As hospitals face economic downturn, leaders must think strategically

Kristin Pothier, global lead, healthcare and life sciences deals advisory at KPMG

Hospitals and health systems don’t need any more financial difficulties, but they could be facing more headwinds.

With the possibility of a recession, or at least more economic volatility, it’s going to be more important than ever for hospital leaders to think strategically, said Kristin Pothier, global lead, healthcare and life sciences deals advisory at KPMG.

Pothier spoke with Chief Healthcare Executive about the challenges ahead and what hospital leaders should be considering.

“As a health system, you have to be thinking short term and long term,” Pothier said.

Many healthcare leaders are bracing for a recession. KPMG recently surveyed business leaders about their thoughts on a possible recession. Roughly three out of four leaders (77%) in healthcare and life sciences think the odds of the U.S. entering a recession in the next 12 months are greater than 50%.

Some healthcare leaders don’t necessarily think it will be a short recession. Nearly half (47%) of healthcare leaders surveyed said they think a recession will last more than one year.

“With COVID, the last couple of years, they’ve been stretched. They’ve had to take care of their covid patients,” Pothier said of hospitals and health systems. “They are also dealing with massive staff shortages, as staff have gotten sick, or sick of working.”

Hospitals have already endured a difficult year financially, with some systems seeing substantial losses. Hospitals could be seeing their most difficult financial year in a long time, Erik Swanson, a senior vice president of data and analytics with Kaufman Hall, said late last month.

With hospitals seeing higher costs in labor and supplies and uncertain revenue, Pothier said hospitals need to be looking to streamline their costs. She said hospital leaders should ask: “Where is the biggest bloat in costs you have?”

Focus on talent

While hospital and health systems could face more cost pressures, leaders must invest in their staff, Pothier said. Given the staff shortages they are experiencing, hospitals can’t afford to lose more talented people.

“Really look at who you’re hiring and how you can best keep them if they’re strong,” Pothier said.

Hospital leaders should be talking to their staff and asking what they need, she said.

Pothier said leaders should ask their teams: “How is the staff feeling? What are they upset about? Are they upset they are working too hard? Too many hours? Not enough flex time?”

If nurses are doing too many chores on top of their duties, and that’s a common frustration among nurses, then smart leaders will find a way to shift some tasks to other duties, she said.

“When you look at all of the jobs a nurse will do, does he or she have to do all of those jobs?”

“Be creative in staffing,” Pothier said.

Hospitals also should be using technology to reduce burden on their staffs, including telehealth or automation. Health systems could consider “adding anything that can ease the strain on the staff you have,” Pothier said.

Hospitals should look to do more automation in the laboratories, which could help systems avoid losing more medical technicians, “and they’re scarce to begin with.”

While hospitals must watch expenses, they also may need to invest in technology to keep pace with rivals, Pothier suggested.

Customers have higher expectations and are more inclined to shop around for health systems, she said.

“The pace of innovations is such that patients get to choose where they go,” Pothier said. "They choose to go to the most innovative center, the center that has at least on appearances, the best care, the best technology.”

“It’s competitive among health systems,” she said.

• Read more: These hospital mergers and acquisitions collapsed. Here’s why.

Impact on mergers

The economic downturn, and the prospects of a recession, could potentially have an impact on hospital mergers and acquisitions. The number of hospital mergers and acquisitions remains below previous years, and the pace of deal-making may not increase in the short term, Pothier said.

Increasingly, she said it’s likely hospitals that are cash-strapped will be looking to form partnerships with companies that can help them in specific areas where they are looking to expand services, such as telemedicine or mental health services, Pothier said.

Hospital leaders may find it more desirable to partner with a company or provider instead of investing heavily in a service they’re currently lacking.

In the first six months of the year, 25 hospital consolidations have been announced, which would essentially match the 49 deals seen in 2021, a quiet year for hospital deals, according to Kaufman Hall. For perspective, there were 79 hospital consolidations in 2020.

While there have been fewer mergers, the hospital industry is seeing bigger deals. Trinity Health just completed its acquisition of MercyOne in Iowa. Atrium Health and Advocate Aurora announced their intention to merge and form a $27 billion system. If approved by regulators, the Atrium-Advocate Aurora deal could spur more mergers of larger hospital systems, analysts project.

Some hospitals that are teetering financially may need to merge with other health systems to stay afloat, some analysts have projected. While Pothier said that the downturn could drive more smaller systems to merge, she said it won’t necessarily be easy.

“Even our largest health systems have significant cost issues,” Pothier said.

If America sees a recession that continues for an extended period, health systems are going to experience more challenges.

In a lengthy recession, some providers could see fewer patients scheduling cosmetic surgery, Pothier said.

At the same time, a recession could lead to more health problems for Americans, whether it’s stress-related or substance use.

“Patients still get sick. Patients sometimes get sick because of what they’re dealing with at home,” Pothier said.

If unemployment rises, more Americans may be going to hospitals or health systems without private insurance.

Life sciences

Executives in the life sciences are exuding more optimism than those leading hospitals and health systems, KPMG reported.

In its survey, 80% of life science company leaders said they were forecasting year-over-year revenue growth in 2022. Conversely, 41% of healthcare executives are projecting a decline in revenue in 2022. Roughly two out of three life sciences executives (65%) said they had an appetite for merger activity.

Over the past couple of years, some life sciences firms became bloated with “covid cash”, as Pothier called it, and moved quickly to acquire companies they found attractive. In a period of economic uncertainty, Pothier said some of those companies may be looking more critically at some of those recent acquisitions.

As Pothier said, some companies could look to “divest the companies that don’t make any sense,” she said. “Let’s be focused on rationalizing the portfolio when some of this cash disappears.”

Life sciences companies also have one edge over hospitals and health systems: they aren’t facing a dearth of critical talent. But that doesn’t mean life sciences companies have it too easy when it comes to talent acquisition, Pothier said.

Firms aren’t just paying to recruit talent. They’re increasingly offering desired candidates the ability to work remotely, she said.

“The war for talent is still very real,” Pothier said. “It’s very different than healthcare. There’s plenty of people to serve the roles. It’s just very competitive.”