As hospital margins gradually improve across the industry, a significant divide remains between higher- and lower-performing hospitals, with nearly 40% of facilities still operating in the red, according to Kaufman Hall. Multiple factors are contributing to this growing divide, including market positioning, payer mix, depth of outpatient services and the management of contract labor.
In an interview with Becker's, Robert Broermann, CFO of Sentara Healthcare, and John Beaman, CFO of Adventist Health, shed light on the key factors driving this divergence, the growing importance of market positioning and how this trend will impact hospital consolidation.
Editor's note: Responses have been lightly edited for length and clarity.
Question: While operating margins are improving on average, 40% of hospitals are still losing money, even as overall market conditions continue to stabilize. What are the biggest factors at play between hospitals on the higher and lower ends of the spectrum?
Robert Broermann, CFO, Sentara Healthcare (Norfolk, Va.): In our system, we have certainly experienced some of this with individual hospital performance. We have about 40% of our hospitals hovering close to the breakeven line. Even within a generally successful health system, strategic positioning in a market is key. If you're not number one or number two in your market, there are real disadvantages, such as difficulty achieving the scale needed or securing fair rates for services. This can affect the quality of medical staff and create challenges in the market.
Additionally, the market itself matters. It's no secret that many rural hospitals are struggling financially. We have a couple of rural hospitals, and that's tough healthcare. While volumes have returned post-COVID, it remains challenging for rural communities to develop the critical mass necessary to support the fixed costs of running a hospital. It's also harder for them to attract talent. Recruiting physicians and allied health professionals is difficult, and rural hospitals often have to pay a premium to attract them. They also face staffing challenges that may require relying on locum tenens and temporary nurses.
If you're not well-positioned in a market, or if the market is too small, it's increasingly difficult in today's environment to make it work.
John Beaman, CFO, Adventist Health (Roseville, Calif.): It really boils down to the market. In addition to rural hospitals, safety-net hospitals are also struggling. This includes inner-city hospitals with a high percentage of Medicare and Medicaid reimbursement, which operate under a fixed reimbursement structure, compared to other markets that may have commercial payers as their primary reimbursement structure.
What cuts across all of these is the inflation we've seen in labor, supplies and other costs. Safety-net hospitals, whether rural or urban, often have a fixed revenue base, but face rising variable costs like labor, which have increased 7-10% annually for 2-3 years. The dynamic really depends on the market you're in and the payer mix or reimbursement structure. The cost implications, however, are consistent across the board — everything is going up.
Q: Where are the key opportunities for financial improvement for rural and safety-net hospitals?
JB: For Adventist Health, about two-thirds of our hospitals are rural in nature. On the rural side, there's focus on the business model, structure and reimbursement mechanisms. But that's also where the value of these rural hospitals being part of a larger system comes into play. Often, when we think of a health system, we think of scale. It allows one hospital to balance another when one might not be doing well. It also creates opportunities for clinical efficiencies, best practices, and service line enhancements between rural and urban facilities. Looking at it holistically, being part of a system helps rural hospitals get back on track, allowing the reimbursement structure to catch up with costs, while other parts of the system can accelerate their progress.
RB: If a struggling hospital is still independent, tough decisions might need to be made about which services can continue. Many facilities also face the need to replace aging infrastructure, requiring them to rethink the model of care from a sustainability standpoint. As mission-driven organizations, we want to offer the full range of services, but to keep the mission alive, tough decisions are sometimes necessary. Independent safety-net or rural hospitals, especially, face significant challenges without this system support.
Several rural hospitals recently elected to join our system to secure long-term sustainability, and choosing the right partner has been critical for maintaining their mission. Even for supporting health systems like us, the question is about what level of care is sustainable for the community. It's tough to remain independent as a safety net or rural provider today.
Q: Hospital M&A activity is rebounding after a decline during the pandemic. How do you see hospital consolidation evolving in the coming years as cross-market deals become more prominent and new players aim to disrupt the sector?
RB: The trend of hospital consolidation will continue. Although COVID temporarily slowed it, we're likely to see it on a larger scale now. 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.
The cost of technology and shared services is rising, with AI being a prime example. 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. As health systems explore the sustainability issue, geographic diversification may also prove beneficial in the long term.
For example, Sentara and Adventist are on opposite coasts, which may seem non-contiguous, but from a sustainability standpoint, it could be a good strategy. Variations between states and regional cycles might work to our advantage. For the first time, we're starting to consider potential partnerships like this.
JB: Adventist has acquired five new hospitals in the last 18-24 months, each with different circumstances. One was a standalone hospital that saw value in joining a broader organization to gain clinical expertise, infrastructure and recruitment support at a fraction of the cost. Another was acquired out of bankruptcy. In a third case, we entered a new market to diversify our footprint.
These acquisitions were driven by business needs, clinical improvements and administrative efficiencies. The cost of entry in healthcare, particularly for technology, is high, but extending resources across a larger system makes it more affordable. We've focused on both geographic concentration and expanding into new markets, allowing us to extend care and fulfill our mission.
Q: AI's potential in healthcare finance has been widely discussed, but tangible results are still emerging. What key initiatives or early successes with AI have you seen at your health systems?
JB: We've approached AI by focusing on the problems we're trying to solve rather than allocating a dedicated budget. On the revenue cycle side, we use AI to identify payment and denial trends from payers, especially with prior authorizations. With healthcare now digitized, AI helps us make better business decisions. On the clinical side, it has helped us identify conditions like sepsis more quickly, literally saving lives. We've invested in AI where it solves specific problems, but we haven't created a dedicated team or budget for it yet.
RB: We approach AI similarly, asking if it's evolved enough to be useful in certain areas, but we haven't set a specific AI spending goal. Valid use cases are emerging, and we've already invested in some, though we're still in the early stages. AI excels when processing large amounts of information quickly, such as in the revenue cycle, where clinical documentation and coding often require human effort. This is a perfect AI application, especially in pushing back against insurance denials. At some point, it may even be AI versus AI, with systems exchanging medical records to facilitate fair decisions. On the clinical side, AI can quickly review years of records to inform better diagnoses, something human clinicians don't have time to do. It's still early in the game, but AI shows promise.