Healthcare Providers Are Feeling the Squeeze: Cost-cutting alone just won’t cut it

“Healthcare providers as a group continue to operate with slim and shrinking margins,” according to recent analysis from Modern Healthcare. Sadly, that’s not a surprise to most of us. The study—which included acute-care, post-acute care, rehabilitation and specialty hospital groups as well as stand-alone hospitals— found that the average operating margin in 2013 was 3.1%, which was down from 3.6% in 2012. Over 61% of organizations saw their operating margins erode over the previous year.

While we’ve seen this coming, the news is sobering. And analysts are skeptical that the worst is over. According to Modern Healthcare, all three credit-rating agencies hold negative outlooks for the not-for-profit healthcare sector.

Of the healthcare organizations in the Modern Healthcare study, only 84.4% of provider organizations operated in the black last year, down from 89.2% in 2012. Last year’s numbers are even below the 86.9% of providers that reported positive results in 2011.

How to make sense of the bump in margin in 2012? That brief improvement came from cost-cutting, says Martin Arrick, managing director at Standard & Poor’s. And while the strategy worked, it was only temporarily. “Hospitals are running out of room to cut costs” even as the decline in patient volume accelerates, Arrick said. “It’s all kind of catching up to us.”

Analysts have said it: cost cutting alone will not keep healthcare organizations in the black. It’s up to organizations to explore strategic opportunities that help them manage costs and create greater efficiency. Revenue from patient care has been squeezed, and costs continue to rise as providers invest in the new technology and care-coordination staff they need to participate in healthcare reform’s new payment models.

We are at the precipice of the era of value-driven healthcare. That means determining optimum resource allocation for future needs. As Todd Hofheins, senior vice president and chief financial officer at Renton, Wash.-based Providence Health & Services, told Modern Healthcare, “Unfortunately, you can’t just get there by cutting costs—you have to get there by investment.”

Look for another post from me soon that delves more into the alternatives to cost-cutting.


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