During the peak of the COVID-19 pandemic, federal programs pumped hundreds of billions of dollars into hospitals and other health care providers as they tended to an upsurge of patients. The extraordinary funding has largely dried up, but hospital advocates caution of fallout associated with delayed primary-care and aftercare visits, and higher labor costs stemming from burnout — all of which are straining hospital finances.

New Jersey Hospital Association President and CEO Cathy Bennett laid out the challenges in stark terms. “The financial math for hospitals no longer works,” she warned. “Inflation and COVID accelerated unprecedented growth in costs — hospital labor expenses grew by 20.8%, drug costs increased 19.7%, and supply/equipment costs by 18.5% on a per patient basis. There are growing shortages of physicians, registered nurses, nurse extenders, advance practitioners, respiratory therapists, support staff, and other professionals.” she said. “After three years of unprecedented challenges and caring for millions of New Jersey patients, including more than 582,000 COVID patients, New Jersey’s hospitals are experiencing sustained and significant increases in the costs required to provide the highest quality, equitable, compassionate care that is the hallmark of the New Jersey acute care system.”

Bergen New Bridge Medical Center President and CEO Deb Visconi said her facility is already feeling the stress. “We are a safety net facility [which does not turn away patients who cannot pay for care] and as such our finances are inherently fragile,” she said. “Our volume has returned to pre-pandemic levels, but expenses are continually increasing, and reimbursements are lagging. Inflation, cost of goods, increased salaries and benefits, pharmaceuticals costs along with increased administrative burdens to seek reimbursement create the perfect storm for health systems.”

The institution’s challenges are compounded by the fact that charity care and government payors are insufficient. “As expenses for health care systems and hospitals rise, the reimbursements we receive do not cover our costs,” Visconi said. “We are placed in a precarious cash position due to not only the administrative burdens for reimbursement, but the costs associated with these administrative requirements.”

Balancing act

In response, Bergen New Bridge is taking “a hard look at our business; the needs of the community utilizing our Community Health Needs Assessment and prioritizing how we can provide the care our communities need,” Visconi said. “We identify gaps in care and invest in eliminating those gaps, focusing on vulnerable communities, the social determinants of health and providing care when and where our communities need it. We are partnering with communities to expand access to care, which we are doing through our CareRite Now locations, which provide primary care in supermarkets across the region.”

In the long term, she added, “We need to reduce the administrative burdens we face from payors while increasing reimbursement rates that support the levels of care we are providing, while recognizing rising expenses for providers.”

The threats come from a variety of directions, added David Glusman, a partner in Marcum LLP‘s Advisory group, who pointed out that the twin issues of consolidation and competition are affecting hospitals in New Jersey. “The state went from a total of 72 hospital sites [18 multi-location systems and 17 single-site institutions in 2020] to 70 sites [13 systems and 13 single-site hospitals] by mid-February 2023,” he noted, pointing to maps issued by, respectively, the NJHA and the New Jersey Health Care Facilities Financing Authority, the primary issuer of bonds for New Jersey’s health care organizations.

One issue drives the other, added Glusman, whose practice includes health care consulting. Previously, Philadelphia-based “Jefferson Health didn’t have any boots on the ground in New Jersey, but the February 2023 map shows a total of three sites in Camden and Gloucester counties. More competition drives health care providers to find more efficiencies, which often means more M&A. But that entails a lot of upfront costs, and it takes time for the cost savings to be realized. Simply integrating EMR [electronic medical record] systems can run into seven figures.”

The continuing buildout of hospital-owned and independent urgent care centers – walk-in clinics that typically focus on care for minor illnesses and injuries – adds to the pressure on hospital finances, observed Marcum LLP Principal Matt Bavolack. “In a bid to capture more patients and in response to health insurers’ demands to get patients out of hospitals faster, many hospitals have set up their own urgent care centers and are also competing with privately own centers,” these buildouts have constrained cash flow, and the expansion of the sector provides patients with alternative options. So essentially hospitals and independent competition are negatively impacting the revenue streams of the hospital sector.”

Additionally, Bavolack, who leads Marcum’s National Health Care Practice, noted that reduced reimbursement rates are also squeezing hospital coffers. “Nationally, more individuals are enrolled in Medicare Advantage plans, which have lower premiums compared to traditional Medicare — but also generally offer lower reimbursement to health care providers. So, hospitals are being squeezed from multiple directions.”

There’s no single solution, added Dr. David Friend, Marcum’s health care practice leader for the Midwest region and chair of the firm’s National Health Care Thought Leadership Committee. “Hospitals have to change their behavior and start to think more like insurers,” he said. “One issue is that hospitals generally need to trim administrative staff, which can easily reach a ratio of 10 administrators for every physician. Some institutions are also dropping out of Medicare Advantage contracts, citing excessive prior authorization denial rates and slow payments from insurers.”

Some experts see signs of improvement but say long-term issues are not disappearing. “I would argue that the patient has stabilized but is still critical,” cautioned Ash Shehata, KPMG U.S. sector leader for health care. “Data consistently shows the typical operating margin in 2023 being around 1% to 2% and this has been consistent and stable as the year has progressed. This is significantly improved from 2022, 2021 and 2020, if you remove government COVID funding.”

He pins the recovery on two developments. “First, more people are coming back for elective surgeries that they may have postponed during COVID-19, which helps the top line. Secondly, health systems have made good progress on stabilizing their staff cost and supply base (for example, less reliance on agency staff), which supports the bottom line.”

But “a 1% or 2% operating margin leaves little room for any sort of shock to the system, such as labor issues or a particularly challenging winter virus season,” Shehata said. “However, I have had more optimistic conversations with clients and industry partners about hospital finances in the last quarter than I have had for many years. I believe that cash flow now is in a better place than it has been for a number of years. For example, Moody’s recently upgraded its outlook for the nonprofit health care sector to ‘stable’ which is a positive sign.”

Still, increased enrollment in low-cost Medicare Advantage plans “is something to watch,” he warned. “You are seeing many hospital systems across the country exiting Medicare Advantage because they cannot get the margins to work. It’s important that providers, payors, and CMS [Centers for Medicare & Medicaid Services] continue to work together to ensure this works for everyone- most importantly, the patient.”

According to Shehata, “Working together with the wider ecosystem is really the only way to help hospital finances in the long term. Ultimately hospital systems, physicians, payors and patients all want the same thing — for patients to live healthier lives and spend less time battling chronic conditions or visiting the emergency room. At KPMG, we have worked with many hospitals across the country to implement modern  [a provider of enterprise cloud applications for finance and human resources environments] and are arguably market leaders in this space with a team with significant breadth and depth. Where clients have implemented modern ERP [enterprise resource planning] environments – whether Workday or other – in a holistic way, treating it as a transformation instead of implementing a system, we have seen significant increases in their ability to drive better forecasting, take more informed approaches to risk-based contracting, streamline and improve procurement, and increase the agility of planning for their workforce needs. Workday [a provider of enterprise cloud applications for finance and human resources environments] and are arguably market leaders in this space with a team with significant breadth and depth. Where clients have implemented modern ERP [enterprise resource planning] environments – whether Workday or other – in a holistic way, treating it as a transformation instead of implementing a system, we have seen significant increases in their ability to drive better forecasting, take more informed approaches to risk-based contracting, streamline and improve procurement, and increase the agility of planning for their workforce needs.”

During the pandemic, hospital systems in New Jersey and elsewhere “received an infusion of funds from the federal CARES Act, which acted as a lifeline,” noted Alan Wink, managing director, Capital Markets at EisnerAmper. “Now, the funds have been spent, and many people who had put off cosmetic surgery and other discretionary procedures have been coming back, which helps hospital revenue, but labor shortages and other issues are driving up their costs even faster, so many health care institutions are still hurting. These challenges are compounded by the fact that Medicare, Medicaid and charity care reimbursements often cover a fraction of an institution’s’ actual expenses. So, it puts many hospitals in a difficult situation.”

It’s all about “freeing up more cash and running more efficiently,” he added. “One strategy could be to use big data analysis to review drug and treatment protocols as a way to increase treatment efficiency and effectiveness. Health care providers are already doing this, but it’s time consuming and they are often limited in the volume of information they can review. But big data analytics, coupled with AI, will eventually allow them to review just about every single case that aligns with a particular patient, which could turbocharge their ability to design an individualized treatment. We’re probably about five years or so from being able to do that, though.”

Meanwhile, advances like telemedicine and remote monitoring are proving to be a double-edged scalpel. “Telemedicine can free up space and save hospitals time and money,” Wink noted. “But at the same time, it can mean more empty beds and less of a markup for institutions, reducing their net cash flow.”

The ultimate answer, he said, may be a move to smaller, less-centralized hospitals. “Advances in health care, along with a focus on preventive and outpatient services, and pressure from insurers to get people back home sooner, may lead to more same-day health care facilities,” Wink said, adding that some sort of change is vital. “When it comes to the current model of health care delivery in the U.S., it doesn’t appear sustainable over the long run.”