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Ailing margins in U.S. nonprofit hospitals may force a deeper look across hospital departments, including laboratories. Although they are key influencers in clinical decisions, laboratories usually take up a small part of hospitals’ expenses, Greg Stutman, director, global solutions with IQVIA(BBC IVD Solutions), a provider of consulting services to the in-vitro diagnostics market, told CLN Stat. Even so, “the laboratory has and continues to remain a vulnerable line item when it comes to cost cutting,” Stutman said.
Several recent financial reports have painted a grim picture of hospital operations, including one from Fitch Ratings, which reported a drop in the sector’s median operating margins from 2.8% to 1.9% over the past year. Operating earnings before interest, taxes, depreciation, and amortization (EBITDA) declined from 9.5% to 8.5%. In other findings, a 6.1% year-over-year revenue growth was “significantly behind the 11.5% year-over-year increase we saw in last year’s medians, signaling perhaps the beginning of top-line revenue contraction,” Fitch reported. This represents the second consecutive year of shaky operating margins for this sector.
Similarly, Moody’s Investor Service reported an “unsustainable” trajectory for both nonprofit and public hospitals. “Revenue pressures continue to overshadow expense saving initiatives,” said Moody’s analyst Rita Sverdlik in a statement, comparing medians from fiscal 2016 and 2017. “While the median annual expense growth rate decelerated to 5.7% from 7.1%, annual revenue growth rate declined faster, to 4.6% from 6.1%.” While the sector has managed to lower expenses by controlling labor and supply costs, it’s had to contend with lower reimbursement, a rise in mergers and acquisitions, and a shift to outpatient care, which has driven down revenue, Moody’s reported. These factors are likely to strain profits through 2019.
An even broader analysis from Navigant Consulting Inc. reported a decline in operating earnings among 104 health systems that operate nearly half of all U.S. for profit and not-for-profit hospitals. “The total erosion for systems with operating earnings declines was $6.8 billion, a 44% reduction. The main cause: Hospitals’ expenses grew by 3 percentage points faster than their revenues from 2015 to 2017,” according to the report. Recovering from these performance declines calls for smarter strategies that encourage growth. “Systems must be disciplined to invest their growth capital in areas of actual reachable demand; that is, matched to the growth potential in the specific local markets the system serves,” Navigant’s report suggested.
All hospital divisions—not just laboratories—may eventually feel the effects if expense growth continues to exceed revenue growth in nonprofit hospitals, Fitch Senior Director Kevin Holloran predicted. “As hospitals/health systems look to control expenses, all departments will likely be looked at to determine if they are core to the overall business and if they are running as efficiently as possible,” he told CLN Stat.
While it’s clear that general labs are core to the business, conversations have been taking place about outsourcing specific tests to central reference labs to save money. “For example, if you only do 10 very expensive, non-STAT tests a year, should you look at outsourcing that work to one central reference lab that will do hundreds or thousands in a year and save on supply/equipment expenses?” Holloran said.
Hospitals facing additional cost pressures under the Protecting Access to Medicare Act’s (PAMA) newclinical lab fee schedule are seeing the benefits of outsourcing. “In the months leading up to the implementation of PAMA and in the weeks since, we have seen hospitals outsource various aspects of their laboratory services to commercial reference laboratories, including procurement and general management of the laboratory,” Stutman said.
Healthcare institutions are also looking for ways to curb over-testing and make their clinical test volume more efficient, Stutman observed. “The increasing use of cascades and algorithms, and ongoing developments in the field of artificial intelligence, may result in adjustments to test requisitions, leading to a reduction of certain tests and panels no longer considered clinically relevant. This is in addition to ongoing initiatives, such as the Choosing Wisely campaign, which promotes discussions around what is deemed to be necessary testing and procedures,” he said.
Another factor bound to affect hospital finances is the Affordable Care Act’s value-based purchasing program. To prepare for the coming changes, a report from J.P. Morgan urged that hospitals adopt a number of strategies. These include:
focusing on easily achievable goals such as ensuring timely removal of catheters;
coordinating patient care with outside facilities;
restructuring incentives to encourage better communication; improving accountability on value-based purchasing clinical measures; and
investing in follow-up care and patient oversight.
The news isn’t all bad for nonprofits: Despite shaky operating margins, the sector is maintaining an “A” rating due to healthy balance sheet metrics such as days’ cash on hand, cash to debt and leverage. These are at all-time high, according to Fitch Ratings. However, “should operational pressures continue for an extended period of time, even strong balance sheets will begin to come under pressure,” said Holloran in a statement.