Financial Challenges in Healthcare

Healthcare is a behemoth, unwieldy system.

A convoluted payment structure, complex regulations and exclusive reliance on in-person engagement have long separated it from the rest of the U.S. economy, according to a PwC report.

But this massive industry might be on the cusp of change, as it grapples with a growing skills gap, crippling spending costs and polarizing politics at the state and federal level. Today, even this unique industry is looking more like any other industry, as it begins to adapt to change, champion efficiency and lean more heavily on emerging technologies to find efficiencies and harness data.

The Importance of Financial Management in Healthcare

Massive pressure to cut costs can lead to mishaps in any industry. In healthcare, the stakes of a slip in quality are much higher, as the level of patient care can be eroded by cutting corners. As it turns out, quality financial management goes hand-in-hand with patient safety and quality, according to one study. The study found that many financial metrics, including hospital profitability, financial leverage, operating efficiency, costs and asset liquidity were all influencing factors in care quality.

Broadly speaking, the study noted public hospitals tend to provide lower quality care than nonprofit hospitals, and rural areas typically have lower quality score than their urban counterparts. Why? Likely due to a ballooning effect. Hospitals that earn more profits can finance future investments and offer higher wages, which in turn attract more skilled staff, and the quality of care rises. Rising quality lends itself to better profits and more capital to invest in both innovation and expertise.

Financial Challenges in Healthcare

Financial challenges are the most pressing concern for hospital CEOs, according to an annual survey from the American College of Healthcare Executives (ACHE). Specifically, some of these financial challenges include:

Maintaining Financial Health and Flexibility

Sizable health systems come with sizable fixed costs, which can make it difficult to maintain financial flexibility. And spending is only expected to rise, thanks to economic forces like an aging and expanding population, advancements in technology and clinical approaches, and increased labor costs. Pressure to reduce out-of-pocket costs has boosted the desire to enrich public health systems. 

Increasing Outpatient Care

More care is focused in the outpatient arena, but most revenue-generating care comes from facilities-based care, according to Athena Health. This is driven by patient request, financial incentives and innovations that now allow minimally invasive surgeries that no longer require a hospital stay.

Even moving to an acquisition of these outpatient facilities may require most hospitals to face a deficit for the first several years, not to mention the challenge of aligning incentives.

Increasing Costs

Most (70%) participants in the ACHE survey said increasing costs of staff and supplies were an issue for their hospitals. Looming tariffs may also pose issues in supply chains for the healthcare industry. For example, the pharmaceutical and medical device sectors rely on the ability to move raw materials and products abroad back to U.S. buyers. Supplies necessary for producing drugs may also increase in cost, according to the PwC report, particularly chemicals.

Insurance Reimbursement

Overall, the industry has seen a dip in private health insurance, particularly among younger patients, according to a Deloitte report. This is impactful because the longer it takes for the hospital to receive payment, the less efficient its finances are, as the services provided have essentially been a loan. This can also hamper innovation if insurance providers refuse to reimburse emerging procedures.

With healthcare spending on an upward trajectory and pressure from patients, insurers, and governments to clamp down on costs, savvy financial management is paramount to the healthcare sectors success. Everyone stands to benefit from a financially sound healthcare system equipped to weather the disruption and uncertainty to be expected in the next decade.

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