Dext Capital Quarterly Industry Update 1Q2023

The Fed is battling inflation with continued rate hikes and hospitals are working diligently to improve their financial position by cutting administrative costs and reducing travel nurse dependence. Forecasts for hospital recovery in 2023 are mixed.

Hospital Financial Performance

Hospital payrolls are increasing while average hourly earnings growth for employees has slowed — a sign the industry's labor challenges may be easing, according to Fitch Ratings.

The "Hospitals and Healthcare Systems Labor Dashboard: April 2023" shows year-over-year average hourly earnings growth for employees at nonprofit hospitals slowed to 4.7 percent in February, down from a peak of 8.4 percent in June 2022. Earnings growth has also come down from a high of 6.3 percent in January 2022 to 3.8 percent in February for employees in ambulatory healthcare settings.

More takeaways from the report:

• As of March, hospital payrolls have risen for 14 consecutive months. Over the 12-month period from April 2022 to March 2023, monthly job additions at hospitals have been up by an average of 15,150. Over the same period, monthly job additions were up by an average of 24,300 across ambulatory care settings.
• The job openings rate for the healthcare and social assistance sector has fallen from a peak of more than 9 percent in March 2022 to 7.4 percent as of February 2023. Still, the rate is "very high" compared to the average of 4.2 percent in the nine-year period before the pandemic.
• Quit rates in the sector are still high, sitting at 2.7 percent as of February. That's up from the average of 1.6 percent from 2010 to 2019.

"These statistics point to the potential of alleviating labor market pressure," Richard Park, Fitch ratings director, said in a statement. To rebound from the persistence of high quits and wage inflation over the last year, "Hospitals will have to invest in cost effective care solutions and develop enhanced business models that incorporate flexible staffing to adapt to labor costs that have been reset to a permanently higher level," Mr. Park said.

CMS FY24 Hospital IPPS and LTCH PPS Proposed Rule

CMS pays acute care hospitals (with a few exceptions specified in the law) for inpatient stays under the IPPS. LTCHs are paid under the LTCH PPS. Under these two payment systems, CMS sets base payment rates prospectively for inpatient stays generally based on the patient’s diagnosis, the services or treatment provided, and severity of illness. Subject to certain adjustments, a hospital receives a single payment for each case depending on the payment classification assigned at discharge.

The law requires CMS to update payment rates for IPPS hospitals annually and to account for changes in the prices of goods and services used by these hospitals in treating Medicare patients, as well as for other factors. The index used to do this is known as the hospital “market basket.” The IPPS pays hospitals for services provided to Medicare beneficiaries using a national base payment rate, adjusted for a number of factors that affect hospitals’ costs, including the patient’s condition and the cost of hospital labor in the hospital’s geographic area. CMS updates LTCHs’ payment rates annually according to a separate market basket based on LTCH-specific goods and services.

Changes to Payment Rates under IPPS

The proposed increase in operating payment rates for general acute care hospitals paid under the IPPS, that successfully participate in the Hospital Inpatient Quality Reporting (IQR) program and are meaningful electronic health record (EHR) users is projected to be 2.8%. This reflects a projected FY 2024 hospital market basket percentage increase of 3.0%, reduced by a 0.2 percentage point productivity adjustment.

Hospitals may be subject to other payment adjustments under the IPPS, including:

• Payment reductions for excess readmissions under the HRRP.
• Payment reduction (1%) for the worst-performing quartile under the Hospital Acquired Condition (HAC) Reduction Program.
• Upward and downward adjustments under the Hospital Value-Based Purchasing (VBP) Program.

The proposed increase in operating and capital IPPS payment rates will generally increase hospital payments in FY 2024 by $3.3 billion. In addition, CMS projects Medicare disproportionate share hospital (DSH) payments and Medicare uncompensated care payments combined will decrease in FY 2024 by approximately $115 million. Subject to determinations on applications for additional payments for inpatient cases involving new medical technologies following a review of public comments on the proposed rule, CMS also estimates that additional payments for inpatient cases involving new medical technologies will decrease by $460 million in FY 2024, primarily driven by the expiration of new technology add-on payments for several technologies.

Biden’s Budget Proposal

President Joe Biden proposed a $6.8 trillion budget March 9, and it includes several healthcare initiatives, including plans to extend Medicare's solvency by 25 years and making COVID-era ACA subsidies permanent.

15 healthcare takeaways:

1. Medicare: The proposed budget would extend the solvency of the Medicare hospital insurance trust fund by 25 years. The fund is projected to run out of money by 2028. The budget would extend the life of the trust fund without cutting benefits through a tax increase on Americans making more than $400,000 a year, raising the tax rate from 3.8 percent to 5 percent a year.

President Biden proposed expanding Medicare's power to negotiate drug prices with manufacturers. The proposed budget would increase the number of drugs on which the program can negotiate the price and cut the number of years before new drugs can be negotiated. The budget would also cap Medicare copays at $2 for some generic medications.

2. Medicaid: The proposed budget would require states to adopt 12-month postpartum Medicaid coverage. At least 30 states have voluntarily expanded postpartum Medicaid coverage.

The proposed budget would establish a "Medicaid-like" insurance option for low-income adults in states that have not expanded Medicaid.

President Biden also proposed allocating $150 billion over 10 years to fund Medicaid home healthcare services.

3. Discretionary HHS funding: President Biden is asking Congress to approve $144 billion in discretionary budget funding for HHS in fiscal 2024, representing a $14.8 billion increase from 2023.

4. Healthcare workforce: The budget asks for $32 million to grow the nursing workforce and $28 million to support innovative approaches to recruit and retain new providers. It expands the National Health Services Corps, which provides loan repayment and scholarships to healthcare professionals who practice in underserved areas.

Additionally, it aims to bolster the high school-to-career pipeline, proposing a $200 million expansion of dual-enrollment, work-based learning programs.

The budget also allocates funds to the Global Health Worker Initiative, which aims to train, equip and protect the international healthcare workforce.

5. Rural hospital assistance: President Biden's proposed budget calls for $30 million to provide assistance to rural hospitals at risk of closure and to support expansion of hospital service lines to meet rural communities' needs. The budget also supports rural healthcare workforce development training programs and telehealth. In addition, it provides dedicated funding for rural health clinics to support behavioral health.

6. ACA subsidies: The proposed budget would make permanent expanded income-based tax-credit subsidies for ACA Marketplace plans implemented as part of the Inflation Reduction Act.

7. Pandemic preparation: The budget calls for $400 million in new discretionary funding to prepare for pandemics and biological threats, as well as supporting advanced development and procurement of vaccines, therapeutics and diagnostic capabilities against known and unknown high-priority threats.

8. Vaccination: The budget includes a new program to give uninsured adults access to free routine and outbreak vaccines. Additionally, it expands the Vaccines for Children program to include all children younger than 19 enrolled in the Children's Health Insurance Program.

9. Cancer moonshot: The budget calls for $2.8 billion for the Cancer Moonshot initiative revived under President Biden last year. Of that total, $1.7 billion would go to HHS to support dedicated activities at the National Cancer Institute, CDC, Health Resources and Services Administration and Indian Health Service.

10. Community health centers: The proposed budget would grow the Health Center Program's reach and put it on track to double in size. It would also expand the Teaching Health Center Graduate Medical Education program, which trains residents in rural, high-need community health clinics.

11. VA healthcare: President Biden proposes $121 billion in discretionary VA medical funding, $2.3 billion above the 2023 enacted level. The budget also includes $20.3 billion for the Cost of War Toxic Exposures Fund, which increases healthcare and benefits delivery for veterans exposed to environmental hazards such as burn pits. That proposal is $15.3 billion above the 2023 enacted level.

12. Maternal health crisis: The budget allocates $471 million to support the White House's blueprint for addressing the maternal health crisis. This initiative aims to decrease maternal mortality and morbidity rates by implementing implicit bias training for healthcare providers, addressing perinatal health disparities —including support of the perinatal healthcare workforce — and other educational initiatives. The budget proposal requires continuous Medicaid coverage for 12 months postpartum.

13. Title X: The budget proposes providing $512 million in funding for the Title X Family Planning Program, which provides family planning and other healthcare services to low-income individuals. If approved, that would be a 79 percent increase above the enacted 2023 level to increase the number of patients served to 4.5 million. 14. HIV and Hepatitis C reduction: The budget proposes $850 million to help HHS reduce new HIV cases. It supports programs that would expand access to both curative and preventive medications — including a mandatory program to guarantee PrEP at no cost to uninsured and underinsured individuals — and proposes a national program to expand screening, testing, treatment, prevention and monitoring of Hepatitis C infections.

15. Behavioral healthcare: President Biden proposes significant investments in behavioral healthcare. The budget aims to eliminate the 190-day lifetime limit on inpatient psychiatric facility services; require Medicare to cover three behavioral health visits without cost sharing; permanently extend funding for community mental health centers; and authorize the Labor Department to impose civil monetary penalties for Mental Health Parity and Addiction Equity Act noncompliance, among other adjustments.

Fitch Applying a "deteriorating" Outlook for the Hospital Sector

Last year is shaping up to be "the worst operating year we’ve ever seen" in the hospital sector, with 2023 set to be a "make-or-break year" for many, Fitch Ratings Senior Director Kevin Holloran said during an April 5 presentation.

Several financial challenges contributed to hospital margins suffering steep declines last year, including labor costs and staff shortages, inflation, higher cost of capital, investment losses and the end of federal pandemic-related funds. While the need for high-cost travel nurses has declined, basic wages have increased and inflation remains at elevated levels.

Fitch doesn't expect much respite for hospitals this year either.

In an analysis of 80 nonprofit hospitals' creditworthiness — the first half of 2021 versus the first half of 2022 — Mr. Holloran found significant declines in the 2022 period, resulting in Fitch applying a "deteriorating," or negative, outlook for the hospital sector.

For the six months ended June 30, labor costs as a percentage of total revenue increased to about 56 percent in 2022 from about 53 percent in the first six months of 2021. However, this metric under-represents costs because it excludes outlays for travel nurses.

Hospitals that can keep this metric at 50 percent or below are likely to be profitable, but there is "no way" they can be profitable if this is above 60 percent, Mr. Holloran said.

On the other hand, revenue growth for the six months ended June 30 was 6.2 percent, but costs increased by 10.5 percent, which is unsustainable over a long period of time, he said.

Mr. Holloran estimates that half of hospitals were not profitable for the full year and that the future for many — especially rural hospitals — looks bleak. Most have a month or less of cash on hand, he said.

Healthcare Employment

Contrary to widespread reports of staffing shortages, healthcare employment reached pre-pandemic levels with the addition of 44,200 jobs in February, according to a recent report from Altarum. A recent survey of hospital CEOs found that healthcare staffing was their top concern. Nurses nationwide have reported unsafe staffing levels, leading health systems to restructure and lawmakers to consider safe-staffing laws.

Yet, healthcare currently has 1.3 percent more jobs than it did in February 2020, according to the monthly Health Sector Economic Indicators brief from Altarum. The nonprofit, healthcare-focused research and consulting organization analyzes available data on spending, prices, employment and utilization to craft the monthly report.

The data holds that this isn't a new occurence. The sector has been adding — on average — 49,100 jobs per month for the past year, according to the brief. In February, hospitals led that growth, tapping 19,400 workers. Nursing and residential care facilities added 13,700 jobs, and ambulatory care settings added 11,100.

However, as healthcare employment rises, its wage growth continues to decline and now lags behind economywide growth. Healthcare wage growth has been declining since mid-2022; in January, pay grew 4.2 percent year over year, while total private sector wage growth grew 4.4 percent.

This statistic also defies industry narratives, as recent labor negotiations between unions and health systems have scored big raises for workers and clinicians.

Oregon Nursing Minimum Staffing Ratios

Oregon’s largest nurses union and the hospital industry are gearing up for a push – and potential fight – in the Legislature to bolster the ranks of nurses that have dwindled over the past three years.

COVID-19 pushed hospitals into a crisis, with nurses reaching a breaking point as the pandemic dragged on. They also faced surges of other respiratory illnesses like influenza and respiratory syncytial virus, or RSV. Patients paid a price, with long emergency room waits and delayed care while burned out nurses fled the field.

The state’s largest nurses union and hospital industry agree that Oregon needs more nurses but they disagree on how the state should fix the problem. The Oregon Nurses Association, which represents about 15,000 nurses, wants a bill passed this session that would establish minimum staffing standards and levels in law for each part of a hospital, including emergency care and intensive care units. Nurse staffing is not determined by state law. Rather, nurses and nurse managers are required to work together in staffing committees on plans that establish how many nurses are needed in each part of hospitals.

The Oregon Association of Hospitals and Health Systems, which represents all hospitals in the state, said staffing requirements set in state law would take a wrong one-size-fits-all approach. The group, in a statement to the Capital Chronicle, said that other solutions deserve a look, such as state funding and incentives awarded to hospitals that offer clinical training programs and state tax credits to nurse educators.

The nurses union is backing House Bill 2697, which is sponsored by Rep. Rob Nosse, D-Portland, and Sen. Deb Patterson, D-Salem, the chairs of the House and Senate health care committees.

The bill would:

• Require the Oregon Health Authority to enforce hospital nurse staffing plans, with fines of $10,000 a day for violators. The health authority would be required to set up an online portal to receive complaints. Nurses could also sue hospitals in civil court if plans aren’t followed.
• Set minimum standards for hospital staffing. For example, a registered nurse in an emergency department would have no more than three patients without a life-threatening critical condition, or just one critical care patient. An intensive care unit nurse would have one or two patients, depending on their condition. That’s just the minimum, though. Nurses and hospital managers could negotiate stricter standards in staffing plans.
• Establish technical staffing committees in hospitals for other health care workers such as radiography technicians, respiratory therapists and others.

Spence, of the Oregon Nurses Association, said the standards would not apply during crises that send large volumes of patients to the hospital, like natural disasters or mass shootings.

Other Items:

• Akorn Pharmaceutical Company, a Gurnee, Ill.-based generic drugmaker, is shuttering all U.S. operations, the company told its hundreds of employees during a Feb. 22 Zoom meeting. Akorn Operating Company attempted to sell itself in 2022, but after "running at a loss for some time," the specialty drug company filed for bankruptcy, closed all its sites and laid off all its employees on Feb. 23, the company's president and CEO wrote in a letter to employees. Its Decatur, Ill., location employed about 400 people, and in a video to those workers, the company's president and CEO Douglas Boothe said Akorn will not be able to provide severance pay, according to the news outlet.
• U.S. Catholic bishops issued a guideline March 20 that encourages Catholic hospitals to not offer gender-affirming medical treatments. "Catholic healthcare services must not perform interventions, whether surgical or chemical, that aim to transform the sexual characteristics of a human body into those of the opposite sex or take part in the development of such procedures," the document reads. Sister Mary Haddad, president and CEO of the Catholic Health Association of the United States, said healthcare providers will continue to respect the dignity of transgender patients and provide them with high-quality care. "We remain committed to honoring the human dignity of everyone, including transgender patients and their families, and to providing them with the best possible medical and spiritual care," she said in a March 20 news release. However, critics of the new guidelines have expressed concern that they will limit patients' access to transgender care. More than 1 in 7 patients are cared for in a Catholic hospital every day, according to a fact sheet from the Catholic Health Association. The association represents more than 600 hospitals nationwide and, for many patients in rural areas, a Catholic hospital may be their only access to care.
• Healthcare announced the third-most job cuts out of 30 industries and sectors measured in the first quarter of 2023. Healthcare, which includes hospitals and healthcare products manufacturers, has announced 22,950 cuts in the first three months of 2023. That's a 65 percent increase from the 13,923 cuts announced in the first quarter of 2022.
• In a March 8 Twitter thread, the FDA acknowledged it's aware of a potential drug supply disruption after Gurnee, Ill.-based Akorn Operating Co. closed in late February. The FDA clarified that the ongoing shortage is of a specific albuterol inhalation solution used in nebulizers, typically in hospitals, for patients having trouble breathing, not in inhalers at the consumer level. The agency said it is working with manufacturers to ease the shortage but state "It's also important to note that these products are manufactured by private companies and the FDA cannot require a pharmaceutical company to make a drug, make more of a drug, or change the distribution of a drug."

Things I’m monitoring during 1Q23:

• Hospital sector financials for 1Q23
• Interest rate hikes
• Macroeconomic conditions

Scott Eshleman, MBA

Chief Risk Officer

Dext Capital

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