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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....
5 min read
Futura Healthcare
December 14, 2022 at 7:30 AM
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.
- 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:
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.
– 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:
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:
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:
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:
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:
“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!
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