throughout last year.

Overall, HCA’s operating expenses rose 8.2% year over year in 2023, Tenet’s rose 4.3% and UHS’ increased 5.7%. CHS’ costs dipped by 2.1%.

Physician fees rose in 2023. By the third quarter, executives at each major for-profit health system reported that costs for retaining contract specialty hospitalist roles — like anesthesiologists, radiologists or emergency department physicians — ran 15% to 40% higher compared to the prior year period.

Physician fees, or the percentage of physicians’ salaries charged by third-party staffing firms, increased in the wake of the No Surprises Act, Loren Adler, associate director at the Brookings Institute’s Schaeffer Initiative on Health Policy, told Healthcare Dive this fall.

The No Surprises Act, which went into law in 2022, prevents patients who unknowingly receive out-of-network care at an in-network facility from being stuck with unexpected bills. However, it has had unintended ripple effects, according to experts.

Staffing firms say implementation of the No Surprises Act has delayed their payments from insurers. In turn, staffing firms have passed more costs onto hospitals, Adler told Healthcare Dive.

Health systems continued to struggle with physician fees during the fourth quarter, though some reported efforts to contain the rate of expense growth. CHS, for example, reported medical specialist fees were “elevated” in the fourth quarter at 5% of net revenue, but that the costs were consistent with the third quarter.

HCA said it had cut physician fees sequentially over the latter half of 2023. However, staffing fees associated with its first-quarter Valesco acquisition would still run the company $150 million in negative earnings before interest, taxes, depreciation, and amortization in 2023 and 2024, according to Hazen. 

Executives detailed cost containment strategies and re-emphasized a need for efficiency to hold onto positive results as operating expenses rose year over year for most systems in 2023.

HCA and Tenet said they focused on cutting labor costs. HCA’s Hazen said its yearlong bid to increase recruitment and retention had created stable turnover and less contract labor spend by the end of 2023.

Likewise, Tenet said it cut its salary, wages and benefit portion of net revenue to 43% in the fourth quarter, down from 46.2% in the same period the year prior.

Meanwhile, CHS is considering insourcing hospital specialists, such as anesthesiologists, to reduce pressures from physician subsidies, according to CFO Kevin Hammons. 

Filton told investors that UHS thinks it has an appropriate grasp on cost estimations for the year to come.

“[...] We’d be hopeful that we could do better than the margins that are embedded in [our 2024] guidance,” he said, but the company has learned to be “prudently cautious about how we look at the profitability growth.”