As Q1 margins improve, health systems aim to create long-term financial sustainability

What’s trending: Positive Q1 financial performance presents a window for health systems to transform for the future

After years of struggling to stabilize their financial footing amid unprecedented operational and financial challenges, many health systems have reported improved financial performance in the first quarter of 2024.

While recent reporting suggests a possible inflection point, the financial future remains uncertain in this volatile market. Prudent healthcare executives are looking beyond immediate stability and seizing the opportunity to pursue a long-term repositioning strategy to set them up for sustainable success.   

Why it matters:

For several years, numerous health systems have been stuck in a vicious cycle of constant cost-cutting and turnaround efforts to maintain razor-thin margins and protect dwindling sources of capital. In 2022, more than 50% of US hospitals and health systems lost money due to ripples from the pandemic, hyper-inflation, and workforce instability, according to a 2023 analysis of nearly 1,000 hospitals. And in 2023, average operating margins barely clawed back to the black (to 0.5%), according to Moody’s Municipal Financial Ratio Analysis. Burnout and stress levels remain high as executives have been constantly fighting operational fires, limiting their focus on strategic issues.

Now, many health systems have reported improved operating margins in the first quarter of 2024. This includes both not-for-profit and for-profit health systems across all geographies in the US.

And while it is welcomed news, the report is for only one fiscal quarter. It is unclear whether the recent upswing in utilization will endure, so it is critical for health systems to accelerate and double-down on their growth strategies.

Staff shortages, while perhaps not at crisis level compared to the peak of the pandemic, are still an issue and continue to elevate labor costs. Similarly, supply costs remain high due to inflation and supply-demand imbalance.

Healthcare executives with an eye toward the future are embracing this moment to reshape their enterprises and achieve lasting financial sustainability.

What’s next:

To achieve lasting financial sustainability, health system leaders must not only execute traditional financial improvement efforts but also boldly transform their care delivery model, portfolio of clinical services, and physician enterprise. Leaders must do so in a manner that defends against intensifying market forces and harnesses novel and emerging solutions.

A new playbook from Chartis shares the following three imperatives to actualize this aspiration:

1. Start with the end in mind. Organizational strategy must drive the health system’s transformation plan. Improving near-term financial performance is important, but creating a health system that is strategically differentiated and financially sound for the foreseeable future is paramount.

To do both these things, leaders must first develop a high-level blueprint for the enterprise’s future strategic positioning. While the ensuing work typically requires 1 to 3 years to fully execute, leaders should complete the initial planning exercise rapidly (i.e., in 4 to 6 weeks)—not over several months like traditional strategic planning efforts.

Leaders should consider launching a rapid planning process with a small group of executives. Their efforts should be informed by targeted market and internal analytics, and oriented around strategic questions, including: What unique role do we desire to play in our market? How will our financial improvement plan enable (and not encumber) that vision? How should we rebalance or reconfigure our asset portfolio to accelerate our strategic and financial improvement goals?

Some actions these leaders might consider include:

• Forming partnerships on specific assets (e.g., joint ventures on ambulatory surgery centers)
• Developing virtual consult capabilities across the broader market to maintain access while optimizing specialist capacity and limiting travel and call burden
• Diversifying the business model by expanding in value/risk if there is a compelling business case, given population and market dynamics.  

While these example actions often require a longer timeframe to implement, leaders should develop high-level hypotheses within the first few weeks of the transformation planning process. They can then use these hypotheses as an overarching strategic framework to prioritize and “screen” the more immediate financial improvement interventions.

2. Link near-term stabilization actions to long-term strategy. Health system leaders must avoid building a performance improvement plan in a vacuum. Rather, they must develop the plan in the context of where the organization is trying to go long-term.

Once leaders crystallize the high-level strategic direction, they should rigorously analyze, prioritize, and implement a set of immediate interventions. These interventions should ensure speed to value (i.e., realizable within roughly 60 to 120 days), materially improve cash flow, and shore up sources of reinvestment to channel into the longer-term strategy.

As one example of linking stabilization actions to the long-term strategy, leaders should avoid assigning wholesale expense reduction targets across each department. Instead, they should protect highly strategic programs that have a meaningful and quickly realizable growth thesis or return on investment. In turn, they should assign disproportionate expense management targets to other areas that do not carry the same value proposition.

One health system recently developed a plan to mature its provider enterprise. This included creating strategies to address major access constraints, through which it could accelerate bed and emergency department throughput, enhance ambulatory access, and optimize transfer center processes. The health system also aligned disparate medical groups and optimized physician and APP deployment. And it developed plans to standardize physician compensation and enhance patient retention.

3. Execute with tenacity and speed. The small window between identifying opportunities and implementing them is often where well-intended transformations lose momentum or fall apart completely. To prevent this from happening, leaders should identify several “quick wins” to begin implementing immediately while the broader opportunity assessment is still underway.

These “quick wins” should be a focused subset of the stabilization actions and should satisfy four criteria: (1) They can make a meaningful financial impact. (2) They have low execution risk and resourcing needs. (3) They can create a positive groundswell and momentum for team members. (4) They support the longer-term strategic direction.

Once leaders have identified, prioritized, and sequenced the broader slate of strategic and operational opportunities, they should launch small workgroups to rapidly execute each one. They also need to embrace that it takes a village to pull off a successful enterprise transformation. It requires galvanizing and convening key clinical and administrative stakeholders across the organization to spearhead the work and actualize the value.

Example actions executives should consider to support this effort include:

• Launching a steering committee and multiple work teams to develop and implement the transformation plan
• Creating and rigorously managing a financial realization schedule that includes milestones tied to specific dates and dollar amounts
• Developing a comprehensive communication and change management plan, including designating physician champions to lead the change across the provider enterprise and clinical programs.

Enterprise-wide transformation is an ambitious aspiration. It requires asking provocative questions, weighing difficult trade-offs, and making audacious decisions. But the rapidly changing healthcare ecosystem and ever-increasing financial pressures require leaders to act now and seize this opportunity.

Read the Chartis playbook for more examples of initiatives and actions organizations can deploy, and a case study of what the playbook looks like in action at a large integrated delivery network in the Midwest.

ABOUT CHARTIS

The challenges facing US healthcare are longstanding and all too familiar. We are Chartis, and we believe in better. We work with more than 900 clients annually to develop and activate transformative strategies, operating models, and organizational enterprises that make US healthcare more affordable, accessible, safe, and human. With more than 1,000 professionals, we help providers, payers, technology innovators, retail companies, and investors create and embrace solutions that tangibly and materially reshape healthcare for the better. Our family of brands—Chartis, Jarrard, Greeley, and HealthScape Advisors—is 100% focused on healthcare and each has a longstanding commitment to helping transform healthcare in big and small ways. Learn more.

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