Becker's Hospital Review

17 CFO / FINANCE Health systems' new growth metrics By Laura Dyrda G rowth is essential for hospitals and health systems, but the way executive teams think about growth has changed significantly over the last five years. Many nonprofit systems are still battling tight margins as they recover from the pandemic and inflation of the last few years. e transformation to more value-based care, focused on better outcomes and lower costs, is pushing care out of the inpatient hospital and disrupting the traditional business model. An article written by Courtney Midanek, John Poziemski and Max Timm of Kaufman, Hall & Associates, and originally published in e Governance Institute's BoardRoom Press newsletter, outlined health systems' new growth imperatives. "Leading organizations no longer measure success through traditional measures such as inpatient volume share alone," the report states. "Successful growth strategies will be measured against metrics such as acquisition of covered lives, increased influence over the spending of healthcare dollars, and direct (and downstream) impact on the total cost of care and experience." Health systems are focused on organic growth strategies including new care models for value-driven care or expanding into additional markets, according to the report. ey are partnering with outside organizations and relying on technology-driven solutions to achieve their goals and dig deeper into incentive-based and / or risk-based payment models. New care models may include outpatient facilities or virtual care efforts, such as hospital-at-home. Nonorganic growth is also an increasingly important aspect of health system strategy. Executive teams are evaluating acquisition and partnership strategies. "A significant number of large organizations are seeking partners that have complementary capabilities, needs, and perspectives aer a pause in activity during the pandemic," the report states. "At the same time, many midsized or smaller organizations seeking to gain those capabilities have shied their perspective on independence." ere were 20 hospital and system transactions in the first quarter, the highest volume since 2020. While the financial challenges for hospitals and need to grow market share contribute to the increased activity, another surprising factor is also driving consolidation: a talent gap. e report notes many hospitals experienced significant staff and leadership turnover in the last four years and the weaker talent pipeline has incentivized partnerships and acquisitions. e most effective partnerships have been with specialty providers and startups, according to the report. Payer-provider affiliations are also realizing value, driving patient access and increasing the premium dollar, according to the report. "At the same time, many organizations are repositioning or even considering exiting some lines of business that may not offer the same opportunities for long-term success (e.g. senior living/skilled nursing, outreach laboratory, or behavioral health)," the report states. "While many of these services are critical to the continuum of care, organizations are finding new and improved ways to partner with specialty organizations to ensure continued access outside of an ownership model." n Hospitals' credit 'trifurcation' issue By Alan Condon H ospital operations have stabilized after a tumultuous few years, with the chasm between revenue growth and expense growth leveling out, but headwinds remain amid ongoing staff shortages, intense wage pressure and high inflation, Fitch Ratings said in an Aug. 15 report shared with Becker's. On average, hospitals saw a 7.6% expense growth versus a 7% revenue growth in 2023, compared to 9.5% expense growth and 5.8% revenue growth in 2022. However, a "trifurcation" of credit quality emerging from ongoing staffing and financial challenges is likely to be an issue well into 2025, with a credit "bifurcation" emerging soon after, according to Fitch, The ratings agency expects most hospitals to fall into the middle of the trifurcation pack with mixed results in the form of lower margins — though not enough to warrant widespread downgrades — and, despite some success in obtaining staffing, a still-heavy reliance on external contract labor. A small portion of hospitals will be successful in recruiting and retaining staff while seeing improved patient demand versus hospitals that will struggle to recruit and retain talent while facing volume demand challenges, according to Fitch. A third group of hospitals will be most vulnerable to rating downgrades this year, when bond covenant breaches will be another area of concern. Mark Pascaris, senior director at Fitch, said most nonprofit hospitals (65%-75%) will fall somewhere in the middle, steadily working to improve their operating margins. Challenges may intensify for 5% to 10% of hospitals and an equal number on the top end of the spectrum are positioned to thrive in stronger markets. "Median days cash on hand continues to decline, dropping to 211.3 in 2023 from 216.2 in 2022, and down from a high of 260.3 in 2021," Fitch said in an Aug. 15 report. "The imbalance between revenues and expenses remains a structural issue for the sector. Although the labor situation is improving, it still falls short of pre-pandemic levels." n

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