H2C PERSPECTIVE
 

2022 Healthcare Outlook

5 Near-Term Themes Driving Healthcare

April 2022

By: William B. Hanlon

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The ways in which healthcare organizations respond to near-term challenges hold strong potential to affect revenue, credit quality, and their ability to meet consumers’ needs.

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Hospitals and health systems are gradually transitioning from an intensive internal focus demanded by the operational strains of the COVID-19 pandemic toward a renewed external focus on strategic growth. As leaders determine where to concentrate attention and resources, it is clear that the changes taking place in 2022 could significantly impact the cost and means of delivering care and thus affect their strategy.

Rating agencies differ on their outlook for the healthcare industry in 2022. Moody’s Investors Service (“Moody’s”) predicts staffing shortages will drive operating cash flow declines(1). Also putting pressure on balance sheets: inflation, supply chain dislocations, cybersecurity pressures and drug costs. Even as elective volumes recover, Moody’s predicts these organizations could struggle to grow revenue given the continued shift toward lower-cost settings, a declining payer mix—with more people moving from commercial insurance to Medicare—and an inability to meet demand due to labor constraints. These are just some of the reasons why Moody’s issued a negative outlook for healthcare for the second consecutive year.

Fitch Ratings (“Fitch”), meanwhile, issued a neutral outlook for the healthcare sector, a change from its stable forecast for 2021(2). Strong balance sheets could help absorb the blow of rising labor costs and supply chain expenses, while in some markets, population growth and strengthening economies could help build scale, diversify services, and reduce risk. S&P Global Ratings (“S&P”) predicts a stable outlook for the sector in 2022, an upgrade from the negative outlook issued for 2021(3). It’s a view based in part on healthy balance sheets, effective leadership, the use of data and technology to manage challenges, rising demand for services, and improved revenue yield combined with remaining stimulus funds and FEMA support through 2022. Although investment market volatility may adversely impact credits, high cash levels and low debt will help offset any temporary operational weakness, S&P predicts, while low interest rates and good access to capital continue to benefit healthcare systems.

Despite the differing rating agency outlooks, what is clear is that the ways in which healthcare organizations respond to near-term challenges hold strong potential to affect revenue, credit quality, and their ability to meet consumers’ needs. According to S&P, weaker organizations may be at a heightened risk if they are unable to make the strategic and capital investments necessary to maintain viability and a strong market position.

5 Near-Term Themes

Here are five near-term themes driving healthcare in 2022, based on a survey of “Leading Health Systems” presented February 2022 by the Health Management Academy (“HMA”)(4). Leading Health Systems include the Top 100 Hospitals and Health Systems across the nation.

1. Workforce challenges. Consistent with the rating agencies’ perspectives, struggles to retain and recruit healthcare professionals of all types will continue to be a growth limiter for the Leading Health Systems surveyed by HMA. They are also a margin depressant—with contract labor costs averaging $4.59 million per hospital(5) in 2021, higher recruiting and training costs, and increased compensation and benefits costs to hold onto existing staff—and the area of highest concern for healthcare leaders. While Moody’s projected higher-than-usual staff turnover due to burnout rates in late 2020, the extent to which the Great Resignation affected healthcare staffing at every level is just beginning to be understood.​

As the pressures of working in a COVID-19 environment begin to subside, now is the time to build an organization’s workforce pipeline and explore new opportunities to ease stress on healthcare staff. These opportunities include:

  • Investing in data-driven workforce planning tools to optimize staffing as elective procedure volumes increase

  • Reimagining how clinical and nonclinical areas could be staffed, such as with a mix of full-time employees, travel or gig workers, and tech-enabled work—a triumvirate that could create improved quality, enhance staff loyalty, and increase access

  • Exploring opportunities for increased workforce flexibility, from scheduling to role scope, skill mix/ratios, career pathing, on-demand training, or an in-house agency within the organization

  • Developing a strategy for “cognitive load reduction” through automation—including robotic process automation—to enable staff to work at the top of their skillset 

 

In addition, just as S&P predicted that operating controls—"especially innovative ways to contain expenses and find broader efficiencies in clinical care”—would be essential to controlling both labor expenses and burnout, such controls will be vital to supporting workforce health and margin recovery in 2022.

2. Consumer engagement. Ramping up consumer engagement is the second-highest priority for healthcare leaders, according to the HMA survey. Many systems are exploring omnichannel communications to appeal to consumers based on generational preferences and the need to “meet patients where they are”— specifically, via their mobile phone. There is also a strong desire to consolidate the many applications needed to provide a well-rounded digital health and communications approach into a single platform. In the area of telehealth alone, a Fall 2021 survey(6) by Amwell/HIMSS found most health systems use three to four platforms, on average, to provide virtual care. This is a consequence of ramping up access to digital health quickly—often, within two weeks or less—at the start of the pandemic, when access to in-person care was suddenly and severely limited.

Source: Amwell/HIMSS Analytics Survey, Aug. 4, 2021, https://business.amwell.com/hospital-survey-virtual- care/

Health Systems Struggle with Telehealth Platform Sprawl Following COVID-19

Number of Platforms Used for Digital Care

How many systems/platforms is your organization currently using to support digital care experiences?

Also top of mind for healthcare leaders:

  • The use of artificial intelligence (AI) and data analytics to shape digital services and provide them more efficiently and effectively

  • The need to merge the EHR with customer relationship management systems to connect with patients based on their preferences—no easy feat, according to leaders surveyed by the HMA

  • The benefits of building capabilities to address social determinants of health outside the walls of the hospital, which S&P predicted in late 2020 “should help to improve the costs of care and improve quality, but likely will take a long time to adequately address”

3. Hybrid care. As pressures to reduce costs of care continue to fuel the shift from inpatient to outpatient to home care services, this transition adversely impacts inpatient revenue and margins. As a result, investing in ambulatory surgery centers is a high priority for health systems, with 76% reporting increased ASC investments in 2020(7). Also critical: investments in telehealth, care-at-home models, and digital health. In late 2020, S&P predicted that delays in these types of investments “could put providers steps behind others.”

8 Reasons Hospitals Own or Affiliate with ASCs

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Primary Care M&A Transactions

Other key considerations for healthcare leaders in building a hybrid care strategy include:

  • Moving from a disjointed point solution for virtual care to care pathway integration—an area where clinical expertise is needed

  • Investigating opportunities related to remote patient monitoring (RPM), including the workflow, clinical operations, and technical challenges that must be addressed for adoption and the extent to which medical staff see value in this approach

  • Leveraging AI and machine learning (ML) in care and care management, which, while still new and poorly understood, is coming in healthcare; issues to address include concerns regarding governance, trust, and legal/ethical issues of the use of AI and ML in care

4. Primary care. Primary care is a $260 billion market that is vulnerable to disruption due to inefficiencies in care delivery and the availability of high-margin ancillary opportunities (e.g., laboratory services, diagnostics). It’s also a specialty where physician rollup strategies are on the rise(8) and where disruptors are inserting themselves between patients and health systems—sometimes replacing them altogether.

Sources: Pitchbook, Provident.

Note: Percentage increase based on transaction count.

Signs of disruption in primary care and ambulatory care were “already well in motion” before the pandemic, as Moody’s noted a continued shift toward treating patients in lower-cost, lower-revenue settings in its late 2020 report. At that time, S&P viewed competition from well-capitalized healthcare disruptors and large companies moving into the healthcare space as a credit risk, “particularly as these competitors gain access to patients early on and may target high-margin business while directing patients to low-cost providers.” Such companies are well-positioned to offer consumer-centric care at lower cost, S&P noted.

Now is the time to consider: How can your organization differentiate itself on the primary care experience— and where do opportunities for partnership exist? One emerging approach to primary care for seniors, for example, is to look for opportunities for partnership with health plans around primary care for Medicare Advantage members—including digital services that create better care and more memorable experiences for this prized population.

5. Achieving the right scale. This involves optimizing sites of service to align with platform ambitions—the No. 1 priority for chief marketing officers for health systems for the past two years. More and more, healthcare leaders also are focusing on “asset light” ways to expand their reach, from digital platforms to outpatient/ambulatory care, home care, and data-driven technologies that leverage RPM data to connect consumers with complex conditions with the right care professionals at the right time.

This is an area where leaders struggle to define their approach. Key considerations and questions include the following:

  • How to reduce inpatient footprints and shift to outpatient care

  • The right approach to increasing risk under value-based payment arrangements—even as the shift to value appears to have slowed

  • Understanding key change enablers for scaling innovation, from governance to structure, data, culture, and partnership

  • How to assess the level of or potential for primary care disruption in the market, when to act, and how to respond

The need to explore partnerships to achieve the right scale is a concept that has received increased attention throughout the pandemic. In late 2020, Fitch predicted a rise in short-term collaboration among competitors—“friendly or otherwise”—to better coordinate care and the use of valuable resources. Today, Fitch projects that short-term collaborations among competitors to coordinate care delivery and resource consumption “may evolve into combinations, subject to heightened regulatory review.”

Assessing Your Healthcare 2022 Trajectory

The pandemic left a deep mark on the ways in which healthcare organizations meet consumers’ healthcare needs and the cost of delivering care and investing in their workforce in a rapidly changing environment. Now, as operational pressures surrounding COVID-19 begin to subside, developing your organization’s strategy in these five areas will be key to meeting consumers’ needs and protecting operational efficiency and your organization’s financial health in the year ahead.

Footnotes:

  1. “U.S. Not-for-Profit Healthcare Outlook,” Moody’s Investors Service, 2022, https://live.moodys.io/miu15457-outlooks-healthcare/not-for-profit-and-public-healthcare-us.

  2. “U.S. Healthcare and Pharma Outlook Neutral for 2022,” Fitch Ratings, Dec. 10, 2021, https://www.fitchratings.com/research/corporate-finance/us-healthcare-pharma-outlook-neutral-for-2022-10- 12-2021.

  3. “Healthcare Ratings Outlook 2022,” Standard & Poor’s, Feb. 1, 2022, https://www.spglobal.com/ratings/en/events/webcasts/healthcare-ratings-outlook-2022.

  4. “Top Health System Executive Priorities for 2022,” Health Management Academy, February 2022, https://hmacademy.com/resources/virtual-briefing-top-health-system-executive-priorities-for-2022/.

  5. Rodriguez, S., “Hospital Contract Labor Costs Topped $4.5M in 2020,” RevCycle Intelligence, Jan. 12, 2022,https://revcycleintelligence.com/news/hospital-contract-labor-costs-topped-4.5m-in-2020.

  6. “Hospital Execs Eye Expanded Virtual Care and Streamlined Platforms in Years Ahead,” Amwell, Aug. 4, 2021, https://business.amwell.com/hospital-survey-virtual-care/.

  7. Stewart, A., “Hospitals, Health Systems Jump on the ASC Bandwagon,” Becker’s Healthcare Review, Oct. 14, 2020, https://www.beckersasc.com/asc-transactions-and-valuation-issues/hospitals-health-systems- jump-on-the-asc-bandwagon-76-increased-investments-from-2019-20.html.

  8. Tepper, N., and Banner, T., “Beyond the Byline: Private Equity Investors Target Primary Care,” Modern Healthcare, July 29, 2021, https://www.modernhealthcare.com/finance/private-equity-investors-target- primary-care.

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About H2C Securities Inc. ("H2C")

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About the Author

William B. Hanlon III is a Managing Director for H2C (bhanlon@h2c.com).