The healthcare industry is facing serious financial risk. While many organizations were already struggling under financial pressures before 2020, the COVID-19 pandemic exacerbated the issue. Now, healthcare organizations are facing mounting challenges from inflation, outdated vendor and payer contracts, and reimbursement rate reductions compounded by the sunset of COVID relief funding that has reduced access to direct help from the government.
Generally, several signs of financial risk span all industries, including healthcare, such as:
- Tight liquidity. Organizations may be experiencing insufficient cash on hand, inability to obtain new financing, and inability to pay debts when due.
- Degradation of market share. As the market becomes more saturated with new entrants and the cost of acquiring new customers continues to increase, many organizations are seeing their market share decline.
- Labor shortage. A lack of available talent across industries and at various experience levels poses a threat to organizations’ abilities to produce goods or deliverables or provide services.
- High inflation and cost of goods. Even as inflation begins to ease, the cost of goods remains high, causing consumers to rethink their spending habits.
- Evolving consumer preferences. Because of elevated inflation and high costs of goods, consumer discretionary spending is changing. Consumers are sensitive to price, foregoing non-essentials, purchasing less, or pivoting to generic brands to save money.
In addition to these industry-agnostic risks, healthcare faces unique financial risks and considerations. In this insight, we look at the specific challenges facing the entire healthcare industry, as well as select subsectors that are at a high risk of financial instability.
Healthcare’s Financial Risk Landscape
For healthcare providers, regardless of subsector, threats to financial stability include:
- Reduced access to capital. Between rising levels of debt, tight liquidity, being fully drawn on credit facilities, and declining margins, healthcare organizations have less capital to work with.
- Declining reimbursement rates. Healthcare payers continue to reduce reimbursement rates for several services, including a proposed physician rate cut of more than 3% for 2024.
- Loss of referrals. Patients are increasingly attracted to flexible coverage options rather than relying on employer-sponsored healthcare coverage. Reasons may include lack of patient engagement, ineffective patient retention strategies, physician retirements, or lack of expertise on the part of individual physicians.
- Rising supply and labor costs. Supply costs continue to rise amid inflation, and so does the cost of labor in the healthcare industry — particularly contract labor.
In addition to these threats, individual healthcare subsectors face unique financial challenges. At the same time, some financial risks impact specific subsectors more than others. Executives in these industry segments should understand which threats may pose risks to their organizations, and what adjustments to operations or capital structures may help their businesses improve or maintain financial stability.
In the next sections, we look at each specific healthcare subsector and examine the primary factors — which are already impacting these organizations — and the secondary factors — which may be starting to impact these organizations.