New Hyde Park, N.Y.-based Northwell Health began 2023 with a low, but positive operating margin, but labor costs are expected to increase again this year on the back of recent union activity in the state.
To offset such increases that were not anticipated in the 2023 budget, Northwell is evaluating opportunities to reduce expenses and increase revenue across the health system, which includes 21 hospitals and about 83,000 employees.
Michael Dowling, CEO of Northwell, spoke to Becker's Hospital Review about the health system's biggest challenge this year, how it approaches cost-cutting and why outpatient care is its biggest growth area.
Editor's note: Responses are lightly edited for length and clarity.
Question: Many health systems saw margins dip last year amid rising inflation, increased labor costs and declining patient volumes. How have you led Northwell through the challenges of last year?
Michael Dowling: We ended 2022 with a low, but positive margin. We've been coming back from COVID quite successfully, and we're back pretty much in all areas to where we were prior to the pandemic. Volumes have returned and we're very busy. We came into 2023 with a positive budget and a positive margin. We anticipate that you're always going to have challenges and disturbances, but it's important to stay focused and deal with it. We have a very detailed strategic plan, which outlines our various goals, and we stick to it.
Q: What is your top priority today?
MD: The biggest issue for us today is labor costs. We have lots of union activity in New York at the moment. There were various nurse strikes in New York City at the beginning of the year. None of our hospitals were involved in those deliberations, but some of those hospitals agreed to contracts that have increases that were not anticipated in anybody's 2023 budget. That's going to have an effect on us. We have negotiations ongoing with the nurses' union, and have 10 unions overall. About 90 percent of Northwell's facilities have unions, so the bottom line is we are going to have expenses as a result of these contracts that were not anticipated in the budget. I don't know the final number on these contracts yet, but it's definitely going to be more than what we anticipated.
The unions in New York get a lot of government support and have become very empowered and quite aggressive. The bottom line is there's more expense than we anticipated in our budget, so we need to figure out how to address that. We're looking at everything across our health system to find expense reductions or revenue enhancements to be able to make up for the increased labor costs and be optimistic about ending the year with a positive margin. But we're in a good place and are not like some other health systems that are struggling financially.
Q: Where are the biggest opportunities to reduce expenses or increase revenue to offset the increased labor costs?
MD: It's a combination of a lot of things. We have a detailed capital plan that we may slow down. We hire about 300 people a week, so maybe we'll target that hiring into specific areas and not be as broad based as we thought we could be. We will examine if we have specific programs or initiatives we can curtail without doing any damage to our core mission. It will end up being a portfolio of items; it won't be one big thing. On the revenue side, we're working very hard to increase our neurosurgery, cardiac, cancer and orthopedic businesses. Over the next couple of months, all of those things will be taken into consideration. The bottom line is we are going to come out of this winning.
Q: Looking three or four years down the line, where do you see the biggest growth opportunities for Northwell?
MD: Our biggest growth is in outpatient care. A lot of surgeries are moving outpatient, so we have to get ahead of that. Some think we are only a hospital system, but only about 46 percent of our business is from our hospital sector today. Home care is going to grow phenomenally, especially given the new technology that's available. Digital health will also dramatically expand.
We're also looking at expanding into new geographic areas and markets. It's about positioning your offerings in places close to where people live, so you reduce the inconvenience of people having to travel long distances for care when it should be available to them closer to home. When you do that, you increase market share. We're constantly increasing our market share by being very aggressive about going to where the customer is and providing the highest quality care that we can. Part of that is also being able to recruit top-line, quality physicians. When you do that, you attract new business because you have competencies that you didn't have before. It's a combination of all of these things, but there's certainly no limit to the opportunities in front of us. We're not in a world of challenges; we're in a world of opportunity. The question is are we aggressive enough and do we have enough tolerance for some risk? We need to be as aggressive as we possibly can to take advantage of some of those opportunities.
Q: What is the biggest challenge on the horizon for Northwell?
MD: The biggest challenge is the huge growth in government payer business — Medicare and Medicaid. The problem with Medicaid — especially in a union environment — is it doesn't cover your costs. The government is a big part of a potential future issue there. By increasing Medicaid, the more of your business becomes Medicaid and the worse you end up doing, unless you can increase your commercial payer business to continue to cross-subsidize. We also have a lot of union negotiations over the next couple of months, which will put a strain on our 2023 budget, but we will resolve it.
Q: How do you see hospitals and health systems evolving as CMS, commercial payers and patients continue to push more services to outpatient settings, where they can arguably be performed at a higher quality and lower cost?
MD: I think it's going to continue to grow. For example, Northwell has 23 hospitals — 21 of which it owns — yet it has 890 outpatient facilities. We've been ahead of this curve a long time. Our primary expansion is in ambulatory care, not in-hospital care. Like I said, only 46 percent of Northwell's total business is its hospital business. If you're relying on the hospital to be the core provider of the future, you're going to lose. You've got to take a little bit of a hit by going out and expanding your ambulatory presence. But the more you expand ambulatory and grow in the right locations, the more you increase market share, which brings more of the necessary inpatient care back to your hospitals. Our hospitals are growing and getting busier in addition to our outpatient centers because we are growing market share. If we enter a new community and see 100 people, five of them will need to be hospitalized. That's a new market. Ambulatory cannot be disassociated from its connection to the inpatient market.
Q: Many financial experts are projecting a recession this year. How might that affect hospitals and health systems, and how can they best prepare?
MD: Even if we do have a recession, it doesn't mean that people don't get sick. In fact, people's problems increase. Our business does not slow down if we have a recession; our business will probably increase. On the revenue side, it won't necessarily affect our government reimbursement, which we don't do well on anyway. The things you worry about during a recession is if employers give up the coverage of their staff. Then those employees with no insurance may go on a state Medicaid program, and that might affect hospitals.
In the healthcare sector, even in a recession, the need for hospital services actually increases. No recession could be as bad as what we experienced during COVID, yet we managed it. We had a problem that we didn't even understand, and we worked through it. I think healthcare deserves an extraordinary credit for what was done during COVID. If there is a recession, we will deal with it. It's just one of those things that happens, and we will respond to it in as comprehensive a way as we can. I can't control it, but I can control our response. Leadership to me is about having a positive disposition; basically saying that whatever happens to you, you're going to win.