The payer/provider turmoil has been heating up, and now there are numbers to show that it's not just all in our heads.

A not-so-unexpected trend has emerged: a notable uptick in payer/provider disputes year over year.

In addition, according to research by FTI Consulting, disagreements over reimbursement rates and contract terms have also garnered more media attention in the last year, consistent with what HealthLeaders has been reporting.

Even more, among these payer/provider disputes there seems to be a clear opponent for providers: Medicare Advantage (MA).

Let’s look at what it all means and how CFOs can better address these challenges.

The numbers

According to the research, over the past two years negotiations between payers and providers have increasingly resulted in disputes that have captured the attention of the media. The coverage of these disputes has grown significantly, with a remarkable increase in 2023 compared to the previous year.

The study found that in 2023, there were 86 publicly reported disputes covered by media outlets, showing a 69% surge from the 51 disputes witnessed in 2022. These conflicts have spanned across 34 states, emphasizing the widespread impact.

"I think you're going to see an acceleration in the public town square, the competitiveness and the negotiating in the public opinion space," Britt Berrett, managing director and teaching professor at Brigham Young University and former CEO with HCA, Texas Health Resources, and SHARP, previously told HealthLeaders.

"I think moving forward, you're going to see a tremendous amount of public awareness on contract negotiations. Payers and providers are going to be arguing their cases in the town square," he says.

Interestingly, out of the total disputes covered by the media in 2023, 44% failed to reach an agreement. This failure to establish timely agreements mirrors the trend observed in 2022 when 45% of disputes remained unresolved.

As mentioned, the data shows that MA plans have emerged as a focal point in contract disputes between payers and providers.

In 2023, 59% of the disputes reported in the media involved MA plans, with 12 disputes exclusively focused on MA plans. This trend aligns with the previous year, where 56% of disputes referenced MA plans.

What does it mean for hospital and health system CFOs?

We know that payer/provider relationships are only becoming more complex, and these disputes are starting to take center stage among the challenges faced by hospital and health system CFOs.

The surge in media coverage of these differences underscores the need for proactive measures to navigate the evolving payer landscape.

Here are key strategies I have gathered from some of the best CFOs in the game:

Strengthen negotiation tactics: As reimbursement rates become a more contentious issue, CFOs need to enhance their negotiation strategies to secure favorable agreements with payers.

And CFOs need to remember they have more leverage in negotiation talks than they think, but it requires willingness and preparation to pull levers that may be uncomfortable yet necessary for financial survival.

One option is to collaborate with legal and financial teams to develop a well-informed bargaining position can help ensure fair reimbursement.

A second option? Consider contact termination.

Dropping a payer is “absolutely an important strategy,” Berrett says. “Providers are becoming more capable in measuring the impact of the slow or rejected payments, and providers are looking at the actual cost of care by patient. Payers need to be aware that.”

There are two important considerations for providers when negotiating, Berrett says. “Are we able to collect our negotiated rates, and are the patients covered by this payer more expensive to treat?”

Develop robust communication channels: Establishing effective lines of communication with payers is crucial to resolving disputes promptly. CFOs should work closely with their revenue cycle management teams to foster open dialogue with payers, enabling timely negotiation and dispute resolution.

Focus on your patient impact: Hospital and health system CFOs must prioritize patient experience and minimize disruption amidst disputes. Developing contingency plans and early communication with patients can alleviate concerns and ensure seamless access to care.

Monitor the regulatory environment: Stay abreast of regulatory changes and proposed legislation that may impact payer-provider relationships—for example, CMS’ attempt to better regulate MA. Understanding evolving regulations can inform negotiation strategies and help CFOs navigate potential roadblocks.

The financial outlook for not-for-profit hospitals and health systems is once again under scrutiny.

With operating margins at risk of a permanent reset, concerns have been raised among investors as it may lead to widespread downgrades, a new report by Fitch Ratings says.

While we are not expected to face a "sector-ending incident," hospitals and health system CFOs must carefully manage their liquidity and capital spending to navigate these challenges.

What is Happening with Operating Margins?

Traditionally, healthy operating margins for hospitals have ranged from 3% or higher.

In fact, even Kaufman Hall has reported that the median calendar year-to-date operating margin index was 2.0% through the end of this past November, “still well below the 3%-4% range often cited as a sustainable operating margin for not-for-profit hospitals and health systems.”

Now, Fitch Ratings predicts that the ideal range will likely reset to 1%-2% for not-for-profit hospitals in the future. While a significant reduction, the report suggests that widespread downgrades are unlikely due to the robust balance sheets and capital spending discipline demonstrated by many health systems.

Despite this, individual hospitals may face downgrades if they are unable to defer capital investments and fail to improve operational efficiencies.

What is the Cause?

One of the critical factors contributing to the financial uncertainty ahead is the aging population Fitch says.

By 2030, the last of the baby boomer generation will reach the age of 65, leading to a larger population in need of heightened healthcare services.

This scenario may strain healthcare providers' resources, potentially impacting their profitability. The need for increased staffing and the associated costs, the report says, may offset any gains made in operational efficiencies.

Another area of concern in the report is the days' cash on hand ratio. It questions whether the current range of 200-250 days may be too high, given the ongoing struggles of the sector.

However, the data shows that the ratio has consistently remained above 200 days in nine out of the last ten years, with a median of 216 days based on 2022 financials. Despite potential improvements in profitability and investment gains, the report suggests that this metric may see little improvement.

So how can CFOs prepare?

There are a few strategies hospital and health system CFOs can use to stay ahead.

Maintain a robust balance sheet: The report highlights the importance of building and maintaining a robust balance sheet to withstand potential financial challenges. CFOs should focus on healthy liquidity cushions to protect against unforeseen circumstances and maintain financial stability.

Optimize capital spending: As the industry faces financial headwinds, CFOs should evaluate capital spending carefully. Prioritizing investments that directly contribute to operational efficiency and improved patient care will be crucial to ensure long-term success.

Plan for the aging patients: With the incoming surge of the baby boomer generation requiring increased healthcare services, CFOs must develop strategic plans to support the growing demand. This may include proactive workforce planning, optimizing processes, and leveraging technology to enhance efficiency.

Monitor days' cash on hand ratio: While the current days' cash on hand ratio range may be appropriate given the sector's challenges, CFOs should continue monitoring this metric. A robust ratio can provide a buffer during economic downturns or unforeseen circumstances, safeguarding against potential financial instability.

While moving in a positive direction, the outlook for not-for-profit hospitals and health systems presents challenges that demand careful financial planning and strategic decision-making. While the reset of operating margins and the pressure to improve profitability may not result in widespread downgrades, it is essential for CFOs to maintain strong financial foundations.

Hospitals and health systems aren't the only ones dealing with revenue loss from Medicare Advantage (MA).

Humana, the second largest provider of MA plans in the U.S., recently released its Q4 2023 earnings report, and it missed Wall Street's earnings expectations by a surprising margin.

Even though Humana lowered its profit outlook due to increased spending, it still didn't perform well. Its CEO, Bruce Broussard, called the results "disappointing" during a call with investors.

Overall, Humana had a net loss of $540 million in the fourth quarter, which is a huge jump compared to the $18 million loss they had at the same time last year.

So what went wrong?

Well, Humana received more claims in December and January than they expected, which reflected higher inpatient and outpatient utilization at the end of the fourth quarter, the company says.

More seniors had short stays in the hospital, while fewer had observation visits in the ER. As we know, those short-stay admissions are more expensive than observation visits.

And when it comes to outpatient spending, Humana saw a higher cost per member in the fourth quarter compared to the third. This was because of increases in physician and outpatient surgical care and supplemental benefits.

Broussard told investors that the increase in utilization towards the end of the fourth quarter was a big deviation from what they expected.

To turn things around, Humana is planning to increase premiums and cut benefits in 2025 to improve their margins, but analysts predict they might have below-market membership growth.

Humana has gone all-in on government plans and even refocused their business on MA and Medicaid. But it's a tough market with risk adjustment and rate changes, along with other uncertainties. In fact, Humana is currently suing the federal government over its plan to audit MA payers.

This is Humana's first earnings release since their potential merger with Cigna fell through at the end of last year due to investor concerns.

At the time, "shareholders balked" and the companies couldn't agree on what would have been a Cigna cash-and-stock acquisition of Humana "with a large stock component," the WSJ said.

What providers might be thinking

It's likely providers have little sympathy for MA plans, especially as they have been dealing with the same MA cost challenges for years.

As HealthLeaders has been reporting, the payer-provider battle is raging, and more organizations have been fighting back against MA.

But why MA? While not the only culprit of the turmoil, organizations have been fighting back against MA’s low reimbursement rates for years, and CFOs are finding no fiscal viability in the relationship with the payer.

One case in point is Scripps Health. Two medical groups within the system canceled their MA contracts for 2024 because of low reimbursement rates, denials, and administrative costs to manage high utilization and out-of-network care.

These challenges have led to annual losses that exceeded $75 million for the system.

“We’re unfortunately on the vanguard of what I think is going to be a very ugly few years between hospitals and commercial insurance companies,” Chris Van Gorder, president and CEO of Scripps, told USA Today.

While the government has even begun weighing in on MA regulations, the MA turmoil being felt from both the provider—and the payers—isn’t likely to ease up anytime soon.

The volume of healthcare bankruptcy cases in 2023 was more than three times the level seen in 2021.

In 2023 there were 79 bankruptcy filings in the healthcare industry, the highest in the past five years—a significant increase compared to the 51 cases reported in 2019, according to the newest report from Gibbins Advisors.

The volume of cases in 2023 was more than three times the level seen in 2021 and 1.7 times the level in 2022. Even more, large healthcare bankruptcy filings with liabilities over $100 million surged in 2023, reaching 28 filings, compared to only 7 in 2022 and 8 in 2021.

The rise in healthcare bankruptcies in 2023 primarily impacted the senior care and pharmaceutical subsectors, so should CFOs of hospital and health systems care?

Yes. CFOs should still care.

Hospital and health system CFOs should still take note as challenges lie ahead. Capital market constraints, labor and supply cost pressures, and revenue strain all contributed to the bankruptcies seen in 2023, and all three of those challenges weigh heavy on hospital and health system CFOs too.

In fact, hospital bankruptcy filings also saw a significant increase in 2023, with 12 filings compared to a total of 11 filings from the previous three years combined.

Though there may be some optimism for providers with expected rate and volume increases in 2024, costs will likely remain a challenge. And as we know, smaller organizations with revenue under $500 million may face greater difficulties than larger health systems.

So, what was behind the three factors that contributed to financial distress in healthcare organizations? 

1. Capital market constraints: Despite an expected softening of interest rates in 2024, healthcare providers continue to face challenges in refinancing, accessing capital, and transactions due to relatively high rates, the report said. Additionally, new FTC and state anti-trust protections may limit strategic options.
2. Labor and supply costs: Over the past two years, healthcare organizations have experienced significant cost increases, creating a margin squeeze. While agency labor is stabilizing in some markets, workforce challenges persist, and potential federal mandates for minimum staffing ratios could exacerbate the situation.
3. Revenue pressure: Payment rate increases often do not keep up with cost inflation. Payers are also playing a role in revenue pressure, the report says, especially since there has been a considerable increase in denials from payers, particularly from Medicare Advantage plans.

 

What does the future hold?

Looking ahead to 2024, Gibbins Advisors predicts that senior care bankruptcies may return, despite the absence of filings in Q4 2023.

The firm also expects continued levels of healthcare bankruptcies similar to those seen in 2023.

Restructuring activity in the hospital sector is anticipated to remain high, particularly for rural and standalone hospitals dealing with profitability, liquidity, and leverage challenges.