News, Analysis, Trends, Management Innovations for
Clinical Laboratories and Pathology Groups

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News, Analysis, Trends, Management Innovations for
Clinical Laboratories and Pathology Groups

Hosted by Robert Michel
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As mergers and acquisitions of large-scale hospital systems continue, their clinical laboratories feel the pressure of deteriorating finances and ongoing staff shortages

Eroding economics is often the major reason why a health system agrees to be acquired or merged. And, as we reported in “Hospital, Health System Mergers and Acquisitions Impact Clinical Laboratories,” these mergers and acquisitions are occurring at an alarming rate.

In response to the latest National Hospital Flash Report from Kaufman Hall, the financial/performance consulting firm’s Senior Vice President, Eric Swanson, wrote that 2022 was “shaping up to be one of the worst financial years on record for hospitals.

“Expense pressures—particularly with the cost of labor—outpaced revenues and drove poor performance [in hospitals]. While emergency department visits and operating room minutes increased slightly, hospitals struggled to discharge patients due to internal staffing shortages and shortages at post-acute facilities,” Swanson noted.

Like their parent organizations, hospital and health system-based medical laboratories are dealing with ongoing staffing shortages, which Dark Daily covered extensively in multiple ebriefings.

Non-profit healthcare systems are particularly hard hit, leading to merger/acquisition deals that continue the trend of hospital consolidation.

“Consolidation will continue. Here’s the scary part. The old solutions of jacking up treatment volumes and commercial payment rates aren’t working. Evidence of business model failure abounds. A fiscal storm is raging,” David Johnson, CEO, 4sight Health, wrote in an article for the Healthcare Financial Management Association. The results of these business failures have a direct impact on hospital-based medical laboratories as well as clinical laboratories in surrounding areas that service a health system’s physicians. (Photo copyright: 4sight Health.)

‘Unprecedented Challenge for Nonprofit Providers’

In “Cracks in the Foundation—Five Structural Defects Are Undermining Nonprofit Healthcare,” a six-part series he penned for the Healthcare Financial Management Association (HFMA), David Johnson, CEO at 4sight Health, noted that when it comes to nonprofits, five of the healthcare giants have been reporting sizable losses.

The numbers speak volumes. Looking at financial statements from 2022, Ascension, Cleveland Clinic, CommonSpirit Health, Providence, and Mass General Brigham all posted losses of more than $316 million dollars, the HFMA series noted. Two in that group (CommonSpirit and Providence) posted losses over $1.1 billion. Providence’s losses represented only nine months of data from 2022.

So, what’s the problem? In another HFMA article titled, “The End of Traditional Nonprofit Healthcare Business Models?” Johnson wrote, “Even in the best of times, the nonprofit hospital business model has never been robust. Hospitals are capital-intensive, labor-intensive, highly-regulated, low-margin businesses that require high-cost facilities and highly expert personnel to operate.

“Competing mission and business priorities make running nonprofit hospitals even more difficult,” he added. “The existential question is whether current operating losses at nonprofit health systems are aberrant or indicate a broader collapse of their models. I believe it’s the latter. Structural weaknesses, combined with pernicious macro forces, make this a period of unprecedented challenge for nonprofit providers.”

In his “Cracks in the Foundation” series, Johnson lists five “deeply embedded defects in current nonprofit business models.” They are:

  • Artificial economics
  • Needs-services mismatch
  • Brittle business models
  • Regulatory headwinds
  • Inadequate leadership

“Under pressure, health systems are struggling to right the ship, but they are defaulting to old habits,” Johnson wrote. “They’re chasing volume and rates under fee-for-service (FFS) medicine. While this has worked in the past, it is not a viable long-term strategy. Powerful macro forces are aligning against healthcare business practices. Ignoring them won’t make them go away.”

This chart, taken from 4sight Health CEO David Johnson’s HFMA article, shows the five large health systems that showed operating losses in 2022. The numbers displayed are drawn from each health system’s publicly released financial statements for the periods shown, HFMA noted. (Graphic copyright: Healthcare Financial Management Association.)

Deteriorating Outlook for Health Systems

Increased expenses for labor and supplies paired with inflation is what a 2022 Fitch Ratings report cited as contributing to a “‘deteriorating’ outlook for systems,” Healthcare Dive reported.

“Labor will remain the largest hurdle for hospitals this year even as they struggle with inflation and spiking COVID-19 admissions that can dent revenue. The labor story just dwarfs the inflation story,” financial analyst Kevin Holloran, Senior Director and Sector Leader USPF Healthcare at Fitch Ratings, told Healthcare Dive.

Holloran has worked for Fitch since 2017, joining after 14 years at S/P Global Ratings. He has 20-years experience in the healthcare sector. 

Nonprofit hospitals that posted COVID-19-related operating losses are struggling with higher costs for labor and supplies while navigating declining and neutral admission volumes, Healthcare Dive noted, citing that healthcare systems have turned to staffing agencies and contracted labor to counter the loss of burned-out employees who go on strike or who leave healthcare entirely. On a positive note, Holloran sees contract labor use decreasing in the future.

What’s Next?

There’s a steep road ahead for nonprofits but Holloran see positive changes. “We are beginning to come out of the worst of it,” he told Healthcare Dive. However, he added, “Hospitals should not expect to ‘grow [their] way out’ of soaring labor expenses by raising revenues or increasing hospital admissions.”

Like Johnson, Holloran stressed the importance of looking for long-term solutions. With rising expenses, declining revenues, and increased labor costs projected to continue for years, “hospitals are putting recruiting and retention efforts ‘on steroids’ amid challenges,” he noted.

One coming improvement is that hospitals “can look toward commercial payer contracts to ease high expenses,” Holloran predicted.

“Payer contracts fall in the approximately 25% to 30% of non-fixed revenue that hospitals have the ability to control. … The ratings agency [Fitch] now expects to see a shift from long-term contracts to single-year contracts as nonprofits attempt to ease expenses,” Healthcare Dive noted.

It appears that, for the foreseeable future, clinical laboratories will continue to feel the pressures brought on by mergers and acquisitions as the healthcare industry struggles to find solutions to the economic downturn and loss of qualified staff following the COVID-19 pandemic.

—Kristin Althea O’Connor

Related Information:

Hospital, Health System Mergers and Acquisitions Impact Clinical Laboratories

Kaufman Hall National Hospital Flash Report

Cracks in the Foundation—Five Structural Defects Are Undermining Nonprofit Healthcare

The End of Traditional Nonprofit Healthcare Business Models?

Nonprofit Hospitals, Hammered by Soaring Expenses, Have ‘Deteriorating’ Outlook: Fitch