Kaufman Hall Leaders See Ongoing Cost Pressures on Hospitals, Medical Groups

Leaders at the Chicago-based Kaufman Hall, a Vizient company, on Sep. 8 released their latest National Hospital Flash Report, based on July data. The report contained three key findings:

1.      Patient volumes and revenues are trending upward. However, bad debt and charity care continue to be elevated.

2.      Expense growth is outpacing revenue growth. Non-labor expenses continue to put pressure on hospitals.

3.      Margins have improved over prior years, though there has been some softening in recent months. Given an uncertain future outlook, many hospitals are taking steps to build long term resiliency.

Per recent findings from their most recent reports, Erik Swanson, managing director and leader of Kaufman Hall’s Data Science and Analytics Team, and Matthew Bates, managing director and leader of the firm’s Physician Enterprise Service Line, spoke recently with Healthcare Innovation Editor-in-Chief Mark Hagland to share their perspectives on the current moment in hospital, medical group, and health system financial and operational stability, and prospects for the near future. Below are excerpts from that interview.

Looking at some of the most recent reports you’ve assembled and published, what are your top-line thoughts, first, on hospitals and health systems?

Erik Swanson: None of what’s happening represents any large break in trends. But hospitals continue to outperform prior years; but they’re still in a relatively tenuous position. And when you look at the system as a whole, you’re seeing 1-percent operating margins. Performance has improved: days cash on hand and capital, have improved; some organizations are trying to build financial resiliency before the OBBB [One Big Beautiful Bill Act passed into law in July] impacts start, around October.

We’re still facing some challenging expense pressures—mostly drugs and supplies—both price increases and utilization increases as the population ages and the level of intensity continues to rise in hospitals—and not just because the population is aging, but because organizations are trying to push patients into lower-cost care setting.

And we’re seeing rising debt and charity care loads. And we may see more patients moving into governmental payers, and possibly also into self-pay and uninsured. So again, we’re observing some of that, and to the extent that that plays a larger role, that will create pressures for hospitals. So there are optimistic and pessimistic signs. And hospitals continue to rely on medical groups and physicians as their front door more so than EDs. It all weaves together into a story.

Matthew Bates: On the positive front, our volumes are now higher than they were pre-COVID, so doctors are seeing more patients; they’re very busy. Their productivity is up. Revenue is also up as a result of all that activity. But the work RVUs has been flat to slightly down over the last few years. So they’re working harder but aren’t getting paid more on a unit basis, so they’re not keeping up with inflation. Revenue is up, but expenses are up more. And we’re starting to see support staff levels decreasing.

We talk a lot about physician burnout; we’re starting to see doctors working at a lower support level than before. The doctor can’t greet the patient when they arrive or room them. So I’m talking about support staff, people who help doctors at the ground level. I’m actually hearing of doctors greeting patients, because they can’t find medical assistants to do that.

What about longer-term nurse shortages?

Bates: If the physician is the clinical captain of the ship, well, nurses are the backbone of the healthcare labor force, like the NCOs of the military. And as nurses are fleeing hospitals, they’re increasing moving into ambulatory settings, for the hours and working conditions. It’s a much better work-life balance in the clinics than in the hospitals. So we’re seeing a lot of pressure. The challenge on the ambulatory clinic side is that they’re much more expensive than medical assistants. And we’ve spent the last decade focusing on helping clinicians work at top of license, but now, it turns out that not everybody wants to work at the top of their license; many want a work-life balance that works for them. And if I work in medical clinic, I don’t work nights, weekends, or holidays, and that makes it easier to raise children. They are less burned out, and they like the environment. And I’ve never heard a nurse say to me, “I’m not working at the top of my license.”

Erik: Hospitals are thinking about how they reimagine the workforce of the future, and recruitment and retention. Everything that Matthew said here applies. Fortunately, the reliance on travel/agency nurses has considerably abated. But there are fewer nurses in the hospital, and the way in which organizations recruit and retain them—how do they create a better work-life balance? And how do they have career progression? Upskilling. Flow pools. And then hospitals are faced with the challenge that if they want people to work at the top of their license, they’re competing with Amazons and Wal-Marts to fill some of those lower-paid positions.

Can the intelligent use of AI help with burnout and staffing issues?

Bates: AI is definitely in the classic hype cycle; you read some reports, it’s going to replace all of us tomorrow. I don’t think that’s going to happen. But is AI making positive impacts? Absolutely. In the physician space, there are a handful of apps, including one my own primary care doctor uses—ambient intelligence. And that technology is very quickly spreading, and it’s working, and we’re seeing productivity improvement in that. It’s largely offsetting pajama time, and that’s huge. Open evidence: Chat GPT meets clinical journal evidence. One out of every four doctors in America is using it on a daily basis: it scours all the clinical evidence out there—it’s a form of Chat GPT, and it’s helping physicians, who can’t keep up with hundreds of studies being published every day, and that’s a game-changer. Now where AI gets us in trouble is when we try to have AI talk to 80-year-olds and schedule complex medical visits. So use cases matters.

Swanson: You said the point upfront, Matthew, which is that it’s not a panacea, it is in a hype cycle. And the strategic and intelligent implement is absolutely key. By and large, the industry is at a point where they’re really recognizing that the traditional methods of the 1980s aren’t sufficient to solve the problems they have today. We always get frustrated when an airplane lands, and the gate isn’t ready right away; but there are incredibly advanced tools being used in that area. So there’s a lot to be said here about areas where AI could advance.

Matthews: There’s can we do it, should we do it, how do we do it? There are certain areas of imaging diagnostics where AI is as good as humans. But if AI gets a diagnosis wrong, can you sue a machine? Who writes the chart? So it’s not just AI in isolation; there are medical-legal and workflow issues. Where does AI help? AI is assisting rather than replacing people. We need to stop talking about AI as replacing things and instead about how it supports thing. And I predate laptops. And there were predictions that people would be replaced by computers, especially by laptops and personal computing. And we haven’t seen that.

Is there anything you’d like to add?

Bates: this is a system that’s basically been trying to claw its way back to sustainability, but is barely hanging on by its fingernails. We’re talking about 1 or 2 percent operating margins; that’s not sufficient to invest in technology and other things. And that’s before the OBBB impacts hit. So we’re getting close to a tipping point; the system is not financially sustainable in its current form.