It’s late at night, and hospital CEOs all across the country are counting flocks of sheep and reaching for yet another glass of warm milk. They just can’t sleep. From shrinking margins to job security, they have a lot on their minds. At Petra, we partner with health system and hospital CEOs every day, giving us keen insight into the unique challenges they face and are working to solve. In this two-part blog series, we’ll take a closer look at what’s keeping hospital CEOs up at night.
What’s Keeping Hospital CEOs Up at Night
- Loss of local control
This isn’t a new development for hospital CEOs, but as hospitals have continued aggregating around geographic areas — from regional to super-regional to national systems — hospital CEOs are now starting to experience how the group dynamics of larger systems are diminishing their local control. The recently completed megamerger between Dignity Health and Catholic Health Initiatives, creating a $29B health system with 142 hospitals and more than 700 care sites in 21 states, is a prime example of the trend.
The gradual erosion of independence is a lot like the old story of slowly increasing the heat under a pot so the lobster doesn’t realize it’s being cooked. The loss of autonomy and lack of independent decision making is frustrating and demoralizing for many hospital CEOs, who now look to directives and decisions coming from system leaders who are not involved in the day-to-day activities of their hospital. While there are definite economic advantages to creating these larger systems, their impact on local control is certainly causing many hospital CEOs to toss and turn at night.
- Shrinking margins
Shrinking margins are reducing access to capital — for which there is an insatiable demand. And that creates pressure. Lots of pressure. A recent Navigant study reports that average health system operating margins dropped a whopping 38.7 percent from 2015 to 2017. Hospital CEOs need funds for building projects and capital improvements, as well as critical technology investments like electronic medical records. In the past, hospital CEOs could count on keeping about 80 percent of the cash flow they produced. No more. Today, that’s changed significantly. Not only have margins shrunk, system leaders — not hospital CEOs — now decide where to invest those reduced hospital dollars at the portfolio level with the goal of producing the greatest ROI. Without readily accessible capital, where will hospital CEOs find the funds they need to continue investing in their own growth and patient care capabilities at the local level, to stay focused on improving outcomes as well as remain competitive in their market?
- Shifting volumes
One of the culprits for shrinking hospital margins is the shifting volumes from inpatient to outpatient care — which, for hospital CEOs, means reduced margins or, worse, no margins at all. As we discussed in our recent blog “2019 Healthcare Trends: A Look at 10 Trends for the Year Ahead”, outpatient migration is challenging the profitability of hospitals and health systems nationwide. While outpatient settings get a thumbs-up for patient outcomes, access to care, and overall costs versus inpatient settings, outpatient settings are still not profitable for hospitals and health systems. Overall outpatient revenues remain less than inpatient revenues, and though the gap is shrinking, experts predict a shift will still be several years in the making.
- Job security through mergers
Mergers typically bring with them greater efficiencies and cost controls. They also bring consolidation of duplicative or extraneous jobs, and hospital CEOs are unfortunately not immune from layoffs and dismissals — though after a merger it can take up to a year or more for layoffs to trickle down and reach the hospital level. Following a merger, job security is a giant question mark for hospital CEOs who may no longer be needed in the new system environment.
Hospital mergers and acquisitions are increasing at a rapid rate, with 115 merger and acquisition transactions in 2017 — the highest number in recent history. The trend continued in 2018, with slightly fewer mergers at 90 total, but the highest-ever average revenue size at $409 million. With experts predicting the trend to continue into 2019, it’s no wonder hospital CEOs are losing sleep, wondering when’s the right time to polish up their résumé.
And the list goes on…
Next month, in part 2 of our two-part series, we’ll take a look at even more challenges keeping hospital CEOs up at night.
Today, everyone needs to do more with less. At Petra, this plays to our strengths, including providing financial predictability, maximizing return on capital, and balancing affordability and alignment. No other strategic planning and construction management firm understands the complex challenges of managing a healthcare organization like Petra does, because we’ve walked in your shoes. At Petra, we partner with hospitals and health systems to solve problems, creating new and better approaches that are unconventional, dynamic, and impactful. We’re setting the pace in the industry with game-changing ideas that raise the bar on expectations — and results. Contact us today to learn more.