How Hospitals Can Prevent Inflation-Driven Losses in 2023

Chicken wings and gas prices are dropping like a rock. Hooray! We’ve crested the post-COVID inflation peak, and now prices will drop back to normal. Right? No. Experts say this will be a long ride.

The Fed is bullish that it will meet its 2% inflation target in 2023, but experts say that’s magical thinking. Historically, in periods when the inflation rate has topped 8%, it’s taken 6-20 years for inflation to fall back down to 3%. In 2022, the U.S. inflation rate was over 8% for a full 8 months.

“History indicates that the median time it will take before inflation eases below 3% is 10 years. That’s not a typo.” 

- Barrons.com November 2022

To put a dollar impact on that, McKinsey & Company’s recent healthcare report references a ‘gathering storm’ and predicts that U.S. healthcare spending will increase by $370 billion over the next 5 years.

With margins already razor thin, there is great potential for earnings to evaporate.

Face it. Doing more of the same won’t be enough to survive the next few years. Your teams are looking to you to lead them out of this storm. Let’s examine the market conditions that, if not checked, could take a huge bite out of bottom-line profitability and where you should focus on making changes in 2023.

Three Inflation Causes

1. Clinical Labor Costs

McKinsey projects a shortfall of 200,000 to 450,000 registered nurses and 50,000 to 80,000 physicians – 10%-20% and 6%-10% of the workforce, respectively – by 2025. This decline of skilled nurses, clinicians, and doctors is a major cause of increased healthcare spending as demand for skilled caregivers will exceed supply. For example:

• We can expect a growing call for nurses in ambulatory care, home care, and hospice facilities. This has the potential to affect a 7% to 10% annual increase in demand for RNs between 2021 and 2025.
• Above-average attrition and retirement will be greater than the number of newly minted RNs over that timeframe, reducing their numbers right when demand for quality patient care is expected to become more acute. 
• Clinical labor shortages could create a $170 billion rise in healthcare spending as a result of wage increases and a scarcity of resources that could impede access to care. 

Inevitably, the pressure created by the decline in skilled clinical labor falls disproportionately on underserved and under-resourced communities, making the goal of health equity more elusive.

“Driving the growth in labor expenses has been an increased reliance on contract staff, especially contract nurses, who are integral members of the clinical team.”

– The American Hospital Association

2. Nonclinical Labor Costs

The nonclinical labor pool represents job functions like nurses’ aides and personal care aides who are not engaged in any type of face-to-face contact with patients. Smart hospital leaders will look at nonclinical tasks performed by clinicians and offload them to nonclinical staff. It’s a great solution, but be advised there are ripple effects. Watch for them.

Added burdens on nonclinical staff have the potential to create dissatisfaction, decrease retention, and – as a result of a shrinking labor pool – inflate nonclinical salaries. Here’s why:

• Incremental wage increases in the nonclinical segment tie directly to inflation growth, according to McKinsey. McKinsey estimates that wages in this segment could be up 3.1% over initial estimates in 2022.
• Incremental cost increases will follow through 2024 before leveling off by 2025. But these are increases on top of already-inflated costs in 2021 and 2022. We can anticipate an incremental $90 billion in healthcare spending by providers in 2027.

3. Supply Costs (Nonlabor)

The early days of the pandemic conditioned hospitals and health systems to do without many essential items or improvise. How can we forget the shortages of personal protective equipment that hospitals were desperately seeking to treat the flood of COVID patients?

Heightened demand for essential hospital supplies and equipment – much of it produced overseas – far exceeded the ability to supply it as countries of origin shut down their economies and reduced manufacturing to a trickle.  

Once the virus was brought under control, production ramped up. However, backlogs in manufacturing and shipping created logistical and distribution bottlenecks across the supply chain. This slowed the delivery of essential supplies and equipment, ultimately increasing costs for the industry. Supply-chain challenges are still a reality and are projected to drive up nonlabor costs by approximately $110 billion by 2027.

Four Ways to Offset Inflationary Pressure

“Accelerating and scaling innovation in care delivery transformation, productivity improvement, technology enablement, and organizational growth will be central to healthcare leaders’ efforts. Together, investing in these areas could create value of more than $1 trillion and up to $1.5 trillion.”

                – McKinsey & Company, November 2022

McKinsey researchers advise that healthcare organizations should evaluate and dig into these four inflation-offsetting strategies in 2023:

1. Transform Care Delivery

Patient care delivery is morphing from hospital-centric to a more personalized, patient-centric model supported by the steady flow of emerging technology. The shifts to home care and virtual care have now become cost-effective treatment and monitoring options. In addition, advances in secure patient data and analytics are accelerating more accurate decision-making at any point along the caregiving cycle.

If hospitals consider implementing the following initiatives, inflationary pressure could be reduced and savings of $420 billion-$550 billion generated:

• Transitioning 20%-25% of their hospital-based patients to alternative sites of care, e.g., retail clinics, virtual health, and community health centers. This step can help make healthcare more accessible by adding more patient touchpoints and expanding location options for mental health care services, well visits, and more.
• Prioritizing value-based care. In this scenario, hospitals and physicians are paid based on patient health outcomes and not on the amount of healthcare services they deliver (fee-for-service model). Increasing the percentage of patient participation in value-based care agreements, for example, up from 6% to 40%, is a more cost-effective method for tracking and measuring health outcomes against the cost of delivering the outcomes.

2. Improve Clinical Productivity 

A breakout of healthcare institution costs indicates that 75%, on average, are linked to clinical activity while 25% result from administrative functions. Here are some examples of ways hospitals can reduce costs by optimizing clinical productivity:

• Consolidate smaller solutions – e.g., a patient discharge planning application or a tool that can help optimize assets in a surgical center – to create a robust, single platform that can support fast clinician access and use across multiple departments. It sounds minor, but the extra time it takes clinicians to sign into, open, close, and switch applications adds up.
• Maximize the physician fill rate. This represents the total number of patients seen by doctors through scheduled appointments during business hours. With industry fill rates averaging 90%-95%, the report recommends hospitals use 95% as their target. Doing so will allow more patients to be seen and treated, allowing physicians to extend access to quality patient care. Implementing these two initiatives has the potential to yield $160 billion-$310 billion in savings.
• Solutions like RFID can reduce turnaround time in critical revenue-generating areas like operating rooms. Adventist Health White Memorial reduced their average OR turnaround time by just 3 minutes. This ‘small’ change amounted to a value of $970k/yr.

3. Simplify Administrative Functions

Workflow productivity studies are a tremendous tool for hospitals looking for quick, sustainable productivity improvements that also reduce costs.

Take wheelchairs, for example. If you have a team of just 7 clinicians, and once a week each one of them spends just 20 minutes looking for a wheelchair, the cost of their time searching for wheelchairs comes to nearly $7,000/yr. A basic transport chair costs about $200. Making sure more wheelchairs are readily available is a no-brainer, and a thorough workflow productivity study jumpstarts the process to find these opportunities.

Four key areas to look for savings:

1. Pay attention to clock-in/clock-out times and incremental overtime
2. Staff according to need, not according to budget
3. Make sure that clinicians are working to the top of their license
4. Watch for daily/weekly deviations in patient volume

This work falls under the umbrella of Strategic Cost Management, which Futura has written about extensively. Take a look at ‘Four Ways to Save on Hospital Labor Costs’ for more ideas.

 4. Capitalize on Enabling Technologies

McKinsey puts a value of $250-$300B on innovations in this last category. They also urge action – saying that “Those who act now could set themselves apart in leading transformative improvements of healthcare and accrue a sustainable competitive advantage.”

Here are some examples of how enabling technologies can increase your hospital’s bottom line:

• Virtual care lowers the cost of care delivery
• eLearning allows you to onboard more clinicians to your technology tools faster, more consistently, and at a lower cost than manual training
• RFID tracking can drastically reduce the amount of time your clinicians spend on manual inventory tracking

“Leaders plan to ramp up training in digital technologies, helping staff feel less overwhelmed by increasingly data-centric processes, and more ready to embrace new, digitally focused responsibilities and ways of working.”

                – Philips Future Health Index 2022 Report

The current – and significant – strain on hospital finances is not likely to lessen in the foreseeable future. Doing the same thing next year will not be enough to lead your team out of potential disaster. You’ll need innovation, strong teams, and fast action. But the payoff is huge. Not only can you emerge from the coming tough economic times in a good place, you’re likely to come out ahead of many competitors who were less committed to the future of their communities and teams. To your success!