After years of pandemic-initiated financial injury, the prognosis for hospitals is improving.
In November, Moody’s Investors Service revised its 2024 outlook for the nonprofit and public healthcare sector from “negative” to “stable,” based on slower expense growth driven by lower labor costs as hospitals become less reliant on expensive contract labor and ramp up efforts to recruit and retain full-time staff.
In addition to curbing labor costs, the Moody’s report also cited a degree of rebound in patient volumes and higher reimbursement rates driving higher revenue growth for hospitals in the 4%-6% range this year.
“These factors signal that a financial recovery will take hold in 2024, marked by an uptick in cash flow margins,” the report said.
San Diego hospitals are also cautiously optimistic about their financial health this year.
“I think this change in outlook from Moody’s shows their confidence in the changes organizations are making to respond to the challenges we face as an industry after the pandemic,” said Palomar Health CEO Diane Hansen, adding that while she believes that the Moody’s revenue predictions are “a little aggressive,” she expects that the healthcare industry will see stabilization.
“We have overcome a lot of the most significant challenges in supply chain, staffing and overall pandemic driven expense increases, however inflation at the moment does seem to continue to outpace reimbursement increases from the health plans,” she explained.
UC San Diego Health CEO Patty Maysent said pandemic staffing challenged the expense structure at hospitals due to the reliance on contract labor when a lot of healthcare professionals left the industry at a time when there was high demand.
“To the degree you can move that contract labor out and replace it with long-term career staff, that helps you stabilize your financial system more quickly. We worked really hard at that in our fiscal year ’23,” she said.
Maysent also pointed to the current “unprecedented” demand for services as a driver of stabilization at hospitals. In addition to the sheer volume of patients, she said the cases coming through emergency departments and clinics are also getting more complex.
“People are really sick,” she said. “In part, from deferred care that didn’t happen in the pandemic, but also an aging community. The demand has been huge.”
Sharp HealthCare Executive Vice President and Chief Operating Officer Brett McClain also pointed to increased volume of services as a driver of stabilization.
“Sharp’s outlook for 2024 is in line with Moody’s expectations,” he said. “After several years of suppressed volumes, we are now seeing individuals access care at rates in line with pre-pandemic levels.”
Sharp is projecting $5 billion in revenue in fiscal 2024, an increase of 5.9% compared to revenue of $4.7 billion in fiscal 2023, he added.
Partnering Up for 2024
Like most health systems in the U.S., McClain said Sharp HealthCare had seen its finances impacted by decreased revenue and higher costs brought on by the pandemic – particularly around labor, supplies and construction.
“To stabilize finances, we will continue efforts to reduce costs, become more efficient operationally while maintaining high-quality care and seek opportunities for growth to increase revenue, including expanding our market share and seeking ventures with industry partners,” he added.
Stabilizing finances through partnerships is a necessity for some hospitals more than others, according to Maysent.
“In general, I think the larger systems that have scale and scope are probably more stable,” she said. “The single hospitals are really suffering a lot – the ones that fall into the distressed hospital category are struggling, having gone through the pandemic and then the post-pandemic implications of struggling with cash and where they sit in the market. They’re not in a good position, generally speaking. Most are trying to find a way to partner across the state or across the country.”
In October, UC San Diego Health announced it had entered a unique partnership with distressed hospital Tri-City Medical Center. Under the Joint Powers Agreement, UC San Diego Health will provide administrative, clinical and operational management for all healthcare services at Tri-City with direct input and guidance from a diverse community board. The new partnership followed a September announcement from Tri-City that it had received a no-interest loan of $33.2 million from the state’s Distressed Hospital Loan Program to address the hospital’s financial challenges.
Maysent explained that the rationale for partnering with Tri-City went beyond just stabilizing healthcare in the north part of the county. The hospital’s location offered the “geographic distribution” it was looking for.
“We’ll be able to create the capabilities for patients to stay in their districts,” she said. “We’re working to try and keep patients closer to home.”
In addition to partnering with Tri-City, UC San Diego Health also acquired Alvarado Hospital from Prime Health at the end of last year, giving the academic health system another strategic location for its preferred geographic distribution and relieving some of its overburdened hospitals with more beds in an underutilized facility.
“We’re packed, we’re full in our system. We have up to 100-plus patients a day waiting for a bed in our Hillcrest and La Jolla campuses and so I needed to find a way to access more beds,” Maysent said, adding that UC San Diego Health is currently building on both campuses, but those projects will take time to finish. “In the interim, acquiring Alvarado made a lot of sense because it was not very busy. The idea that we could step in and go into empty ORs and empty beds, empty procedure suites, is really going to be helpful for us in terms of stabilizing the impact that we’re having right now in terms of growth.”
UC San Diego Health wasn’t the only hospital that made moves in 2023 to stabilize its impact in terms of growth.
In December, Rady Children’s Hospital announced a merger with Children’s Hospital Orange County, bringing together two regional powerhouses under one umbrella that will now be named Rady Children’s Health.
The newly merged entity will serve a total addressable market of around 2 million children in Southern California and, if economic trends remain positive, generate more than $3 billion in revenue. Since a pandemic-era decrease of $50 million in revenue – from a total revenue of $1.31 billion in 2019 to $1.26 billion in 2020 – Rady Children’s Hospital has seen positive revenue growth, from 2021 to 2022 growing revenue more than $300 million to $1.65 billion and last year growing revenue to a total just above $2 billion.
Challenges to Stabilization
As area hospitals stabilize from the challenges brought by the pandemic, there are new challenges that may emerge that might derail recent progress. According to the Moody’s report, issues with payments from insurance companies and state and federal agencies are a top concern – and that is a current concern at Palomar as well.
“We are seeing significant increases in denials and payors taking much longer to pay claims. This puts a real strain on our cash position,” Hansen said. “Additionally, the state is taking much longer to turn around our supplemental revenue that supports the MediCal population that is such a big part of the community we serve. We are continuing to see greater losses on the MediCal patients that we serve because of the significant increases in cost after the pandemic. Until the state reassesses the reimbursement rates for MediCal, which haven’t changed in decades, we will continue to be challenged as we serve more patients.”
Maysent also sees government reimbursement as a roadblock to financial stabilization at hospitals.
“It is still not even coming close to covering the actual costs. From that perspective, we lose money on every single patient,” she said.
On the commercial side, she said payers are also getting “more and more aggressive about where they are putting their increases. You could have labor inflation of 8-10%, but if your commercial contract rate is only going up a certain portion, you’re always going to be facing a disproportionate amount of expense to your revenue.”
Although hospitals are shedding some costs by replacing contract nurses with hired staff, Moody’s pointed out that rising labor costs could still be an issue as contracts with unions expire and are renewed in a more labor-friendly environment.
In October of last year, Kaiser Permanente took the uncertainty out of its labor finances with a four-year agreement with the Coalition of Kaiser Permanente Unions. The agreement included annual wage increases, new minimum wages, and a redesigned Performance Sharing Plan. The agreement also addressed other top priorities such as staffing, additional opportunities for employee education and career development.
Kaiser Permanente said the agreement with the Coalition “will help ensure Kaiser Permanente remains a best place to work and receive care.”
Although Palomar Health has reduced its contract labor costs to pre-pandemic levels and is expecting further reductions this year, Hansen expects state and local mandates on wages will be an issue.
“The most recent challenge we are already trying to address is the new minimum wage law that takes effect for us in June 2024,” she said. “This will significantly increase our labor cost and overall cost to provide care to our patients, many of them from the most underserved communities.”
In addition to reimbursements and labor concerns, the general economy is also a potential roadblock to stabilization.
“The economic environment may present a challenge to stabilizing hospital revenue if we encounter a recession in 2024 that results in a loss of jobs and health insurance coverage,” McClain said. “Additionally, in a recessionary market, individuals delay obtaining needed care for elective cases as they become concerned about missing work and the cost of care, for example, deductibles and co-pays.”
Facility Expansions Completed and Continuing
McClain added that an economic downturn could also have a detrimental effect on Sharp HealthCare’s facilities expansion plans.
“Philanthropy is very much tied to the economic environment,” he said. “Donations decrease in recessionary times and increase in prosperous times.”
In 2022, Sharp HealthCare announced a $2 billion, 10-year plan to ensure advanced care for future generations of San Diegans. To support this effort, the Foundations of Sharp HealthCare launched Envision, a philanthropic campaign that seeks to raise $250 million from donors in the community.
In addition to the Sharp Prebys Innovation and Education Center, projects supported by the Envision campaign that are expected to see completion over the next three years include the Sharp Grossmont Hospital for Neuroscience and the Moore MountainView Hospice Home, expanded Emergency Department and Stroke Center at Sharp Coronado Hospital, a new Sharp Rees-Stealy Clinic in the South Bay, and continued progress on Sharp’s largest initiative, the Sharp Metropolitan Modernization project. The Metro project was recently advanced with a $10 million gift from Laurie McGrath for a new acute care tower.
“As we close on 2023, Sharp is pleased to announce we have surpassed the halfway point of our $250 million Envision campaign, which now totals more than $140 million,” McClain said.
2024 will mark the first full year of operations for Kaiser Permanente’s $403 million, seven-story San Marcos Medical Center opened in August. At its opening ceremony, Jane Finley, senior vice president and area manager for Kaiser Permanente, described the facility as having “room to grow.”
Although Kaiser has not announced any additional growth plans for the San Marcos Medical Center in 2024, the hospital network is planning an upgrade of its Bonita Medical Offices this year.
“The project, completing in early 2024, is an $11.1 million, complete exterior upgrade of our Bonita Medical Offices and surrounding site,” a Kaiser Permanente spokesperson said. “Bonita is a 1970s-era medical office building in need of modernization. The upgrades significantly improve access, entry and wayfinding.”
Palomar Health is also planning an upgrade to existing facilities.
“We are in the process of building out our remaining shelled space on the 9th, 10th, and 11th floors [of the Palomar Medical Center in Escondido],” Hansen said. “The bond refunding we did a couple of years ago provided the funding necessary to complete these floors and to allow us to finish the hospital as it was opened in 2012.
“We are also in the design phase to complete the buildout of our third 75,000-square-foot medical office building on the Escondido campus. We just recently added a second brand new state of the art Linear Accelerator to our Oncology program.”
Palomar is also making “significant improvements” at its Poway campus to upgrade the appearance and infrastructure, she added.
Rady Children’s Hospital will be continuing work on its seven-story, 500,000-square-foot Intensive Care Unit and Emergency Services Pavilion that broke ground in August last year.
The new tower, estimated to cost between $1.2 billion and $1.4 billion, will house 140 intensive care unit beds and four operating rooms and will double the size of the emergency department, from 46 rooms to 86, and expand the space dedicated to providing behavioral health services.
UC San Diego Health is in the middle of several major facilities projects, including a “$3 billion-plus” redevelopment and expansion of its Hillcrest Medical Campus, Maysent said. “We’ll be adding beds there, planning on around 440 to 460 beds.”
The first project to be completed will be the McGrath Outpatient Pavilion that will have cancer, surgery, imaging and multidisciplinary clinics. “That will be open in summer 2025,” Maysent said.
Other UC San Diego Health facilities projects include an outpatient hub in Rancho Bernardo slated to open in 2026 and another outpatient pavilion in La Jolla that the hospital system is “just beginning to scope right now. We’re probably five years away from being completed,” she added. “And hopefully we’ll have the opportunity with Tri-City to build out their outpatient building. It’s shelled out right now in front of their facility.”
The hospital is also planning a seismic retrofit on the newly acquired Alvarado Hospital. “So we’ve got a lot going on.”