Part 1: For Health Systems, Acute Margin Pressures Are Now Becoming Chronic

Health Systems Look to Get Back into the Black, If Barely

While health systems have a better handle on managing pandemic waves, acute margin pressures related to COVID have given way to chronic challenges. Today, even health systems with a track record of strong financial performance find themselves in a precarious position thanks to compounding economic headwinds.

• Patient volume recovery has largely played out, with demand often below pre-pandemic levels
• Supply costs have been hit by 40-year high inflation spike
• Workforce shortages and higher wages have driven significant increased labor costs  

Together, these factors have contributed to lower-than-projected operating margins. Data from The Academy’s survey of CFOs from Leading Health Systems (LHS) show how hard providers have been hit, with CY Q1 margins in the red at minus 0.7%. That’s against a projected 0.9% margin.

It doesn’t get much better for the year: while CFOs expect their operating margins to improve, those expectations still fall short of the margins needed for financial stability (pre-pandemic margins in the 3.5-4.5% range).

Putting more strain on health system financials, the 15+ year investment bull run has ended abruptly. That’s a big concern for health systems since non-operating revenue from investments has traditionally helped balance their low operating margins. To put this into perspective: on average, the 10 largest not-for-profit health systems reported investment income three times greater than their operating income between 2015 and 2020. 

While the macro forces (e.g., the Fed’s ability to help tame inflation) shaping the financial trajectory of 2022 remain uncertain, it is clear LHS are navigating a financial landscape not seen in 40 years. Compared to CFO’s attitudes towards cost containment in 2021, there is now a much higher priority to reduce spending.

Strategic Approaches to Cost Management and Revenue Diversification

“The risk is we focus too much on cost management and not enough on growth during these challenging times.” -Chief Strategy Officer, LHS

Financial pressures have given LHS a new sense of urgency to foreground cost containment tactics as well as new revenue strategies. This is a marked shift for many systems that for some years routinely prioritized revenue growth over cost management.

While some degree of classic cost cutting may be needed to stem the margin bleed, LHS executives have identified a set of more strategic approaches to driving down cost. The challenge they face is most of these solutions— from new workforce structures to technology investments— are long-term strategies that won’t provide immediate relief.

It’s a similar story on the revenue side of the equation. With the goal of growing market share, they are also moving forward with long-term strategic investments that support care delivery transformation and even new services outside of acute care. As our conversations with Chief Strategy Officers point out, “leading” requires investing, even in difficult economic times. But pursuing revenue levers like securing more of the premium dollar takes time. 

Check out our executive summary for more data on how LHS are approaching these strategies. And look for parts 2 and 3 of this series, where we will discuss LHS cost management and revenue diversification strategies in greater depth.