What’s Driving Margin Erosion in Healthcare? Your Guide to Preventing Margin Erosion
High Labor and Contract Expenses
These expenses, which have trended upward over the past several years, have plateaued but show no signs of falling. Even with costs plateauing, April 2023’s performance showed a 3% increase in labor expenses.
- Impact: VERY HIGH
- Expected Duration: ENDURING
Interest Rate Hikes
The Fed’s recent interest rate hikes have increased the cost of borrowing. We could see further increases to the cost of capital as economic indicators like the better-than-expected May 2023 jobs report and wage increases may cause the Fed to bump rates up again later this year to cool ongoing inflation.
- Impact: VERY HIGH
- Expected Duration: ENDURING
High Inflation
High inflation increases costs in healthcare. May 2023’s jobs report and wage rate increase data may prompt a Fed rate increase to offset ongoing inflationary pressures that, for example, have contributed to mortgage rate increases being their highest since November 2022.
- Impact: HIGH
- Expected Duration: ENDURING
Low Capacity
Shifts in case mix are driving higher bed utilization. Hospital stays are also trending longer, due in part to heightened acuity resulting from delayed care during the pandemic. Furthermore, staffing shortages are contributing to a lack of capacity and a reduction in some cases of elective services.
- Impact: HIGH
- Expected Duration: ENDURING
Decreasing Commercial Coverage
Providers face lower reimbursement rates as coverage by nongovernmental organizations declines. This problem will worsen as an aging U.S. population leads to greater numbers of people covered under government programs, which provide lower reimbursement rates. An unfortunate outcome of the debt ceiling resolution is increased restrictions around employment requirements that may actually reduce the number of insured Americans, which will also extend to the Food Stamps program.
- Impact: HIGH
- Expected Duration: ENDURING
Changing Sites of Care
Patients are increasingly seeking care from non-hospital sites of care that pull volume and revenue from provider systems that subsidize many physician groups and practices.
- Impact: On hospital systems: HIGH
- On non-hospital providers: MEDIUM
- Expected Duration: ENDURING
Competition from Non-Traditional Entrants
Non-traditional entrants like retail and tech providers are taking market share away from traditional facilities.
- Impact: HIGH
- Expected Duration: ENDURING
Underperforming Assets
Underperforming service lines or specialty facilities can take a disproportionate amount of capital to maintain for very little ROI.
- Impact: HIGH
- Expected Duration:
- If providers divest/lease/sell these assets: SHORT TERM
- If providers maintain these assets: ENDURING
Supply Cost Increases
Supply costs continue to rise due to geopolitical disruption and lack of geographic diversity in supply chains.
- Impact: MEDIUM-TO-HIGH
- Expected Duration: ENDURING
Underperforming Real Estate
Real estate represents a high fixed cost that can quickly become a financial burden in the event of underperformance.
- Impact: MEDIUM
- Expected Duration:
- If providers regularly assess and adjust their real estate holdings: SHORT TERM
- If providers do not regularly assess and adjust their real estate holdings: ENDURING
Lingering Impacts of COVID-19
Providers are catching up financially after COVID-19, with some still waiting to receive COVID-era payments and reimbursements. However, some organizations planned poorly for Paycheck Protection Program (PPP) repayments and are facing unplanned cash impacts.
- Impact: LOW
- Expected Duration:
- If we do not see another mutated variant: SHORT TERM
- If we do see another mutated variant: ENDURING
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