Economic Conditions Push Margins Lower
It is no secret that the past two years have been difficult for healthcare providers. Several issues, exacerbated by the effects of the COVID-19 pandemic, combined to create significant pressure on margins for health systems and private practices alike: rising inflation, supply chain breakdowns, labor shortages, and continually decreasing reimbursement from both payers and patients. All these factors led to disheartening headlines regarding health system losses, hospital closures, and even physicians leaving the profession.(1) Additionally, as of November 2022, Becker’s Hospital Review reported significant dips in cash on hand for multiple large health systems.(2) Despite this decrease in cash, many large health systems still have healthy cash reserves. However, smaller community hospitals may move closer to the edge of sustainability if these trends continue into 2023. These critical healthcare providers will likely need additional government assistance to weather the storm as the economy rebounds from the inflationary pressures of 2022.
Alongside community hospitals, these macroeconomic trends also adversely affected physician practices. In its Q3 2022 Physician Flash Report, Kaufman Hall found a growing divide between revenues and expenses compared to previous years. The data in this report indicated expenses had exceeded revenues, despite year-over-year volume growth in the physician practice sector. The median loss per provider was $227,282, compared to $190,608 from the same period in 2021.(3) Moving forward, simply growing patient volumes may not be enough to be financially viable. Providers will need to tighten their belts on the expense side to mitigate negative financial results. All of these factors may lead to additional consolidation in the physician practice market as independent doctors more seriously consider employment or affiliation offers from both health systems and private equity stakeholders.
Outlook for 2023
Based on the economic factors described above, there are several key topics to know and monitor as 2023 begins. First, there is some positive news for Medicare reimbursement through the final Outpatient Prospective Payment System (OPPS) rule released in late 2022. The rule will implement a slight increase in outpatient payment rates for hospitals. Additionally, it created the new Rural Emergency Hospital (REH) designation to provide a more financially sustainable path for critical access and small rural hospitals at risk of closure. This new provider type is expected to provide more favorable payment rates for eligible facilities for outpatient, emergency, and observation care services.(4) However, transitioning to an REH will require careful planning and execution for prospective entities to meet all guidelines under the rule.
While the OPPS rule provided encouraging reimbursement signs for hospitals, the 2023 CMS Physician Fee Schedule painted a bleaker picture for practices. The new rule, released in late 2022, will cut reimbursement across the board by approximately 4.5% through the new conversion factor. Also, if Congress does not intervene, the rule will implement another 4% reimbursement cut through the Statutory PAYGO sequestration, which had previously been delayed during the pandemic.(5) At the time of writing this article, no congressional action has been taken to avoid these cuts. So it will be essential to track such news as practices prepare their budgets for 2023. Needless to say, additional reimbursement challenges will only exacerbate financial hardships for provider groups in 2023.
Finally, one more item to monitor in 2023 will be the status of the Public Health Emergency (PHE) period declared during the COVID-19 pandemic. If the PHE expires in 2023, then provider groups must understand how their operations and patient population may be affected. One potential impact will come via Medicaid coverage, as the PHE extended eligibility to many individuals during that time. Patients may lose coverage or be forced to transition to other options, which may prove disruptive. Another factor to watch is the regulatory flexibilities implemented during the PHE, specifically those related to telehealth and the delivery of other services.(6) While CMS has taken action to address some telehealth services, others may be lost in the shuffle. Providers should diligently monitor this news to understand how such changes will impact their business.
After a turbulent year in 2022, provider groups will enter 2023 with significant headwinds via external economic factors and industry-specific reimbursement challenges. Optimizing revenue through core services and managing tighter expense budgets will be critical as our industry weathers this recessionary environment. These factors may further accelerate the consolidation we have seen in previous years as health systems grow and merge and as private equity expands its reach into the provider space.
References
Devereaux Mari. Physicians left their jobs by the hundreds of thousands in 2021: report. Modern Healthcare. https://www.modernhealthcare.com/physicians/physicians-left-their-jobs-droves-2021-report . Accessed 11/17/2022.
Dyrda L. Health system cash reserves plummet. Becker’s Hospital Review. https://www.beckershospitalreview.com/finance/health-system-cash-reserves-plummet.html . Accessed 11/16/2022.
Kaufman Hall. October 2022 Physician Flash Report. https://www.kaufmanhall.com/insights/research-report/physician-flash-report-october-2022 . Accessed 11/16/2022.
Minemyer P. Following provider pushback, CMS finalizes payment rate increase in outpatient rule. Fierce Healthcare. https://www.fiercehealthcare.com/regulatory/following-provider-pushback-cms-finalizes-payment-rate-increase-outpatient-rule . Accessed 11/18/2022.
Payerchin R. Congress must act to avoid Medicare reimbursement cut in 2023, senators say. Medical Economics. https://www.medicaleconomics.com/view/congress-must-act-to-avoid-medicare-reimbursement-cut-in-2023-senators-say . Accessed 11/18/2022.
McDermott+ Consulting. Way too early preview: what the midterm election results might mean for health policy in 2023. https://www.mcdermottplus.com/insights/way-too-early-preview-what-the-midterm-election-results-might-mean-for-health-policy-in-2023/ . Accessed 11/17/2022.