Healthcare Economics

Health systems struggling to stay afloat amid historic inflation

Health systems that already operate on the thinnest of margins have to get creative to survive historic levels of inflation.
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· 4 min read

Inflation has hit record levels this year as demand for goods and services far outpaced supply, and many companies are still trying to bounce back from the shutdowns of early 2020.

Health systems, which have razor-thin operating margins even in the best of times, aren’t an exception—and experts told Healthcare Brew they’ll need to get creative to make it through.

“In the past, we’ve always said that healthcare was kind of recession-proof because demand for healthcare keeps going, regardless of what’s happening in the economy,” said Tina Wheeler, leader of consulting firm Deloitte’s US healthcare practice.

But in the last year, inflation hovered around 8% for much of the year, while medical-care prices increased by only 4.8%, according to Wheeler. Since medical costs are negotiated between hospitals and payers years in advance, hospitals can’t just raise their prices now to keep up with the pace of inflation, said Gerard Brogan Jr., senior vice president and chief revenue officer at Northwell Health.

Labor costs, which have risen 25% since 2019, and an overall labor shortage in healthcare are part of what’s driving inflation in the sector, according to an analysis from consulting firm McKinsey & Company.

How badly is healthcare hurting?

By the numbers:

  • Inflation could cause an additional $370 billion more in healthcare spending than the expected baseline increase by 2027, according to McKinsey.
  • The national health expenditure could grow at a rate of 7.1% over the next five years, compared to the expected economic growth rate of 4.7%, according to McKinsey.
  • By the end of 2021, total hospital expenses per adjusted discharge were up 20.1% compared to 2019, according to the trade group American Hospital Association.

Rising interest rates also hurt hospitals since their main access to capital is through issuing tax-exempt bonds, Wheeler said. The rising cost of capital limits hospitals’ ability to fund projects, like opening a new oncology center to treat patients, for example.

What are hospitals doing in response?

Although shutting down services is pretty much always a last resort, some hospitals have taken that step to stay afloat, said Katie Sklarsky, a principal at healthcare consulting firm Chartis.

In Oregon, Bay Area Hospital attributed 56 travel-nurse layoffs to steep wages and cut its inpatient behavioral health services to trim its annual expenses. Bozeman Health in Montana said it laid off 28 employees due to rising healthcare costs, and for months has stopped providing inpatient dialysis, healthcare research firm Advisory Board reported in August.

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“Some hospitals face the reality of either cutting back on some services or their overall viability becoming questionable,” said Brogan. “And so sometimes it’s better to scale back and still provide core services to the community than to not be there at all for the community. Those are really tough choices that some hospitals are facing.”

Northwell, the largest health system in New York State, had an operating margin of just 1.2% last year and has taken several measures this year to cut costs, including slowing down hiring and limiting any spending not directly related to patient care, Brogan said.

And once a hospital shuts down a service, it’s not a quick process to bring it back, Brogan added.

“[Y]ou now have to re-recruit all of the doctors and all of the nurses that provided those services,” he said.

What can hospitals do to avoid cutting services?

The first step is getting creative in trimming expenses. At Northwell, Brogan said they start by looking at costs that aren’t associated with patient care, like food. The finance team looks at the system’s food suppliers and sees if it could get better rates if it contracts elsewhere, Brogan said. His team will also look at whether they can consolidate office space and reduce lease expenses—pretty much anywhere that doesn’t directly affect patient care.

Once a hospital has cut all the expenses it can, the other option is looking at how to use technology to do the same work with fewer people, Sklarsky said.

Many hospitals are also starting to use software to automate some administrative tasks that take up physicians’ time, Wheeler said. Some are considering automating services like letting patients order food from an iPad, according to Advisory Board.

Wheeler said outsourcing has also become a “big trend” for things like internal auditing, compliance, and IT.

“If they can find a better cost effective outsourcing option, that’s something that they’re really looking at pretty closely right now,” Wheeler said.

Navigate the healthcare industry

Healthcare Brew covers pharmaceutical developments, health startups, the latest tech, and how it impacts hospitals and providers to keep administrators and providers informed.