The majority of hospitals are predicted to have negative margins in 2022, marking the worst year financially for hospitals since the beginning of the Covid-19 pandemic.

Radio Advisory's Rachel Woods sat down with Advisory Board experts Monica Westhead, Colin Gelbaugh, and Aaron Mauck to discuss why factors like workforce shortages, post-acute financial instability, and growing competition are contributing to this troubling financial landscape and how hospitals are tackling these problems.

Read a lightly edited excerpt from the interview below and download the episode for the full conversation.

Rachel Woods: I am seeing headline after headline that 2022 has been the most difficult year financially for hospitals, at least since the beginning of the pandemic. At a high level, how would you describe the state of hospital finances?

Aaron Mauck: It's pretty challenging at present for most hospitals. It goes from either moderately bad to overtly terrible, is probably the standard across the sector.

Woods: Colin, what are you hearing?

Colin Gelbaugh: I agree with Aaron, it's certainly not ideal, but broader picture. Keep in mind that we haven't really hit a breaking point where we've seen a lot of closures necessarily, but margins still are certainly down compared to prior years.

Woods: You're completely right that there haven't been mass closures, but I do think one of the reasons why we wanted to have this conversation is people are a little bit worried about some of the things that they have seen in the news.

Monica Westhead: Well, we have seen significant closures in the post-acute space. I think that is where it's definitely getting a little bit scary with obviously the challenges, the financial challenges go across the entire health care delivery system, but post-acute providers tend to be hit among the hardest out of the entire industry. And that has ripple effects for hospital finances as well.

Woods: That's right. And we've also seen organizations make some big structural changes in terms of their administrative footprint, have some big layoffs, signals that financially, things are not great.

Mauck: Closures are probably the last thing to happen, of course, but we've already seen very significant dark clouds on the horizon when it comes to the sort of decisions that are being made. Pulling back on certain growth strategies, reevaluating new projects.

To your point, reconsidering administrative footprint, probably reevaluating the viability, economic viability of certain units. Those kinds of signals are there, certainly, and those reflect probably that overarching challenge that folks have been seeing over the course of the last year, but also some forward direction of what they expect coming into 2023.

Woods: Let's forget the headlines for a second. What are you hearing from hospital and health system and post-acute leaders right now? What's the kind of tone of the conversations that you have when it comes to the financial reality for hospitals today?

Mauck: Pretty considerable anxiety from senior leaders in relation to this. Most of them feel like they have a fairly strong strategy. They trust their fundamentals. They are trying to make sense of the root causes of this because it was a little bit unexpected, and trying to find some strategies, short term strategies that will help to bridge towards their long-term approach.

So if they can find a way to stay financially viable through this time, weather the storm, they hope that their fundamentals will lead them through and ultimately they'll get back on a path to growth.

Westhead: I definitely hear anxiety from both health system and post-acute leaders about the future. There's a little bit more concern around the interdependence of the different pieces of the health care industry and realizing that if one part of the industry starts to fail, the others are kind of dragged down with it.

That is where I will say I've been hearing a lot more concern over the last few months when I talk with health system leaders about an inability to discharge people to post-acute care, just because the post-acute facilities are understaffed or they may have closed entirely. You can't discharge someone, you can't get a new DRG in that bed, so it creates this really challenging cycle where no one is able to get the revenue that they need in order to get their footing back.

Woods: Yeah, and Monica, you're getting at exactly where I wanted to go next. Aaron mentioned the root causes of this. My big picture question is how do we actually get here in the first place? What are the factors that are impacting the financial instability of hospitals right now?

Mauck: Well, we already pointed to one, of course one, the one that's gotten the most attention has been staffing, which is a persistent challenge. It reflects sort of a broad issue related to availability, but also renegotiated contracts, the use of travelers when it comes to the nursing side, just general challenges around churn that we've seen. And the net effect has been massively rising cost of labor and that has not really alleviated itself fully.

Woods: And hopefully our listeners are remembering those challenges because we've talked about those quite a few times over the last couple of months. Monica, you've been on the podcast talking about those exact challenges this year.

Westhead: And I think what's interesting about the staffing challenges and what I'm hearing from organizations is, this feels very different than it did 10 or 15 years ago when people were talking about we have to find a way to cut labor costs.

I think there is knowledge that labor is going to continue to be a huge part of spend, and certainly organizations want to reduce dependence on agency and travel labor because that does come at a premium. But at the same time, there is an understanding that labor is just really costly right now, and it has to be an area of investment if you want to be able to operate

Gelbaugh: Labor, certainly the biggest expense item, but supplies, drugs, purchased services, expenses are all rising. And that also has to do with other macroeconomic factors, as everyone knows that all industries are facing right now with inflationary pressures and general cost concerns

Mauck: And those inflationary pressures aren't going to alleviate any time soon. We know that this constitutes a pretty significant challenge. There's more rapid acceleration in the health care space for some of those than across the economy as a whole.

And we have to be attuned to those being a palpable headwind that we'll have to confront. And leaders are cognizant of that and thinking about renegotiating contracts and some of the other things that have to come with that particular pressure.

Woods: Are any of these going to resolve soon? I don't want to make light of the labor shortage problem, because it has been such a serious issue this year that's on the forefront of every single executive's mind.

But dare I say, the challenge isn't quite as bad today in the middle of November as it was, Monica, the last time you came on the podcast a couple of months ago. Is it correct to say that a problem like that could resolve itself? Could any of these challenges resolve themselves on a long enough timeline?

Westhead: From a staffing perspective, I don't expect it to resolve itself. I do think that we are starting to see it stabilize. So we're not seeing the rate of departures continue to increase anymore the way that we were earlier in the year.

And part of that, quite frankly and unfortunately, is since there are predictions that we may be headed into a recession, yes, health care jobs do tend to be attractive in a recession because they're much less likely to be laid off than service industry jobs, for example.

So that may be playing into some staff members' minds. And I will say a lot of systems have also put in place strategies to try to retain people that are starting to make some headway.

Mauck: And one thing that's related to that, and we haven't touched on as a drag on finance, has been the dynamics around demand. So there have been some shifts in demand. Demand overall, if you track it, looks like it's largely where it was pre-pandemic and we've talked to some hospitals that say they're bursting at the seams, but the kind of patient that we're seeing in the hospital is a little bit different. There's more medical admissions, there's longer length of stay and that has effects.

Then there are certain areas like emergency departments, where in some markets they haven't fully come back yet. Now those demand dynamics have the potential to alleviate. We don't know if we're at a rebasement point, for instance, around things like emergency departments. We may or may not be, but we do expect at some point those patients are going to come back.

They're going to need to have procedures done, they're going to need those electives, they'll need to come into the ED. So in principle, that can alleviate. I think we have open questions there, but that certainly is an area that has some potential to help alleviate those financial pressures.