Despite overall hospital margins improving, many health systems remain in need of a lifeline.
As more hospitals feel the constraints of financial pressures, they're turning to dealmaking to alleviate costs.
Health system mergers and acquisitions are continuing to trend toward pre-pandemic levels, but the volume of transactions doesn't necessarily indicate improved financial health. Rather, several of the recent deals have been driven by financial distress, as well as issues sustaining higher occupancy levels, according to a report by Kaufman Hall.
Eighteen transactions were announced in the third quarter, easily clearing the 10 deals over the same period in 2022 and the seven deals in Q3 2021. Of the 18 transactions from July through September of this year, seven involved a hospital or health system that cited financial distress as a driving factor for the deal, Kaufman Hall stated.
While hospitals as a whole are seeing margins stabilize the further back the pandemic is in the rearview mirror, that doesn't mean every facility is enjoying the same financial relief. Kaufman Hall's latest National Hospital Flash Report showed the median year-to-date operating margin index increasing from 0.9% in July to 1.1% in August, with net operating revenue increasing 8% month-over-month and gross operating revenue rising by 9%.
However, as Kaufman Hall's report over the summer noted, the gap between performing and struggling hospitals has widened, creating a haves and have-nots dichotomy. That divide is creating a more robust environment for M&A, with health systems in need of a lifeline seeking out partners with increased financial flexibility.
Kaufman Hall's M&A report revealed that only one of the transactions in the third quarter was considered a "mega merger," or a deal in which the smaller party has annual revenues above $1 billion. Total transacted revenue was $8.2 billion, which was down significantly from Q2's figure of $13.3 billion, but the drop-off was due to the second quarter having three mega mergers announced.
"When removing the mega mergers from each quarter, the average revenue in Q3 was actually significantly higher than that of Q2, at $243 million and $159 million respectively, demonstrating the significant uptick in activity in sizeable independent hospitals seeking out partnerships with larger organizations," the report said.
Fourteen of the 18 transactions in Q3 featured nonprofit acquirers, with half of those being academic or university-affiliated health systems. While many health systems have seen patient volume slowly creep back up to pre-pandemic levels, academic health systems are experiencing higher occupancy levels, with a recent Kaufman Hall report showing a median inpatient occupancy rate of 70% at academic health centers, compared to 53% at acute-care hospitals.
"Aligning an academic health system with a community-based health system provides the opportunity to relieve some of the occupancy pressures at the academic flagship hospital by utilizing available space in high-quality community hospitals to treat lower acuity patients," the report stated.
"An academic/community health system pairing also offers expanded opportunities for residency programs, clinical research trials, and patient access to tertiary and quaternary services."
Looking forward, CEOs should be prepared for increased scrutiny on transactions with new proposed merger guidelines issued by the Federal Trade Commission and the Department of Justice, Kaufman Hall warned.
However, hospitals recently secured a major win against regulatory requirements for dealmaking when a U.S. district judge ruled in favor of LCMC Health's purchase of three Tulane University hospitals from HCA Healthcare. The ruling granted the health system's request for a summary judgement that the transaction was exempt from federal antitrust laws due to Louisiana's issuance of a state certificate of public advantage (COPA). The FTC has lobbied against COPAs, which are currently present in 19 states.
The company released its fourth quarter earnings and financial outlook for 2024.
Walgreens plans to shut down 60 VillageMD clinics and exit five markets next year in an attempt to cut at least $1 billion in costs as it pivots in strategy with a new CEO.
Two days after naming Tim Wentworth CEO, the drugstore chain released its fourth quarter earnings report, showing a net loss of $3.1 billion for the year, compared to net earnings of $4.3 billion for the 2022.
"Our performance this year has not reflected WBA's strong assets, brand legacy, or our commitment to our customers and patients. In just six weeks, we have taken a number of steps to align our cost structure with our business performance, including planned cost reductions of at least $1 billion, and lowered capital expenditures by approximately $600 million," interim CEO Ginger Graham said in the release. "We anticipate seeing the impact of these actions in fiscal 2024, beginning in the second quarter."
Graham also said the company is "intently focused on accelerating our profitability in the U.S. Healthcare segment," which will be helped by the closing of 60 underperforming VillageMD clinics in 2024, Walgreens leadership revealed on a call with investors.
The U.S. Healthcare division consists of primary care provider VillageMD, at-home care provider CareCentrix, specialty pharmacy Shields Health, and Walgreens Health.
While pro forma sales for the quarter grew 17% for VillageMD, 24% for CareCentrix, and 29% for Shields, the unit as a whole reported an adjusted operating loss of $83 million.
"While we have made progress on the build-out of our healthcare business, we are not satisfied with the near-term returns on our investments," John Driscoll, president of U.S. Healthcare, said on the call. "We will continue to grow in 2024, but with a renewed focus on more profitable growth."
He added: "VillageMD, Summit Health, and CityMD will be the most meaningful drivers of growth in fiscal 2024. It has taken us longer than anticipated to realize the cost synergies across the combined assets."
For the fiscal year 2024, Walgreens said it expects adjusted earnings per share to be between $3.20 to $3.50, coming in below analyst forecasts of around $3.70.
Graham highlighted three near-term operational priorities for the company going forward: supporting customer-facing activities, "scrutinizing every penny of spend that does not directly benefit the customer," and improve cash management.
Wentworth will be at the helm of the company, effective October 23, as it takes these steps to drive towards profitability.
Speaking on the call, Wentworth said: "Walgreens was built on convenience, access, and trust and has unique advantages in today's healthcare environment. I see the opportunities before us to build on our pharmacy strength and our trusted brand to evolve healthcare and the customer experience to deliver better outcomes at a lower cost."
It's a potentially seismic strategy that will further close the divide between venture capital and providers.
Venture capital firms are no strangers to acquiring and restructuring hospitals, but their relationship with healthcare has generally stopped short of direct ownership to influence how care is provided.
However, that's exactly what General Catalyst is attempting to do through its bold move of buying a health system as a testing ground for new technology. The venture capital firm announced its eyebrow-raising intentions at the HLTH conference, where it publicly launched a business spinout called Health Assurance Transformation Corporation (HATCo). Former Intermountain Health CEO Marc Harrison will lead the new company, working alongside General Catalyst managing director Hemant Taneja.
While Harrison and Taneja did not divulge key details such as which health system they are looking to purchase, when the acquisition would happen, or for how much, the announcement at HLTH and through their blog postsignals a potentially unprecedented shift in how venture capital can break down walls between it and providers.
"[It] is another step in GC's move to 'transcend' venture capital," Harrison and Taneja wrote in the blog. "We've said that achieving HATCo's mission will require a long-term orientation that existing fund structures cannot support."
Venture capital firms don't usually buy health systems due to the thin margins and regulatory challenges. It's a high-risk, low-reward business decision for players whose main objective is to squeeze out profits.
What General Catalyst is trying to do through its impending purchase is change the paradigm. The venture firm already partners with 20 health systems across 43 states that test out technology developed by its portfolio companies, but the firm is now seeking to implement new technology without being restricted by cash-strapped and risk-averse providers.
The private equity model is all about reducing costs and in many ways, General Catalyst is hoping to do the same, but Harrison and Taneja said the commitment to technology and innovation will give "health systems the opportunity to capitalize on new revenue streams, which (in turn) should allow them to invest in more innovation and in servicing their communities. In addition, HATCo will look to foster the creation of scaled platforms (rather than fragmented point solutions) that can provide the missing technology pieces of the puzzle."
The other aim of General Catalyst's plan is to leverage its technology to implement a value-based care model that demonstrates it can be both better for patients and profitable for business. Part of HATCo's vision is to use AI and data analytics to prevent patients' conditions from developing or worsening, thereby reducing the need for costly services.
It's not too dissimilar to what Kaiser Permanente is striving for with its launch of Risant Health, which is focused on delivering value-based care through technology to its acquired health systems. Where HATCo is attempting to differentiate is by creating a blueprint with its health system that can be applied elsewhere.
HATCo also wants to deviate from the typical timeline of venture capital acquisitions—the thinking isn't years-long, but decades-long. It's a long-term play that Harrison and Taneja say they have the capital and stomach to see through.
"The transformation of our healthcare system is not a short-term endeavor," they wrote. "Even venture's decade-long return horizons are insufficient to effect real, systemic change. HATCo aims to create a new standard of healthcare investing and set expectations for investors to think longer term."
The suggested timeframe means other venture capital firms may have to wait a while to see if General Catalyst's unprecedented maneuver pays off, but before the full results are even realized, the process could embolden other firms to make similar leaps.
Regardless, it's becoming more and more clear that the future of hospital and health system mergers and acquisitions will be driven by technology and the role it can play in not just refining healthcare, but overhauling it.
Bruce Broussard will give way to Jim Rechtin in the latter half of 2024.
Humana has already mapped out its succession plan with longtime CEO Bruce Broussard set to step down in the second half of 2024, the company announced.
After spending more than a decade at the helm of the payer, Broussard will end his tenure and hand the reins to Jim Rechtin, president and CEO of Envision Healthcare.
The transition to Rechtin reflects the direction Humana is heading, with the company expanding beyond only offering health insurance and becoming an integrated model. In 2022, the company restructured into two business units: Insurance Services and CenterWell. The latter includes healthcare services, such as its primary care clinics.
Along with its sister brand Conviva Care Enter, CenterWell Senior Primary Care delivers care to more than 272,000 members in more than 250 centers across 12 states. Humana plans to add an additional 30 to 50 new centers per year through 2025.
Rechtin brings experience in provider settings from his previous role as president of UnitedHealth Group's OptumCare and from multiple leadership positions with DaVita Medical Group.
"Jim has worked closely with clinicians in many different care settings," Broussard said in the news release. "That experience will help support our growing clinical footprint and continuing evolution as a health care company and the important work we do in driving health outcomes for our customers."
Kurt Hilzinger, chairman of the Humana Board, said: "[Rechtin's] first-hand experience leading through challenges and opportunities of a changing health care services continuum will help accelerate our integrated care strategy at pace."
In its announcement, Humana also said Rechtin has "a deep understanding of Medicare Advantage," which will be key as the payer continues to hone in on that side of the business. Humana is exiting the commercial health insurance market and focusing on growing its offerings in Medicare Advantage (MA), where it has the second-largest market share behind only UnitedHealth Group. Under Broussard, the company tripled its MA membership to more than five million.
Broussard, who joined Humana in 2011 and took over as CEO in 2013, will remain as a strategic advisor to the company into 2025. Until Rechtin steps in for Broussard, he will act as the president and chief operating officer, effective January 8, 2024.
The company is seeking ways to improve cash flow to stay afloat.
Cano Health found a lifeline in its sale of its Texas and Nevada primary care centers and more divestitures could be on the way for the company as it claws for liquidity.
By selling its clinics to Humana's CenterWell Senior Primary Care business, the value-based primary care chain brings in nearly $67 million, including over $35 million in cash paid at closing, Cano announced. The sale comes weeks after the company said in its second quarter earnings report that there was "substantial doubt" about its ability to financially continue within the next year.
With the sale to Humana's subsidiary, Cano now has approximately $109 million in available liquidity, of which $80 million will be used to pay off debt so the company can avoid being required to comply with the financial maintenance covenant.
Cano CEO Mark Kent said in the news release that the sale refines the company's footprint and focus on improving operational and medical cost performance in the Florida market.
"The net cash proceeds from this sale strengthen our balance sheet, allowing us to continue executing on our plan and supporting our mission of providing market-leading primary care," Kent said.
According to Kent, the sale is also one of "many planned steps" in Cano's strategy to gain financial flexibility, which means more selling of assets could be on the way for the company.
Overseeing potential moves in the immediate future will be Eladio Gil, who steps into the role of interim CFO after Brian Koppy departed at the end of September, the company announced.
Cano has had to weather unrest in its leadership, with three board members resigning earlier this year while criticizing the company for poor corporate governance and increasing debt.
Meanwhile, founder and CEO Marlow Hernandez stepped down from his role in June after the backlash.
Federal approval of hospital transactions may not be required in certain states.
Hospitals secured a major victory in their battle with the Federal Trade Commission (FTC) over regulatory requirements for mergers and acquisitions.
A U.S. district judge ruled in favor of LCMC Health's purchase of three Tulane University hospitals from HCA Healthcare, granting the health system's request for a summary judgement that the transaction was exempt from federal antitrust laws.
The ruling backed the power of state certificates of public advantage (COPA), which allows mergers and acquisitions to avoid federal approval if they receive oversight from the state. LCMC and HCA argued that the deal was exempt from pre-notification requirements implemented under the Hart-Scott Rodino (HSR) Act—notifying federal antitrust authorities and observing a 30-day waiting period—because of the issuance of a COPA from the Louisiana Department of Justice.
The FTC has lobbied against COPAs, claiming that transactions exempt from federal antitrust requirements have led to higher costs and worse outcomes.
Judge Lance Africk wrote in his ruling that "the court appreciates that this holding may make enforcement more difficult for the FTC in the narrow context of transactions that close pursuant to state COPAs."
Greg Feirn, LCMC Health CEO, said in a statement: "We are pleased to announce that the District Court has recognized the value of our partnership with Tulane University and upheld the State of Louisiana's approval. Earlier this year, LCMC Health and the Attorney General Jeff Landry took a strong stance by taking legal action to safeguard this significant collaboration. This partnership underwent a thorough review and approval from the Louisiana Department of Justice, which has been validated by the court's decision."
Due to the ramifications of the ruling, the FTC may pursue an appeal. Nevertheless, the decision is noteworthy in that it strengthens protections for hospital transactions from federal oversight.
By securing a state COPA, hospitals can avoid requirements under the HSR Act, including the 30-day waiting period. The FTC has also recently proposed sweeping revisions to the HSR Act, which would greatly increase the burden on hospitals.
However, not every state has COPA laws. Currently, 19 states have some version of a COPA law, so hospital transactions outside of those states won't be able to skirt federal approval.
Hospitals and health systems must be proactive instead of standing pat and waiting for inflation to ease.
Since hitting record highs during the pandemic, inflation has continued to wreak havoc on the economy. Every industry has been affected in some way and healthcare is no different.
Hospitals and health systems, however, are in the precarious position of being susceptible to inflationary pressures during a time when margins are thin. That reality has tasked CEOs and CFOs to adeptly maneuver to keep finances afloat and doors open.
It's no wonder then that most healthcare CFOs view the current economic situation as their top organization concern, a survey by Deloitte revealed.
The good news? Medical prices are growing at a similar rate as past years, but are being outpaced by prices in other parts of the economy, according to analysis by KFF. The opposite has typically been the case, but using the consumer price index, KFF found that medical prices grew by 0.1% year over year in June 2023, below the 3.0% overall annual inflation rate.
Meanwhile, the producer price index, which represents inflation from the producers' perspective, has increased 3.5% for overall health services during that same period, illustrating the toll inflation is taking on healthcare organizations' costs, even if it is showing signs of cooling.
The c-suite now has no choice but to evaluate every single financial decision in the context of how it will be affected by inflation.
"The biggest part of that is just reassessing any plans for growth and major capital, just like anybody would normally do with their personal decisions with regard to major purchasing. Health Systems must do the same," Matthew Arsenault, CFO at Baptist Health South Florida, toldHealthLeaders.
"So, we want to make sure that we provide care, but deciding which projects happen when and evaluating the cost of those projects and inflationary environment is something that we're constantly doing more of now, and more frequently than we have been historically because of the current inflationary environment."
Ultimately, fighting inflation means finding ways to reduce expenses and improve efficiencies. The c-suite needs to work together and place focus on a few areas of contention including labor costs, revenue cycle, and the supply chain.
Lower labor costs
Arguably the biggest challenge hospital and health system leaders have had to face since the onset of the pandemic has been the workforce. Specifically, the decline in staff coupled with the increase in labor costs.
The KFF analysis on inflation found that since mid-2021, health sector wages have increased slightly faster than overall average weekly earnings. While average weekly wages for employees of private organizations increased by 16.9% from $982 in February 2020 to $1,148 in May 2023, healthcare employee average wages rose by 19.3%, from $1,039 to $1,239 over that span.
Skilled nursing employees have seen the highest average wage increases, with average weekly earnings rising by 23.7% from $671 in February 2020 to $830 in May 2023. Skilled nursing, of course, has also experienced significant turnover and burnout over that period, forcing organizations to rely more on contract labor.
Bringing those contract labor costs down has been a priority and several hospitals have made encouraging progress doing that this year. For example, HCA Healthcare for the second quarter reported a decline of 20% in contract labor costs year over year, which allowed the health system to net $1.193 billion for the quarter, compared to $1.15 billion for that period last year.
How can CEOs and CFOs keep contract labor in check? By investing in their staff to both retain employees and attract new ones. That means offering competitive salary and bonuses, as well as improving staff wellbeing.
Strengthen revenue cycle
Investment, however, shouldn't be limited to just the workforce. Executives need to review revenue cycle management (RCM) processes and assess ways to implement technology to cut down on administrative tasks and collect money in a timelier manner.
"To tackle financial challenges in healthcare, hospitals typically look at strategies such as optimizing operational efficiency, implementing new payment models, exploring partnerships, and investing in innovative technology," Stephen Forney, senior vice president and CFO of Covenant Health, toldHealthLeaders. "At Covenant, we've seen how AI can play a crucial role in addressing financial challenges by streamlining workflows and improving revenue cycle management."
Whether it's pursuing an end-to-end solution or a bolt-on vendor to fill in the gaps, hospitals can benefit greatly from embracing automation in their RCM. The key is to find the right technology or vendor to invest in.
One of the greatest areas of need in RCM right now is denials management. Only 38% of hospitals and health systems currently automate any component of denials management, according to a survey by AKASA, while Plutus Health found that 30% of surveyed providers said AI and robotic process automation resulted in faster cash flow and collections.
Despite tight budgets, hospitals and health systems can save on costs in the long run by strategically devoting resources to create the most efficiency as possible in RCM.
Optimize supply chain
Another area where inflation has created issues is supply chain, resulting in disruptions and product price increases.
Ideally, hospitals will choose not to pass the price increases on to their patients, but that requires engaging with suppliers to understand the actual costs of products to ensure reasonable prices.
"We are working closely with our suppliers to make sure they understand that we need to push back on cost increases, and they need to find ways to take cost out," Sam Banks, chief procurement officer and vice president of supply chain at Indiana University Health, toldHealthLeaders. "In some areas and contracts, we have protection against inflation or at least a cap on prices. That has saved us in quite a few situations."
He added: "I am a firm believer that the better we understand how their products are made and their input costs, the better our ability is to push back on cost increases."
Organizations can also cut down on unnecessary costs by identifying opportunities for standardizing equipment and supplies, allowing for less reliance on multiple vendors. Technology can also be utilized to improve inventory management and reduce waste.
Inflationary pressures are still high, and healthcare is still in a place where the c-suite has to pull necessary levers to avoid getting swept up by relentless waves.
CMS announced minimal changes to the average monthly plan premium in the private program.
Payers offering Medicare Advantage (MA) plans continue to want to keep premiums down to attract members.
CMS announced that average premiums, benefits, and plan choices for MA will remain relatively unchanged in 2024, with the data showing that MA plans are opting to remain competitive with their offerings.
The average monthly plan premium for all MA plans is projected to bump up 4% from $17.86 in 2023 to $18.50 in 2024. Most members that choose to stay in their plan will experience little to no premium increase, with nearly 73% not seeing any premium increases at all, according to the federal agency. Supplemental benefit offerings, meanwhile, will "increase slightly."
"Today's release shows that, as expected, people with Medicare will continue to have robust options and stable benefit offerings in the MA market," Meena Seshamani, CMS deputy administrator and director of the Center for Medicare, said in a statement. "We encourage individuals eligible for Medicare to review these options as well as Traditional Medicare and enroll in the option that best meets their health needs."
The availability of low to zero-dollar premium plans in MA has been a factor in the private program's growth over the past decade and with MA enrollment in 2024 projected to represent approximately 50% of all Medicare enrollees, MA payers are eager to seize as much of the market as possible.
However, it is possible that the saturation of zero-dollar premium plans is driving more beneficiaries to choose plans with higher premiums and lower out-of-pocket costs.
According to a recent report from eHealth, demand in zero-dollar premium plans fell for the first time since 2018. While 84% of eHealth enrollees still chose a plan without a monthly premium, the potential trend away zero-dollar premium plans may cause MA plans to reconsider offerings in the future.
CFOs and revenue cycle leaders can save on costs and optimize workflows by addressing the problem area.
If your healthcare organization isn't already automating denials management, it should consider moving away from manual processes to alleviate expenses.
Denials management is one area of revenue cycle management that is especially susceptible to inefficiencies, which is why hospital leaders need to explore investment in AI, whether that's a standalone or an end-to-end solution.
Currently, only 38% of hospitals and health systems are automating any component of denials management, according to a survey of more than 350 CFOs and revenue cycle leaders by AKASA. However, many of the respondents said they plan to automate some component of denials management in the future, with 44% indicating they would by the end of the year and another 32% saying they plan to in 2024.
Denials management continues to keep healthcare executives up at night, due to the resources, time, and costs it incurs.
A previous survey commissioned by AKASA found that, based on the answers of 550 financial and revenue cycle leaders, denials management required the most subject matter expertise (78.7%) of all revenue cycle tasks.
Another survey by Plutus Health revealed that denials management is the greatest challenge for healthcare providers when it comes to revenue cycle management, cited by 59% of respondents. More than 40% of the providers surveyed also said they lose more than half a million dollars in annual revenue each year because of denied claims, with 18% reporting losing more than a million annually.
Of the respondents who use AI and robotic process automation (RPA), nearly 20% said the greatest improvement since implementing the technology was improved efficiency in filing claims, while 30% said it resulted in faster cash flow and collections.
Due to tight margins, providers are cautious right now when it comes to investing outside of their organization, but technologies like AI and RPA have proven to be beneficial in cutting down on costs in the long term.
Nicole Clawson, VP of finance and revenue cycle at Pennsylvania Mountains Healthcare Alliance, recently shared with HealthLeaders how her organization implemented an end-to-end solution to streamline revenue cycle process, including denials management.
"The integration of data, the ability to loop the front end, data quality, and eligibility to the back end in payments, denials, collections, and everything in between made the difference," Clawson said. "Being able to analyze that data and find the root cause for denials or payment issues and correct it going forward to eliminate the issue. I prioritize and focus on prevention."
Hospitals want to bring down labor costs, but not at the risk of staffing turnover.
Hospital and health system CFOs are facing a bit of a dilemma when it comes to recruiting and retaining physicians. On one end, physician compensation is rising. On the other, slashing labor costs is a priority.
That reality necessitates that CFOs achieve a balancing act between employing top talent while keeping expenses in check. But hospitals' bottom lines aren't just affected by how much it costs to pay a physician. There are also opportunity costs and other expenses associated with physicians walking out the door in search of better compensation.
For that reason, cutting corners with physician salary isn't at the top of CFOs' to-do list. If anything, the opposite seems to be true, with hospitals acknowledging the competitive landscape for attracting and retaining physicians and showing willingness to invest in their workforce.
And investing will be necessary, considering recruiting incentives for physicians and advanced practice providers (APPs) have sizeably increased over the past year, according to report from staffing company AMN Healthcare. Based on a representative sample of 2,676 permanent physician and APP search engagements, AMN Healthcare found that the averaging signing bonus for physicians jumped from $31,000 in 2022 to more than $37,000 in 2023, while the average starting salary offer for many specialists shot up, such as a 12% year-over-year increase for orthopaedic surgeons.
"The demand for physicians has continued to increase," Leah Grant, president of AMN Healthcare Physician Solutions, told HealthLeaders. "With that demand, a lot of healthcare organizations are trying to figure out how to be more competitive and how to get a provider in the door faster. The faster you can get a physician into your clinic or hospital, the more revenue you are going to generate. You can also decrease patient wait times, which are a concern in the market. Decreased wait times can make you stand out in the market as a preferred provider."
Reducing turnover reduces costs
Getting physicians into your hospital is important—getting physicians to stay is essential.
Staffing turnover can be costly, so much so that giving a physician a raise in salary is often less detrimental to a hospital's finances than having to replace them.
According to a study published in the Journal of Hospital Medicine analyzing a large integrated health system, direct costs of physician turnover totaled $6,166 per incoming physician. The largest expenses stemming from turnover were additional clinical coverage required at times of transition, followed by physician time recruiting and interview candidates. While the total cost may seem low, it accounts for cost savings on salary difference between outgoing and incoming hospitalists, which was $5,561 per physician in the study.
What that total cost didn't factor in was that newly hired physicians may be less productive than established hospitalists, leading to less revenue. Based on the study's findings, a hospitalist in the first 25 days of employment would be expected to bill 33.2 fewer relative value units than a hospitalist after that period.
That's a big reason why hospital decision-makers are eyeing ways to cut down turnover.
Scott Wester, president and CEO of Memorial Healthcare System, recently shared with HealthLeaders how the South Florida-based nonprofit created $200 million in savings by dropping about 80% of use of outside contract labor and reducing turnover from around 21% to below their historical average of under 14% in just a year.
"We did it with the intention of understanding we had to make sure that we had a better talent acquisition team, making sure that we played more offense than defense, and by reaching out to the work community to try to figure out what are things that are maybe are limiting the people to come join our organization," Wester said.
"We work very closely getting information, understanding we needed to do some market adjustments on individual pay raises for certain job classifications, and working closely with our university and educational facilities."
Less reliance on contract labor
When a hospital isn't losing its physicians, it can be less dependent on contract labor, which boomed during the COVID-19 pandemic and put added stress on hospitals' margins.
Hospitals can still achieve profitability by paying their physicians while reducing contract labor costs. HCA Healthcare is an example of that, as evidenced by the health system's second quarter earnings. Though HCA saw its expenses for salaries and benefits climb 7.1%, a significant decline in contract labor costs of 20% year over year helped the system net $1.193 billion for the quarter, compared to $1.15 billion for the same period last year.
HCA CFO Bill Rutherford told investors on an earnings call: "Our hiring metrics are up, turnover is down. And I think that portends good things for us going through the balance of the year."
CEO Sam Hazen, meanwhile, said HCA wants to continue investing in its staff: "We're very competitive, we believe, across the organization with our compensation and benefit programs. We've been able to navigate through these difficult periods and maintain margins."
As hospitals move away from contract labor, they must also try to incentivize physicians with bonus programs and other benefits outside of straight compensation.
David Koschitzki, CFO at MJHS Health System, spoke with HealthLeaders about solutions his organization has focused on to retain and attract talent, such as employee recognition programs and initiatives "that speak to the personnel side of their job responsibilities."
Koschitzki said: "Staffing is primarily the largest investment that we've been making. As I said, we have to address compensation issues, and we must address the competitiveness of the industry. So, we've enhanced staff salaries as an investment in our staff, and we've enhanced programs to attract staff."
