Healthcare Finance Trends for 2022: Investment Management Focus Report

This Focus Report offers a range of themes carrying particular importance for investment and treasury management selected from the Healthcare Finance Trends for 2022 eBook prepared by CommerceHealthcare^®. The three trends highlighted are related. Financial recovery from the pandemic’s dislocations will be of paramount concern. (Trend 1 below) Complicating the effort is a complex and challenging supply chain scenario for the coming year. (Trend 2) Both of these concerns will require significant investment during the year. So too will providers’ growing role in safeguarding and improving public health. (Trend 3)

For each trend, a few additional data points and considerations are provided for further illumination. Leaders are encouraged to read the complete Healthcare Finance Trends for 2022 eBook, detailing 11 trends that carry significant implications for the economic and operational wellbeing of health systems, hospitals and practices.

Another Year of Financial Recovery

The trajectory of the COVID-19 crisis suggests a long-tailed recovery. The latest financial data reveals the ongoing challenges.

• Margin/Profitability. More than a third of hospitals maintained negative operating margins during 2021. Estimated total industry net income loss was $54 billion and median margin 11% below pre-pandemic levels.¹ Hospitals paid an additional $24 billion for clinical labor during the year; $17 million for the average 500-bed hospital.² Medical practices have suffered as well. Under 30% of surveyed primary care practices reported being “financially healthy.”³
• Revenue and Volume. An encouraging but decidedly mixed picture emerges on the demand side. Through August 2021, overall healthcare spending was 7.2% higher than the previous year, distributed as displayed in Figure 1.⁴ Spending has lagged GDP growth. Hospital revenue grew but volume of overall discharges and ED visits remains depressed from 2019 and flat for OR minutes.⁵ The longer-term utilization outlook sees inpatient volume decreasing 1% through the end of the decade, outpatient rising 14% and ED growing 5% for Emergent and falling 15% for Urgent.⁶

View PDF of Figure 1 Chart^[PDF]

• Cash/Liquidity. This metric was bolstered by COVID-19 government subsidies and expedited insurance reimbursements. Disciplined cash management will be required as these supports are removed. In fact, a recent article detailed an emerging liquidity challenge. Major insurers are “behind on billions of dollars in payments” for various reasons.⁷
• Medical Cost Trend. Another closely watched indicator is growth in employer medical costs. Forecasts for 2022 include:
  • PwC: 6.5%⁸
  • Willis Towers: 5.2%⁹
  • Aon: 4.8%¹⁰

Several 2022 implications arise from the data. Effective scheduling and resource management remain essential to optimizing elective procedures. Many will diversify revenue, exploring sources such as new reimbursement models, office space leasing and service line expansion. Cost management will be a constant. Leaders will look outside for help. A recent survey found 92% of hospital respondents are intensively considering more outsourcing vendors to drive down both clinical and nonclinical costs.¹¹

Additional Data and Takeaways

• Reports through October 2021 showed health systems and hospitals are still struggling to regain previous margin levels. Labor expenses continue to be a major factor depressing margins. Those costs have risen 12.6% from October 2020 and 14.8% from 2019.¹²
• Providers are contending with inflation, but it is not yet manifesting itself in pricing power. The healthcare price index was up only 2% year over year in October, well below the economy’s overall rate.¹³
• Full recovery will be a long-term project. Fitch Ratings describes the cost burden from the pandemic as “inestimable," and predicts that the ramifications for healthcare “will be felt for decades.”¹⁴
• Some analysts urge leaders to emphasize organic growth transformation, deploying “a range of strategic and operational levers to drive top line revenue growth from acquisition of new patients or greater capture of a patient’s care lifecycle.”¹⁵ It will require a priority shift from the focus in recent years on cost and inorganic growth transformations. (Figure 2)

View PDF of Figure 2 Chart^[PDF]

Supply Chain Bottlenecks a Major Pressure Point

Another factor impeding recovery is a global supply chain breakdown. Nearly all hospitals and health systems are experiencing supply chain problems with 80% enduring shortages and scrambling to find additional vendors.¹⁶ The scope of affected products is broad:

• Drugs. Pharmacy inventories are low for a number of important medications, from cancer drugs to anesthetics to inhalers. Even outages of medication containers have been reported.
• Medical technology. Semiconductor chip shortages have created an “acute, industry-wide issue” for manufacturers of a host of devices including ventilators, glucose and other monitors, imaging machines, and many more.¹⁷
• Supplies. Availability of numerous high-volume items remains limited and some providers have issued appeals for donated crutches and other medical supplies. COVID-19 case surges have also produced shortages of oxygen.

The ramifications are significant. Extended lead times for critical supplies can force delays in procedures. Costs are increasing as some goods become more expensive to procure or workarounds are pursued. Productivity also suffers as staff devote more time to overcoming supply chain challenges, including managing more suppliers. Patient care and safety can likewise be placed at risk.

Unfortunately, the forecasts are not positive. IHS Markit projects that global supply chain disruptions will persist throughout 2022 and even into 2023.¹⁸ Providers are taking several actions to ameliorate current pressures and strengthen the supply chain long-term:

• Drive greater efficiency. Finance and procurement need to be nimble, efficient and able to maintain close relationships with an expanding array of vendors. Removing paper-based processes and streamlining through automation supports all of these objectives.
• Rely on data analysis. In a highly constrained environment, providers must stay on top of their supply needs, usage and projections. Sharing data with suppliers can be very helpful.
• Refine budget and cash flow analysis. Higher cash levels are likely to be committed to inventory and cost pressures mean that investment management of short-term funds will need to be optimized.
• Pursue additional best practices. Gartner recently evaluated the top health systems for supply chain management excellence and highlighted two approaches they take to manage the current difficult scenario. One is concentrating on “risk and resiliency” with some even creating resiliency positions to lead the effort. Second, a deep commitment to collaboration with vendors is maintained. This partnering “spans everything from placing an efficient order to visibility and transparency of where products are manufactured.”¹⁹ Finance and revenue cycle management must be prepared for such teamwork.

Additional Data and Takeaways

• There were 220 drugs affected by an ongoing national shortage as of Q3 2021.²⁰ Substitutes are available for many, but this problem is long-standing and likely to increase.
• Vendors vary in their ability to manage through major disruptions. A global supplier survey found that 42% have not tested their pandemic plan in the past three years.²¹
• Other provider tactics being recommended:
  • Diversifying suppliers, including finding more domestic sources.
  • Rethinking group purchasing organization (GPO) arrangements, potentially moving to more direct contracting. GPOs are said to manage almost 60% of a hospital’s non-labor spending, and some have expressed disappointment with GPO performance during the pandemic.²²
• Substantial automation in AP will be mandatory to manage the supply chain productively and to foster the necessary supplier relationships.

Providers Become Partners in Public Health

The COVID-19 crisis exposed serious weaknesses in the nation’s public health infrastructure. Interest is high in strengthening preparedness through closer provider-government partnership. Investment priorities for 2022 include:

• Data gathering and exchange. Comprehensive information at scale is vital. Data gaps hampered pandemic containment efforts and the problem has been longstanding. In 2018-2019, 50% of hospitals reported constraints on their ability to exchange information electronically with public health agencies, while 70% said they have faced one or more public health reporting challenges.²³ On the government side, experts assert that the CDC has debilitating deficiencies in data management tools, advanced analytics and integration with electronic health records.²⁴
• Physical capacity. Health systems, hospitals and practices are evaluating supply policies, moving from just-in-time inventory management to what has been called “just-in-case.” Hospitals are devising plans for facility flexibility and surge staffing.
• Population health management. COVID-19 underscored the strong role social determinants play in care access and quality. The crisis likewise offered evidence that population health efforts and community-based care buttress pandemic response.

Operational efficiency built on process automation is central to producing the cost structure, investment capacity and management efficacy to scale public health initiatives and maximize readiness. With the pandemic still in the forefront, 2022 should be a year of national progress toward these crucial goals.

Additional Data and Takeaways

• Investment portfolio management and smart use of credit will be critical to providers’ ability to meet the public health infrastructure and services demands on top of funding for technology, security, new services and more.
• Navigating the investment pathways necessitates a more strategic capital allocation discipline. A 2021 survey of provider leadership showed that 49% said the pandemic forced them to rethink their capital allocation strategy.²⁵ Many want additional data to guide their efforts.
• Looming hike(s) in the deferral finds rate are certain to affect healthcare investment portfolios in 2022 and beyond. Understanding this impact and preparing for the results of any increases will be critical for leaders as they forecast cash flows, liquidity needs and long-term return objectives both on/off balance sheet.
• The drive for public health improvement supports expansion of community-based care and population health management initiatives. There can be a strong economic return. One study found that a community health worker program generated an annual return of $2.47 per dollar invested and patients in the program had 30% fewer inpatient admissions.²⁶

Conclusion

Balancing the funding requirements for the multiple priorities discussed in this Focus report will be crucial. Fuller context for these and other high-impact trends can be gleaned from the complete Healthcare Finance Trends for 2022 eBook, provided by Commerce Bank.

Disclosures:

1. American Hospital Association and Kaufman Hall, Financial Effects of COVID-19: Hospital Outlook for the Remainder of 2021, September 2021.
2. Premier, Inc., “PINC AI Data Shows Hospitals Paying $24B More for Labor Amid COVID-19 Pandemic,” blog post, October 6, 2021.
3. Primary Care Collaborative and the Larry A. Green Center, Quick COVID-19 Primary Care Survey, Series 30 Fielded August 13-17, 2021, September 2021.
4. Altarum Center for Value in Health Care, “Insights from Monthly National Health Spending Data through August 2021,” Spending Brief, October 19, 2021.
5. Kaufman Hall, National Hospital Flash Report, October 2021.
6. Sg2, 2021 Impact of Change^® Forecast Highlights: COVID-19 Recovery and Impact on Future Utilization, June 2, 2021.
7. J. Hancock, “Major Insurers Running Billions of Dollars Behind on Payments to Hospitals and Doctors,” Kaiser Health News, October 6, 2021.
8. PwC Health Research Institute, Medical Cost Trend: Behind the Numbers 2022, June 2021.
9. P. Minemyer, “Willis Towers Watson: Employers Expect Health Costs to Rise by 5% in 2022,” Fierce Healthcare, October 6, 2021.
10. Aon, 2022 Global Medical Trend Rates Report, 2021.
11. Black Book Research, “Labor and Supply Shortages Fuel Surge in Hospital Outsourcing Partnerships, Black Book 2021 Survey Results,” press release, September 30, 2021.
12. Kaufman Hall, National Hospital Flash Report, November 2021.
13. Altarum Center for Value in Health Care, “Insights from Monthly National Indices through October 2021,” Price Brief, November 16, 2021.
14. S. Muchmore, COVID-19 Impact on U.S. Healthcare System Will Stretch for Decades, Fitch Says,” Healthcare Dive, July 29, 2021.
15. McKinsey & Company, Preparing for the Next Normal Now: How Health Systems Can Adopt a Growth Transformation in the COVID-19 World, August 2020.
16. D. Thompson, “Supply Chain Issues Bring Shortages of Drugs, Devices to U.S. Hospitals,” HealthDay News, November 4, 2021.
17. B. Murray and S. Bradley, “The Semiconductor Chip Shortage Hits MedTech: Strategies to Rebuild Resilient Supply Chains,” Advanced Medical Technology Association blog, September 23, 2021.
18. C. Bustos, “Supply Chain Delays Will Spread Well Into 2022 and Possibly 2023,” Yahoo Finance, September 2, 2021.
19. Gartner, Inc., “Gartner Announces Rankings of the Gartner Healthcare Supply Chain Top 25 for 2021,” press release, November 10, 2021.
20. American Society of Hospital Pharmacists, Drug Shortages Statistics, December 2021.
21. Healthcare Purchasing News, “Supply Chains and Their Pandemic Readiness Plan,” blog post, April 22, 2020.
22. FTI Consulting, Rethinking Healthcare Expense Management Post-COVID, January 2021.
23. C. Richwine, C. Marshall, C. Johnson, V. Patel, “Challenges to Public Health Reporting Experienced by Non-Federal Acute Care Hospitals, 2019,” ONC Data Brief, September 2021.
24. S. Gottlieb, Uncontrolled Spread, 2021.
25. EY, Is Your Capital Allocation Strategy a Long-Term Plan or a Short-Term Fix? March 2021.
26. C. Cheney, “Social Determinants of Health Program Generates ROI,” HealthLeaders, February 3, 2020.