Inflation Conundrum or Opportunity?
The stark realities facing health system leaders during this time of inflationary and recessionary hardship are paramount. The US economy and health system have not experienced this level of inflation since the late 1970s and early 1980s. Back then, cost-based hospital revenue models (pre-DRG era) were somewhat ‘elastic’ and could withstand the impact of high costs and labor. Not the case for today’s CFO and finance leaders – and this hyperinflation will likely continue over the next four to eight quarters. Also, consider that there is no ‘new money’ coming into the US healthcare system anytime soon. We cannot expect to see Medicare or Medicaid rate adjustments offsetting inflation and, commercial rate increases, if any, will likely be well below the rate of inflation.
Escalating expenses have devasted razor-thin operating margins caused by the pandemic and this trend will accelerate due to persistent inflationary pressures residing in supply chain, labor supply, energy costs, and the imputed cost of capital. The basic supply-and-demand aspects of nearly all profitability determinants are expected to have an adverse effect on quarterly earnings throughout 2022-2023. Some economists do not predict a recovery until 2024-2025.
Where are We Now?
In 2022, top-line revenue is suffering, while expenses swell at an increasing rate. Profitability and cash flow from operations may continue their decent for the ensuing 12 – 24 months. Fortunately, some savvy CFOs implemented strategies to bolster their balance sheets throughout the pandemic. However, a strong financial position will eventually give way to eroding profits. And if you factor in ‘wildcard-unknowns’ such as a new pandemic surge, geopolitical fallouts, and failed domestic policies, even the most highly-rated (i.e. Fitch, Moody’s, S&P) health systems are not immune to a financial hit.
Expectedly, most experts agree it will get worse before it gets better. Inflation, labor supply, investment losses, and supply chain issues will likely worsen. This is not anecdotal, it’s a nationwide phenomenon. State hospital associations and reporting organizations are sounding the alarm. In Washington state for example, during 1Q2022, hospitals lost nearly $1B due to increased operating expenses and investment losses, noting that all 52 of the state’s urban hospitals and health systems reported negative margins averaging -13%.
Amid these unprecedented fiscal challenges, reside the core components of your health system: patients, providers, and employees. How can you make care more affordable, accessible, and equitable for the communities you serve? What technology and innovation investments should you make, and which ones should you forego? How can you best leverage existing infrastructure investments to harvest revenue and margin? What can you do to attract and retain the best talent while providing a safe, productive, and rewarding environment for clinicians, administrative, and operations professionals? What is my go-forward, true cost of capital? These questions cannot be ignored when evaluating strategies for near- and long-term sustainability.
Light at the End of the Tunnel or an Oncoming Train?
Strategies to navigate the Inflation Conundrum will vary greatly based on organizational makeup, competitive landscape, geography, and leadership’s experience with developing and executing winning strategies. Plans may involve new, innovative partnerships, technology investments, service line assessments, operational efficiencies, competitive/market re-positioning, revenue harvesting, and expense cutting. Viable strategies may even involve mergers and acquisitions, as hospitals seek to generate economies of scale and gain skills to enable them to take on additional risk contracts.
Regardless of the approach, several common denominators should be considered: impact on the patient, near- and long-term cost benefit, can existing investments be leveraged to accelerate or increase ROI, where can the most gain be realized with minimal risk. CFOs may have to get out of the comfort zone and take on a certain level ‘measured risk’ if the juice is worth the squeeze.
CURAE™ is a proven strategic partner for health systems with over 25 years of delivering ROI. CURAE exists to empower providers to serve their communities by making care affordable and accessible for all patients. CURAE’s institutional-grade, low-cost Non-Recourse funding is frictionless for patients and staff; enabled by our fintech, consumer-centric model that interoperates within existing technology platforms. CURAE is capital market leverage that improves provider results—guaranteed.
About the author:
David Grizzanti CPA, MBA is Executive Vice President at CURAE. David is a strategic-minded, healthcare finance executive who began his career in investment banking and earned his CPA and MBA in Finance and Economics. David has twenty-five years of revenue cycle and technology experience within the provider, payer, and medical device verticals. David held leadership roles in prominent healthcare organizations Cerner (now Oracle) and Wipro, as well as with entrepreneurial start-ups purchased by Sutherland and NThrive. Based near Philadelphia, David leads Curae’s healthcare sector in the New England, Northeast, and Mid-Atlantic markets.
Washington State Hospital Association, July 2022
Healthcare Finance Journal, July 2022
Kaufman Hall, Flash Report, June 2022