Health system leaders face mounting challenges that require bold, innovative strategies to ensure long-term financial sustainability and operational efficiency. Rising costs, workforce shortages and payer challenges are reshaping how hospitals operate, with many rethinking traditional partnerships, tackling revenue cycle complexities and exploring new M&A models.
Consolidation and geographic diversification
Consolidation is not a new trend for hospitals, but the number of deals being announced or completed is on the rise after a brief decline during the pandemic.
"The trend of hospital consolidation will continue, and we're likely to see it on a larger scale now," Robert Broermann, CFO of Norfolk, Va.-based Sentara Health, told Becker's. "Hospitals and health systems need to grow to stay healthy, but there's a shrinking field of independent providers to join them. We're beginning to get into the later innings."
Rising costs in areas such as technology, particularly AI, is a key driving force. Consolidation allows health systems to distribute these costs over a larger network, making significant investments more feasible.
"While we're excited about AI's potential, it's expensive, and spreading those costs across a larger platform allows us to invest more deeply and quickly," said Mr. Broermann, who has served as Sentara CFO since 2001. "As health systems explore the sustainability issue, geographic diversification may also prove beneficial in the long run. Variations between states and regional cycles might work to our advantage. For the first time, we're starting to consider potential partnerships like this."
Cross-market mergers and acquisitions are becoming more prominent as health systems diversify their portfolios, pursue further economies of scale, and strengthen bargaining power with vendors and payers. Healthcare is shifting to a "multi-region model," with the number of systems operating in multiple states rapidly increasing.
By partnering with organizations in different regions, health systems gain access to new markets and mitigate the risks associated with regional economic downturns or demographic shifts. This diversification may also allow systems to capitalize on varying regulatory environments and reimbursement models, further strengthening their financial footing.
Tackling revenue cycle complexities
Partnerships are a key component of Tower Health's turnaround strategy as well as its future growth, according to CEO Sue Perrotty.
West Reading, Pa.-based Tower is one of many health systems that recently transitioned their revenue cycle operations to an external partner. Effective July 1, about 675 Tower employees moved to Ensemble Health Partners, which manages more than $32 billion in annual net patient revenue.
"Hospitals' biggest challenge in the revenue cycle is that we provide services to anyone who walks through our front door. I don't know of any other industry that has a business model in which they don't know when, if or how much they will get paid, and the customer is not the person paying," Ms. Perrotty told Becker's. "It's one of the hardest business models to try to figure out, and we're subject to a whole other industry, the insurance industry, and all of the shifts a consumer might go through throughout their lifetime."
A growing number of health systems are outsourcing certain aspects of their revenue cycles — such as billing and collections — to more specialized partners, allowing them to maintain focus on patient care.
"We are never going to be the best in class at doing that because we want to invest in our clinical infrastructure," Ms. Perrotty said. "For revenue cycle, we wanted to partner with an organization where that's all they do."
Ms. Perrotty also urged hospitals to move away from an outdated mindset that clings to in-house systems and long-standing operational models that may not be as efficient in 2024.
"You don't need to own something for it to work well. Health systems need to get away from the 'we built it, we love it' or the 'this is the way we've always done it' mindsets. Push yourselves to think beyond the way you've always operated and figure out if there's a smarter way to do it," she said. "You've also got to own your market. There should never be a person that goes anywhere else but to us to get the high-quality care that they need."
Rethinking partnerships to fuel growth
Similar to Tower, Minneapolis-based Allina Health also transitioned revenue cycle functions as well as IT functions to an external partner this year. About 2,000 Allina employees moved to Optum, part of UnitedHealth Group, in June.
Allina also plans to sell its lab assets to Quest Diagnostics to improve access and affordability of lab services while freeing up Allina to focus on other areas of patient care. The deal is expected to close this quarter.
These two partnerships highlight the importance of reevaluating long-standing practices and partnerships to free up health system leaders, resources and staff to focus on other high-priority areas, including patient care and market expansion. Health systems should not be constrained by certain internal resources and pursue external partnerships to accelerate growth in ways they may not be able to achieve alone, according to Allina CFO Doug Watson.
"Just because you've been doing something a certain way for a long time, doesn't mean that that's the best way for you to do it," Mr. Watson told Becker's. "Give thought to who your partners are, and are there partners that can help you accelerate things in a way that you can't do on your own, that then help benefit the organization so you can focus on other things that really you have to do yourself."