Financial Management & Patient Outcomes in Healthcare

According to a report by Kaufman Hall, 2022 was the worst financial year for hospitals since the onset of the Covid-19 pandemic. Median monthly operating margins were in the red for 11 out of 12 months, and approximately half of all surveyed hospitals finished the year with a negative margin. Despite the figures improving in December, many experts predict that expense pressures will continue well into 2023.

Even as the Covid-19 pandemic recedes, healthcare organizations face a superstorm of adverse financial conditions. Inflation continues to raise the prices of workers and supplies, while higher interest rates make loans and debt more expensive. As always, healthcare leaders are working with limited resources. But properly allocating those resources can influence more positive and equitable care outcomes.

Read on to learn more about the importance of good financial management in healthcare and how this area is evolving to meet the current challenges.

Richard L. Gundling, FHFMA, CMA

Richard Gundling is the senior vice president of professional practice for the Healthcare Financial Management Association (HFMA). He is responsible for overseeing HFMA’s technical and content direction, leading the organization’s Washington, DC activities, and managing the association’s thought leadership efforts.

Gundling also serves as staff liaison to the HFMA Principles and Practices Board and has written many published articles on broad topics within healthcare finance and the healthcare industry. He is a fellow of HFMA, a certified management accountant, and a member of the Institute of Management Accountants.

Negin Fouladi, PhD, MPH, MS

Dr. Negin Fouladi is an associate clinical professor and the director of hpm online programs in the Department of Health Policy and Management at the University of Maryland School of Public Health. She teaches graduate and undergraduate courses on health systems, public health research methods, healthcare strategic planning and marketing, global health, and health policy.

Dr. Fouladi has expertise in translational science, and her research focuses on comparative health systems, value-based care, and knowledge translation and exchange (KTE). She earned her MPH in health services organizations and her PhD in health policy from the University of Texas School of Public Health – Health Science Center at Houston.

Melvin Seale DHSc, RHIA, CCS-P, CRC

Dr. Melvin Seale is an assistant clinical professor and the director of graduate studies in the Department of Health Policy and Management at the University of Maryland School of Public Health. He earned a doctor of health science from A.T. Still University. His dissertation focused on identifying barriers to the interoperability and implementation of electronic health record systems within ambulatory care facilities.

Dr. Seale also holds a master of arts in teaching (MAT) from Marygrove College and a bachelor of science in health information management. He is a registered health information administrator (RHIA) and is certified in clinical coding classification systems (e.g., ICD-10, CPT, HCPCS).

“We are going through a very challenging period,” Gundling says. “Covid, supply chain issues, and inflation all sent costs skyrocketing. At the same time, governments are now starting to roll back their public health emergency funding. It’s a hard landing.”

No healthcare system budget is built to operate in pandemic-level conditions, and Covid-19 left many hospitals on financial life support. At the same time, returning to normal will take longer than it will take for Covid-19 to recede fully.

“In the US, a significant amount of care is related to elective procedures,” Gundling says. “People postponed those types of treatments during the pandemic, creating a hole in some healthcare organization’s revenue. People are beginning to come back now, but it’s relatively slow, still. They’re cautious.”

Healthcare had plenty of challenges before the pandemic began, and those challenges remain. An overarching trend is sicker patients staying longer in the hospital, and it costs hospitals more to take care of them.

Hospitals need more staff to deal with the increased need, but staff is in shorter supply than it used to be. Many in the healthcare workforce, burned out from the pandemic, are either retiring, switching careers, or getting more selective in what jobs they take.

“One of the major challenges going forward is labor cost,” Dr. Fouladi says. “We have seen a shortage in nurses, technicians, and clinicians. Hospitals need to find ways to retain and maintain their staffing levels.”

Inflation is also a serious factor, increasing the costs of hiring new staff. But hospitals and health systems are also big purchasers of medicine, technology, services, and other supplies, all of which have ticked up in price. And it’s not just public funding being rolled back, either: rules around reimbursement for certain services, such as telehealth, were relaxed during Covid-19, but are now being reimplemented, costing healthcare organizations more time and money.

“As far as operating expenses, everything is going up,” Dr. Seale says. “Meanwhile, it’s challenging dealing with guidelines that are constantly changing, and a reimbursement rate that seems to be constantly shrinking.”

All healthcare organizations are working with limited resources, including their finances. But some organizations are working with fewer resources than others, and the effect can negatively compound itself. A short-staffed hospital, for example, will have higher cases of staff burnout, which can lead to worse patient outcomes. Tight financial conditions make purchasing equipment or attracting new staff harder. Poor hospitals in poor areas often have to see poor patients, who tend to be sicker and harder to get reimbursement for.

“Years ago, I worked with one of the largest hospitals in North America,” Dr. Seale says. “It was a level one trauma center, and most of the patients were uninsured or underinsured. They ran a deficit almost every single year. But based on the contracts, and now according to the government’s Hospital Readmissions Reduction Program (HRRP), not only do they have to treat the patients that come in for certain conditions, but they have to make sure they don’t come back with those conditions; otherwise, they’re penalized across all discharges. It can be a vicious cycle.”

On the other end of the spectrum, effective incentives can boost population health, creating healthy communities that require fewer healthcare resources. That surplus can carry over into other areas, reinvested in the healthcare organization and its surrounding community. Healthcare leaders looking at the financial bottom line need to simultaneously consider the human element of their budgets.

“It’s not just finances,” Gundling says. “This needs to be done in a community-focused way.”

The practices now implemented by healthcare administrators can set the stage for how healthcare organizations manage their finances far into the future. At its core, this is about resource management, and it can start simply, with reducing waste and removing duplicate processes.

A major target for all hospital administrators is to reduce their readmission rates—instances where discharged patients return to care for the same issue within a certain timeframe, usually 30 days. In 2018, there were 3.8 million adult hospital readmissions, amounting to an average readmission rate of 14 percent.

Not only do readmissions represent a failure of care, but they’re also extremely costly: approximately $15,200 each, on average. Investments in tech and data management can reap large dividends in this area, with AI-powered predictive analytics showing promise in reducing readmissions.

“The biggest thing going forward is AI,” Dr. Seale says. “If we can add AI into EHR systems, it can improve healthcare reimbursement, and it can improve patient outcomes.”

Administrative costs account for up to 25 percent of US health expenditures, with billing and coding being two of the top drivers of these expenses. Autonomous coding could help by alleviating short-staffing issues around medical coding and making the reimbursement process more efficient. But tech is only one part of the larger calculation.

“We’re not living in a world of pure numbers,” Dr. Fouladi says. “We’re living in a world where individuals want to be validated, and especially in the healthcare setting. With Covid, we saw a lot of challenges related to representation of the community. It’s extremely important, moving forward, to integrate those concepts and approaches within healthcare’s financial management systems.”

The values of diversity, inclusion, and representation have a clear business case in healthcare settings: hospitals and healthcare organizations that better understand, serve, and collaborate with their communities create healthier and happier patients (who, in turn, cost less to care for). This human outlook is reflected in the best implementations of value-based and integrated care models. As cost savings are reinvested back into healthcare organizations, and back into community-minded public health initiatives, a previously vicious cycle can become a virtuous one instead.

“Healthcare organizations need a holistic approach,” Dr. Fouladi says. “That holistic approach should consider staff, stakeholders, clinicians, and community. If leaders want to be transformational rather than transactional, they need to go beyond numbers.”