By Tracey Drury – Reporter, Buffalo Business First
Jan 20, 2023
After a challenging two years, hospital executives are buckling in for what could be the worst year yet with ongoing cost increases, labor difficulties and revenue shortfalls.
The rest of the community should be concerned as well: With combined revenue of more than $5.5 billion, the Western New York hospital sector is a major employer that touches just about everyone, from patients and families to hundreds if not thousands of vendors and businesses.
A mid-December report by the Healthcare Association of New York State did not mince words, warning that three out of five hospitals statewide are underwater, with a fourth on thin ice:
• 64% of hospitals reported a negative operating margin, while 85% reported negative or unsustainable margins of less than 3%.
• 100% of hospitals reported nursing shortages they can’t fill, while 75% said other key worker positions can’t be filled.
• 49% percent of hospitals reported reductions or eliminated services.
While size and scope have often been cited in the past as a safeguard for financial woes, even the region’s largest hospital systems are suffering: Kaleida Health and Catholic Health each projected losses topping $100 million for 2022, while Erie County Medical Center Corp. had an $80 million loss through November.
That follows a difficult 2021, when all three reported losses in the eight and nine-figure range. Independent hospitals also suffered: UPMC Chautauqua lost $12.5 million while Niagara Falls Memorial Medical Center lost $9.2 million, with losses also reported by Wyoming County Community Health System, Eastern Niagara Hospital and Brooks-TLC Hospital System.
It’s a far cry from early 2020, when most hospitals in the region were able to make do through the first year of the pandemic thanks to state and federal aid. But that stopped about 18 months ago, said Ken Schoetz, vice president of the Healthcare Association of Western and Central New York.
“All of the hospitals who were doing okay and kept things going, they’re well under water,” he said. “These are not fake calls for help. They are real and the help that’s required is needed now, because the circumstances have changed significantly since the pandemic.”
Contributing factors
How did things get so bad? Industry executives point to the same inflationary issues affecting other businesses and individuals. The problem is, payment for services lags far behind:
Last year, New York increased Medicaid reimbursement by 1% — the first increase in 12 years. But that still covers just $0.61 on the dollar; while federal Medicare reimbursement is $0.84 for every dollar spent. That’s on top of “exploding” labor costs that make up 60% of a typical hospital budget.
“There’s no business that can survive with that kind of financial plan,” Schoetz said. “This has been an ongoing problem for smaller hospitals and independent hospitals forever, and now it is not just the smaller hospitals. … It’s now a problem for the systems and bigger hospitals as well.”
While hospitals nationwide are struggling, New York hospitals seem to be having an even tougher problem.
Although margins remain negative for 2022 for hospitals nationwide, many saw a slight increase in operating margins during November thanks to lower expenses and increased patient revenue, according to a report by health care management consultancy Kaufman Hall, which studied data from more than 900 hospitals.
That was not the case, however, for hospitals in New York and across the Northeast, which continued to see performance declines from falling volumes and revenues without commensurate declines in expenses, said Erik Swanson, senior vice president at Kaufman Hall.
Overall expenses for 2022 through November were up 15.4% compared to the same period in 2019, with the cost of drugs increasing 19.6% and total cost of labor up 22.5%.
Labor shortages – especially in the Northeast and in New York in particular – remain a major challenge, he said, and where workers are available, they’re costing a lot more.
On the topic of labor, the cost for agency nurses to help supplement shortages exploded over the past two years, with weekly pay increasing in New York from $2,062 in January 2020 to $3,523 in December 2022; surpassing the national rates of $1,896 and $3,177, respectively.
At Catholic Health, staffing remains a major issue, but so do inflationary costs and the geopolitical issues taking place across the globe, CEO Mark Sullivan said.
“It’s the snow globe – you can’t really see what’s in there until it’s settled,” he said. “The snow globe is still shaking, with the workforce emigration out of health care and competing industries for the same workforce. What we’re seeing nationally is the effect of moving from crisis to stabilization and that’s still going to be part of 2023. We’re trying to be adaptable and change our approach. Catholic Health has to pivot.”
Generating new revenue
With outpatient revenue in New York seeing growth of about 11%, hospitals or health systems have capitalized on providing services at off-campus settings by building facilities or buying ownership in ambulatory surgery centers either on their own or in partnership with physicians and private groups.
That helps offset some of losses on the inpatient care delivery side but requires cost controls and an understanding of what the hospital’s patient population looks like and needs.
“What we are seeing is organizations and hospitals that have positioned themselves to have a stronger, larger outpatient ambulatory footprint tend to be more well-positioned to capture that revenue and provide that care to patients who need it,” Swanson said. “It’s an area of optimizing, but also a challenge for organizations who haven’t already established themselves and will be challenged to do so.”
Other areas with revenue opportunities include expanded telemedicine as well as retail pharmacies, imaging and lab facilities – though there are more external competitors in those areas.
For Catholic Health, that includes continuing to build its ambulatory surgery capacity off campus.
“Surgery continues to migrate to outpatient,” Sullivan said. “So if you rewind to when I became CEO, we had zero ambulatory surgery centers. Now, we have the geography throughout the region, high-quality ambulatory surgery centers and that’s part of the future of health care. So that migration balanced with our outstanding quality and acute care, we just need to stabilize that.”
And though patient volume is starting to return, including emergency department and medical-surgical nursing, it’s not back to pre-pandemic levels and remains sluggish on the surgery side.
“We still need to lead the region in quality, provide access and make decisions on what our footprint looks like. Do we need more medical beds? Do we need to invest in home care or specialty pharmacy or surgery?” Sullivan said. “The further diversification of our continuum is important but we have to evaluate those pieces.”
Erie County Medical Center is working to grow successful revenue lines, including orthopedics and reconstructive plastic surgery, while continuing to work with Kaleida to support primary care and specialty practices through the Great Lakes Integrated Network.
The longterm goal there is to help coordinate care for patients to keep them out of the emergency department, where it costs more to provide care that’s not necessarily appropriate for the ED, said Thomas Quatroche Jr., president and CEO.
When hospitals are successful in those efforts, it leads to more funding from state and commercial payers through risk-based and value-based payment programs, Quatroche said.
“What we’re doing will take some time,” he said. “The goal is really less utilization, which means less costly care in hospitals, which is also, frankly, better quality care.”
ECMC also invested in new robotics systems this year, which helps from a clinical standpoint and also to recruit younger doctors. For 2023, ECMC is planning for a $700 budget, with a goal of cutting its losses in half to about $35 million, he said.
Getting to break-even would require cutting critical services that just aren’t feasible, he said.
“Our ability to invest in our organization will be important,” Quatroche said. “Eventually we would like to be able to expand our operating rooms as well.
National impact
The same difficulties are affecting hospitals across the country, including stalwarts like the Cleveland Clinic — which reported losing $1.5 billion through third quarter. Mass General Brigham in Boston – that state’s largest health system — lost $2.3 billion in 2022.
While Covid-19 has subsided somewhat, the longterm ramifications of canceled surgeries, expenses and double-digit inflation increases continue, Quatroche said.
“You’re seeing major organizations who have high amounts of commercial patients… these are organizations that traditionally had very, very high profits so this is a national problem,” he said. “We’ve been through a war and need to be rebuilt and the federal government has their head in the sand over this issue.”
Quatroche said ECMC continues talks with both government and commercial payers to boost rates, as well as come up with ways to reimburse the hospital for patients who end up remaining in beds or in the emergency department for days and weeks when they can’t be discharged into the community.
“It’s a troubling dynamic,” he said. “This is the toughest dynamic I’ve seen in almost 20 years in health care.”
Kaleida Health hopes to turn things around over the next two years with a $300 million improvement plan that includes negotiating rates with payers, as well as developing or strengthening profit-making operations.
“The goal for all health care organizations is to maintain cash moving through 2023,” CEO Don Boyd said. "There are some select growth opportunities. We are starting to see – although it’s slow – some return of volume, but it’s playing itself out differently by service line and by hospital.”
Building and strengthening that network will require making the system easier to navigate for patients when it comes to both referrals and where they physically go for care. Kaleida and its partners have been working to identify three regional hub sites in the Northtowns, Southtowns and in the City of Buffalo.
One possible site could be the new 160,000-square-foot 716 Health medical office building Kaleida is building with UBMD and other partners in Amherst, a facility that will include physician offices as well as an ambulatory surgery center.
It’s part of Kaleida’s larger ambulatory services plan, which has a target of shifting 60% of care to outpatient settings, Boyd said.
“We’re looking at markets where that makes sense, where there’s an unmet need or where we can physically consolidate locations we have to improve the patient experience,” Boyd said.
Research focus
Roswell Park Comprehensive Cancer Center continues to be successful thanks to its specialty focus and research grant efforts.
That strength comes from expanded cancer services on and off campus, as well as from new patients coming from partner institutions associates with its network across New York.
CEO Candace Johnson anticipates ongoing growth as Roswell Park’s immunotherapy program continues to develop, with treatments for more types of cancer.
“The real challenge is can we use that technology and that approach to treat other cancers like pancreatic, which can be really dismal, or ovarian or even some breast cancers and lung cancers,” Johnson said.
It's that innovation, Johnson said, that draws people – patients and physicians and surgeons and researchers – to Roswell Park.
“What supports our business growth is that innovation,” she said. “The more we do for innovation and we do in our community, it does help our business aspect.”
Though the hospital wasn’t impacted in the same way as other area hospitals by the pandemic, in 2022 Roswell Park faced many of the same stressors when it comes to increased costs, declining reimbursements and workforce challenges.
“The landscape is changing for all of us,” Johnson said. “Just like in your house, everything is going up, the cost of goods is going up and it’s going to get harder and harder.”