The total impact of inflation on independent community hospitals is yet to be determined, but likely will have long-term implications, even more so if the inflationary period is extended. As the pandemic has gone on, hospitals have experienced negative impacts: shifting revenue, rising labor expenses, increased supply and pharmacy costs along with continued delays in key elective healthcare procedures.
Adding higher inflation, rising interest rates, decreased consumer healthcare spending and continued labor cost challenges, the next few years will be a challenge for independent community hospitals. As a hospital leader or a member of the board of directors, you must be asking:
- How can our hospital maneuver through these headwinds?
- What can we now do to prepare?
The answers to these questions are critical for independent hospital leadership teams and boards. As John Waltko, VP of Finance & Policy at Octave states, “Hospitals are a reflection of the local community where they are located. As the local economy goes, so goes the local hospital.” The closure of Williamson Memorial Hospital in Williamson, WV, after the “railroads left the area, the mines are shutting down” is one of far too many examples.
Here are six observations and three must-dos to survive the challenging years ahead.
- Pressure on Capital Dollars – Capital access and cost needs to be weighed against the importance of projects. That said, it is usually an unwise decision to delay capital expenditures or expansions that are aligned with a hospital’s long-term strategy because of higher borrowing cost. FHA, USDA, bank lending or other programs will have more benefit in this borrowing environment than in our prior world of absolute low rates and credit spreads. Bart Plank, Managing Director and Co-Head of Healthcare Public Finance, Cain Brothers, a division of KeyBanc Capital Markets, emphasizes, “I am seeing solid ‘A’ category credits ensuring they have good liquidity lines. The idea is to get the line in place BEFORE everybody is running to the banks looking for capital.”
- Impact to Local Business – As economists and business owners know all too well, small businesses are disproportionately affected during times of inflation; cash flow tightens as profits get directed to replacing inventory and paying higher wages. In an extended inflationary period, businesses tend to produce less and less, often relying exclusively on lines of credit. If the past is an accurate predictor of the future, higher interest rates and additional overhead costs then cause further price increases to enable businesses to remain profitable. Small companies simply struggle, something we are already seeing as a whopping 85 percent report they are concerned about the impact of inflation. This, in turn, inevitably impacts healthcare spending at the local level. Large corporations are a bit more insulated due to capital access, assuming they are not over-leveraged already.
- Hospital Dependency on Reimbursed Dollars – Hospital revenue streams continue to be threatened by the squeeze on pricing and commercial payer rates, along with CMS payment pressure. The CMS proposed rule, for example, would increase Medicare inpatient prospective payment system rates by a net 3.2 percent in fiscal year 2023 yet the annual inflation rate was 8.6 percent for the 12 months ending in May 2022. Add in the shift to more ‘boundaryless’ care channels, e.g., virtual, destination medicine and retail care, and the trend towards less reimbursement will persist.
- Pressure on Bad Debt and Uncompensated Care – For hospitals, higher levels of bad debt and uncompensated care, particularly coming through the emergency department, will add more pressure.
- Lower Consumer Healthcare Spending in the Short-Term – With the current economic headwinds, healthcare spending is often the first thing off the family budget. Even health insurance can go away from the individual and employer standpoint. So, those annual check-ups are delayed, ultimately causing bigger healthcare issues down the road for hospitals due to emergency department admissions, delayed procedures and postponed surgeries.
- Rising Hospital Expenses –In an inflationary environment, the costs for labor, medical supplies, drugs, IT systems and building projects will continue to increase as will hospital utility expenses.
To mitigate inflation, independent, community hospitals must:
- Manage costs
While the overall healthcare industry, e.g., providers/delivery, pharma, medical device, etc. is big business, and most small businesses in communities across America look at the local hospital as big business, independent community hospitals often operate on razor thin margins—and in many cases require additional subsidies to make the bottom-line work.
- Managing costs, then, is critical to keeping margins as healthy as possible. During inflationary periods, it’s even more important.
- Increase contract compliance and reimbursement
- Independent hospitals must be negotiating for higher reimbursement rates from payers. For example, Octave helped a hospital in the Southwest improve its financial performance by thoroughly analyzing contract performance and then using the analysis to negotiate $1 million in new revenue across multiple payers.
- Improve revenue cycle performance by focusing closely on coding and claim denials.
- Ensure access to short-term capital
- In all environments and all sectors, there will be winners and losers.
- While inflation makes an even tougher environment within which hospitals must work, forgetting about strategy will be harmful:
- New market entrants may come in and attract patients with convenient access points or digital service offerings.
- Well-funded health systems or larger independent competitors are always looking to expand their markets.
- Patients/consumers will be looking for care, despite how hard it is to predict how, when and where.
- For example, if an organization has a strategy to expand its market presence, it must find a way to be opportunistic by creating a new physician office location, an ambulatory surgery center and/or a service line expansion.
- An independent hospital must drive economies of scale through shared services to compete with better-funded health systems. It is the economies of scale factor that often is the greatest differentiator between successful and unsuccessful healthcare organizations. Afterall, that’s typically the primary justification for healthcare mergers. Despite independent hospitals’ intention to create leverage and economies of scale through mergers, as Dr. Dwayne Gunter, CEO of Octave, wrote in a recent article, “…research about impacts of hospital mergers suggests there are downsides….” Instead, leveraging technology for automation, data and outreach will ensure a healthier organization that can successfully cut through inflation-driven headwinds.
- As hospitals continue to operate in challenging times, Dr. Gunter reminds us, “We cannot do the hospital business the way we’ve always done it. We must evolve into organizations utilizing innovation, automation and real-time information.”
There is a healthy future ahead for independent community hospitals. Even in the midst of a challenging economy, improving local healthcare and enabling it to thrive is achievable. People and communities will always need local independent healthcare.