Although the past year brought more stability for the not-for-profit hospital sector, analysts foresee 2024 as a pivotal period in determining the viability of individual organizations.
Fitch Ratings continues to describe the sector’s outlook as “Deteriorating.” In a year-end report, the credit-rating agency said downgrades of hospitals and health systems in 2023 had outpaced upgrades by a roughly 3-to-1 margin as of early December.
“A sector outlook reassessment would likely require significant improvement in labor productivity, given the current scarcity of available labor industrywide and for clinical positions in particular, which historically have been in high demand but short supply,” the report states. “Gains in labor productivity will likely be achieved only through redesigned labor processes, possibly through technology and artificial intelligence (AI) advancements. Recent years have seen enhanced recruitment and retention efforts emerging as one of if not the single most meaningful differentiator between operational success and failure.”
In a subsequently released labor tracker for the sector, Fitch noted that “labor conditions are easing,” citing a growth in payrolls, deceleration of year-over-year wage increases, and job openings that are declining toward pre-pandemic levels.
Nonetheless, “the healthcare industry remains in a hypercompetitive landscape for personnel against a challenging backdrop that includes a higher cost of living and the exit/early retirement of some skilled labor from the workforce,” the second report states.
In a webinar hosted by Deloitte, Tina Wheeler, U.S. Health Care Sector leader, noted there have been positive overall signs.
Compared with other sectors in healthcare, “We’re seeing that not-for-profits are having more challenges, but we have seen headlines where some not-for-profit health systems have had some pretty good results in Q3,” Wheeler said.
Wary about the future
In an annual survey conducted by Deloitte, only 3% of health system executives and 7% of health plan executives described their 2024 outlook on the industry as positive (respondents represented 30 organizations in each sector; see results on YouTube). Year-over-year, those numbers are down from 15% and 40%, respectively.
However, another 43% of health system leaders and 50% of health plan leaders said they were cautiously positive about the upcoming year.
While 57% of organizational executives cited workforce talent challenges and shortages as a high-impact factor for 2024, that was down by 11 percentage points from the 2023 survey.
Based largely on an organization’s success in recruitment and retention, a “trifurcation” of credit quality is likely to intensify over the next year, Fitch predicts. A majority of organizations will be in the middle tier, with mixed results in staffing and a continuing need for contract labor.
“This dynamic will continue to contribute to overall sector margins remaining lower than historical norms in the near term,” the agency’s year-end report states.
Fitch also said it is monitoring the potential for a second year of debt-service covenant violations by individual organizations in 2024. Although such violations likely will not be widespread, any occurrence could “intensify the potential for bondholders to declare an event of default and accelerate bond payments.”
Costs still a paramount concern
In its year-end report, PwC said providers still face a steady rise in the cost of treating patients. The company’s Health Research Institute is projecting a 7% year-over-year increase in medical costs for 2024, up from projections of 5.5% and 6% for the two previous years. Figures are based on feedback from health plan actuaries.
The acceleration stems from projected unit-cost increases at the plans’ contracted providers and from anticipated pharmacy-cost trends, including the impacts of specialty drugs such as cell and gene therapies and of the rising utilization of GLP-1 agonists to help treat conditions such as diabetes and obesity.
“The inflationary impact is further exacerbated by continued clinical workforce shortages in 2023-24, prompting hospitals to increase salaries and consequently seek higher reimbursement from payers,” the report states.
PwC’s 2022 cost projection is 1 percentage point lower than it originally was, in part because of a shift in care from inpatient to ambulatory settings.
Providers should “work with plans to establish ownership models that share financial gains and incentivize physicians to accelerate the shift to outpatient care,” the report states. “This will help ease the pressure on inpatient settings whose capacity has been the slowest to recover across the country, driven by an acute lack of skilled labor.”
But even an increased site-of-care shift would not be enough to substantially temper the inflationary drivers.
“Healthcare executives really need to think about who [their organizations] want to be and what they do well, and consider ways to outsource functions that can be done more efficiently and effectively at a lower cost,” Wheeler said, citing potential areas ranging from revenue cycle, billing and claims management to human resources, clinical administration and supply chain.
Consumerism should be top of mind
Just as inflation pinches hospitals and health systems, it also intensifies consumers’ concerns about the affordability of healthcare.
“When you think about affordability, you have to think about the lens of the consumer, and they’re facing rising healthcare expenses,” Wheeler said, noting that many health plan executives in the Deloitte survey said affordability would significantly affect their strategy in 2024.
In such an environment, she said, “This is a moment when healthcare leaders can influence those consumer health decisions. They need to drive loyalty and market share by providing digital tools that will really help consumers navigate their healthcare journey.”
For that reason, among others, strategies to ensure a sustainable form of digital transformation should be a 2024 focal point.
“When we’ve surveyed healthcare executives, they all agree that generative AI has the potential to really address many of our sector’s most challenging issues, whether it’s access, patient wait times, claims, staff burnout, even sharing of clinical information [and] assessing unique patient outcomes,” Wheeler said. “We really think it can revolutionize the way that healthcare’s delivered.”
The ongoing transition to a digitized healthcare system in 2024 will accompany continued steps toward becoming a more consumer-oriented industry. In Deloitte’s survey, relative to the prior year’s survey, two areas that received more responses as being expected to have a great impact were accelerated digital transformation (from 35% for 2023 to 50% for 2024) and consumer empowerment (25% to 47%).
Industry entrants are “going to be more focused on meeting those consumer needs,” Wheeler said. “If you can follow this mantra as you think about your 2024 strategy, it’s going to help legacy health systems transcend from business as usual to more groundbreaking business models and offerings that are going to meet these changing consumer expectations.”