2023 is shaping up to be a mixed bag in healthcare financial decision making—but there are several trends that financial leaders will benefit from keeping on top of. This is especially true as legislation and decisions of previous years take effect and the COVID-19 pandemic continues to drive staffing and resource challenges. 

1. Margins will remain depressed—but there’s “light at the end of the tunnel.”

2023 is shaping up to be a rough year for hospital margins, but it might also be a year when things finally start to turn around. Senior director and sector leader for Fitch Ratings, Kevin Holloran sees change coming. “We think we are beginning to come out of the worst of it…It’s going to be another difficult year…somewhere in 2023, we will get…closer to back to normal…there is some light at the end of the tunnel.” This is good news, seeing as the percent of hospitals with negative ratings outlooks jumped from 3% to 7% in 2022. 

But while the potential for more downgrades is possible, so is change. Some hospitals have found success in improving margins while challenges in addressing labor shortages are starting to fall away. At the same time, operating margins could also be slow to recover. 

Through all this, hospitals and health systems will navigate inflation and higher labor costs, meaning tough negotiations with both payers and labor—on top of the likely need for changes during hospital budget season.

Solution: Margin analysis will become a necessity

What used to be an advanced function of hospital finance will become a base need in 2023 as challenges become even more complex and the status quo drifts further into the rearview mirror. 

Hospitals and health systems will find themselves increasingly pressured to look at profitability through a granular lens, stepping away from yesterday’s overly simplistic approaches to budgeting and labor costs. Expect to see more providers in your area refreshing their approach to hospital budget season and walking away from volume-based reimbursement, instead diving into a deeper understanding of their margins through case-by-case profitability through advanced cost accounting.  

2. Financial recovery will be a long-term project—but planning makes a difference.

Healthcare hasn’t held up to its “recession proof” reputation recently, meaning that recovery is going to involve some untested waters. This is for a few reasons

Primarily, labor shortages, of nurses especially, will likely continue to get worse. Nursing vacancies have more than doubled since the beginning of the pandemic and hospitals have lost 105,000 employees. While the days of peak contingent labor costs are likely behind us, expect overall wage costs to continue to increase, especially as much of the remaining workforce nears retirement. On top of this, though, payment rates will probably fail to keep pace with rising costs—for example, Medicare reimbursement is already slated to fall short of hospital costs. While there is opportunity to recover ground in commercial rates, hospitals and health systems won’t likely see the effects of contract updates until a significant number of contracts are renegotiated. 

Solution: Refresh your planning tools

Unless they’ve made recent updates, most providers will need to take a fresh look at the tools they use to navigate financial well-being. This will include the decision support software used in evaluating financial performance, understanding decision impact on staffing, tracking financial outcomes, and the overall hospital budget process. 

3. You’ll need to track cost by payer type—and the tools you’ll need already exist.

Cost management is the theme for 2023, which means a need for deeper insights into how those costs are distributed across your payer mix. 

Expect to see a shift in costs from individual payers as the 65+ population continues to grow and more seniors sign up for Medicare Advantage plans. At the same time, though, according to McKinsey, Medicaid enrollment could fall by about ten million over the next five years due to legislation that gives states the ability to restart eligibility redeterminations that were paused during the COVID public health emergency. 

Rethinking hospital budget season

Solution: Granular insights into costs

Many hospitals are planning on raising prices, but this isn’t an exercise that should be taken on without accurate understanding of costs. As these changes play out in 2023 and beyond, you’ll need precise, data-based insights in your arsenal to fuel smart contract negotiations and service line decisions across all payers. 

4.Hospitals get another year to prep for price transparency—but you’ll need to make changes today

The federal hospital price transparency rule has just hit its two-year anniversary—and hospital leaders will need to move beyond the bare minimum of posting standard charges and dodging financial penalties in 2023. Full compliance means displaying a shoppable list of services that’s consumer-friendly and detailed in plain language, grouping procedures with ancillary services. The Semi-Annual Hospital Price Transparency Report has noted that compliance has slowed significantly, with only 16% compliance almost 20 months after implementation of the rule. 

2023 could shape up to be the year we get a real understanding of what price transparency means. Earlier studies on price transparency like this one out of the American Journal of Managed Care have revealed that, while patients have expressed frustration with costs and generally like the idea of shopping, they do still prioritize quality and loyalty when choosing providers. And most importantly, there are increasing public calls for CMS to move beyond its lighter approach to enforcement—the Kaiser Family Foundation found that 95% of Americans want price transparency to be a key priority, beating out any other presented healthcare reform. 

Solution: Margin analysis will be necessary for successful commercial pricing strategies

The future of price transparency is murky, but whichever way it turns, post-price transparency decision-making will take a new perspective rooted in cost accounting to identify cost drivers.

5. Rural hospitals will face greater closure risk—but specialized support can help

The warnings of rural hospital closure risk have been sounding for years now, and 2023 looks like things are going to be even more intense. Currently, six states are at risk of half or more of their rural hospitals closing and all states but seven have at least one rural hospital facing immediate risk of closure.

Over 150 rural hospitals closed between 2005 and 2019, with another 19 shuttering in 2020, and six in 2021 and 2022. The last two years were buffered by pandemic-related financial assistance but as they expire, the Center for Healthcare Quality and Payment Reform (CHQPR) expects to see increased risk. These closures have been fueled by losses in patient services but moving forward, inflation and workforce challenges will likely exacerbate the issue. 

Many potential solutions are being floated around, including conversion to rural emergency hospitals, expanding Medicaid eligibility, and health plans increasing payments to rural hospitals to address negative margins. 

Solution: You’ll need a specialized financial decision support tool

As community hospital leaders face increasing pressures, they’ll need to identify opportunities to make cuts that don’t negatively impact care—but this will require the right software and partnerships. These options should include powerful tools that help hospital leaders manage their bottom line just like larger hospitals. Flexibility and alignment with the goals and needs of community-focused hospitals will be critical. This is a good place to start exploring your options. 

As we move into 2023, we want to invite you to keep up with our insights and efforts to change the face of healthcare decision support software and outcomes. You can start that process by learning more about Oi Health here