Effectively Addressing Declining Profit Margins

The healthcare industry has long struggled with declining profit margins. However, recent years have seen even more significant challenges related to finances and staffing as many healthcare organizations are operating at a loss due to the COVID-19 pandemic. In fact, a January 2023 report from Kaufman Hall finds that some hospital operating margins are still -1%. This decline is due to various factors, including labor costs, workforce shortages, inflation, rising healthcare expenses, reduced insurance reimbursements, an aging population, and supply chain shortages.

Rising labor costs, particularly in areas such as coding, are significantly impacting profit margins. The increased demand for skilled coders and a competitive market have increased salaries, putting pressure on hospital finances. Moreover, workforce shortages make it difficult to adequately staff hospitals, placing limits on cash flow and further adding to the strain on resources.

Inflation is also impacting healthcare costs, affecting the prices of supplies, equipment, and personnel. Healthcare costs are increasing faster than the general inflation rate and insurance companies are reducing reimbursements, resulting in less hospital revenue.

An August 2022 report from the American Hospital Association details how the COVID-19 pandemic resulted in many patients with chronic diseases delaying necessary care and treatment. As a result, when these patients eventually seek medical attention, they are presenting with more acute conditions. This leads to longer hospital stays and adds to the financial and staffing challenges hospitals are facing.

Additionally, the aging population in the United States has led to an increased demand for healthcare services, including chronic disease management, rehabilitation, and long-term care. At the same time, government healthcare programs such as Medicare and Medicaid have not kept pace with the increasing costs associated with this demographic shift.

Finally, lingering overseas supply chain disruptions are making it difficult for hospitals to obtain necessary supplies and equipment. This can lead to delays in patient care and increased costs for healthcare organizations.

To address declining profit margins effectively and improve profitability, healthcare organizations need a multi-faceted approach. The shift to value-based care models is increasing the need to prioritize quality, outcomes, and efficiency. By embracing AI-based technologies that improve productivity and quality, optimizing revenue cycle management, considering outsourcing options, and focusing on documentation accuracy, hospitals can streamline processes, reduce expenses, and boost revenue.

Implementing computer-assisted coding (CAC) and clinical documentation improvement (CDI) platforms helps eliminate coding backlogs, improve efficiencies, and increase accuracy, leading to improved revenue collection. Investing in artificial intelligence (AI) and data analytics tools can improve productivity, quality, and the patient financial experience while reducing overall costs.

Collaborating with experienced partners in revenue cycle management and healthcare technology can provide valuable insights and solutions tailored to specific needs to meet specific goals. Outsourcing revenue cycle management functions can help reduce in-house operation costs and denials. Specific tasks like coding, transcription, faxing, and medical record indexing are all potential outsourcing options, particularly in a remote work environment.

Focusing on documentation accuracy and compliance is also important for maximizing reimbursement and minimizing the risk of external audits. Hospitals should have compliance audits in place to identify and address any potential areas of vulnerability.

As an example, a health system facing challenges with coding denials did not have staff or the technology and analytics to determine their top denials. There was no way to eliminate the denials on the front end. Our review of historical and current data found that front-end audits could prevent those denials. By conducting front-end audits, analyzing denial statistics, and providing education to healthcare providers and revenue cycle staff, those denials were reduced by 88% and collected $13.2 million in revenue loss prevention over two years. In another case, natural language processing improved overall quality and helped to optimize one organization’s case mix index by 4.9%. In terms of value, this equates to more than $1 million.

Listen to the recent AGS Health RCMChat podcast to hear more.