The Economics of Healthcare - Part 10

The Economics of Healthcare - Part 10

Though we have presented on a historical basis that healthcare has been recession proof, it does not mean that there are not issues in healthcare that create major problems in good times and in bad times. I have told many students and investment bankers that with healthcare comprising over 20% of the U.S. economy, there is always a part of the industry that is on fire and one that is melting down. Today, insurance companies are on fire as companies continue expanding into healthcare.

As we mentioned previously, we are now seeing the challenges of burnout and high labor cost in the U.S. beginning to impact healthcare companies. Particularly hard hit are hospitals whose biggest cost is people both by the nature of their business, as well as the heavy regulations.

The reality is, both union and non-union facilities are experiencing personnel shortage and growing labor cost as the cost of replacement workers, whether permanent or traveler, grows. We also suspect to see a drop in productivity however, that will take longer to document.

As further proof, note the following article in Modern Healthcare[1]. Below are two key points made in this report:

“A New York based hospital “announced it would pause admissions to its adolescent inpatient mental health unit over staffing in May. “It’s been frustrating. The challenging situation we are in—as a healthcare provider and together as a community—is related to the national healthcare staffing crisis. This crisis wasn’t caused by COVID, but the ripple effects of the pandemic certainly complicate it….”

The article continues with the following:

“This year has been the worst financially for hospitals since the pandemic, according to research by healthcare consultancy Kaufman Hall. Nationally, operating margins were -0.98% in July, the seventh negative month in a row, the firm found. The median change in operating margins was -63.9% compared with the year before.”

Operating margins for many urban hospitals were already diminishing due to increasing cost to maintain aging infrastructure, supply chain challenges, and the aforementioned labor cost. When coupled with an inability to simply reprice services, as many other industries can do and ‘pass some or all costs to the consumer,’ hospitals do not have this option – they are caught between government (Medicare/Medicaid) and private insurance contracts. Also recently, we have read many other articles noting 100s of hospitals closing or cutting cost, one stood out as it stated that “17 hospitals scaling back care” mostly due to “financial challenges and staffing issues.”[2]

This problem is not just a rural, smaller hospital, or even for-profit versus non-profit issues. World famous Cleveland Clinic just announced that it had incurred a US$1 billion loss for the first six months of 2022[3].

Though Cleveland Clinic had revenues of over US$6 billion, it was not enough to make up for the rapidly escalating cost of operation. This is what they reported:

 “Nationwide labor shortages have created staffing challenges that have resulted in increased overtime costs and premium pay for employed caregivers as well as an increase in the utilization of agency nurses and other temporary personnel to meet the demand of patient activity,” Cleveland Clinic said in an earnings release. “Supplies, pharmaceuticals and other nonlabor expenses have also increased due to recent inflationary trends and supply chain challenges.”

How are some hospitals adapting?

Many hospitals are finding efficiencies, in part leveraging technology to integrate physical care with remote or telemedicine – in particular, with hospital employed specialists. The COVID pandemic brought telemedicine to the forefront so now the radiologist or the neurologist does not have to come to see the patient; they can just “Zoom-In.” That makes their time way more efficient. We are also seeing better and more dynamic scheduling of staff and more use of “telemetry” of connected technologies. We expect hospitals to use more technology and more hybrid-care to cope with the financial challenges, while price adjustments from active contracts remain in force and government program catch up with cost.

More on that in a future blog.

-Noel J. Guillama, Chairman