Higher costs, tough negotiations: KPMG’s Ash Shehata looks at hospitals in 2023

With only a couple of weeks until the new year, Ash Shehata offered an amusing response when asked about the outlook for hospitals and health systems in 2023.

“I think the first headline in ’23 is, let's look towards ’24,” Shehata, KPMG’s national sector leader for healthcare and life sciences, told Chief Healthcare Executive.

To be clear, Shehata said the coming year won’t be entirely negative. But he said hospitals are going to continue to face difficulties with labor costs.

“I think there will be a little bit of a moderation of the increase of labor rates,” Shehata said. “We already saw that moderation happening in the second half of ’22. My expectation, we'll start to see a little bit more of that.

“Now the issue is, does it ever go back? Does it reverse the trend? Likely not.”

Shehata spoke with Chief Healthcare Executive about trends in hospitals and healthcare in the year ahead, the outlook for mergers and acquisitions, and the opportunities with greater consumer interest in healthcare.

Most nonprofit hospitals and health systems have relatively low operating margins, even when they aren’t facing economic challenges, Shehata said. With higher costs for labor and supplies, hospitals are struggling with tighter margins. Hospitals are also looking at more contract negotiations with nurses in 2023.

“So the question is, if you're already making low margins as the health system in general, how do you continue if you take off a half a point or a point in perpetuity? You have to kind of make that up somewhere else,” he said.

Hospitals will likely continue to look at more cost-cutting techniques in the coming year, he said.

(Watch excerpts of our conversation with Ash Shehata. The story continues below.)

• Read more: Hospitals looking at ‘very bumpy 2023’

‘Tough negotiation’

More hospitals are going to be seeking better rates from insurers in the coming year, particularly as hospitals have struggled mightily with their finances in the pandemic.

Hospitals won’t find it easy, Shehata said.

“It's a tough negotiation, I think, maybe from both sides of the coin,” he said.

“Now the payers are looking for getting back to some normalcy around volumes. There's still pent up demand and delayed provisioning of services, which could actually lead to increases of medical costs. So I think the payers are planning for that in ’23, and ’24,” he said.

“On the other hand, as we know, the hospitals and health systems are feeling the effect of those margin compression. So I think there'll be a little bit of give and take, maybe not to the degree that health systems are going to be looking for that relief.”

In the end, Shehata expected hospitals and payers would forge some agreements, but it may be a difficult road.

“I think the two sides will come to an agreement, but ’23 will be a bit of a contentious year still,” he said.

More mergers should happen

Expect to see more mergers of hospitals and health systems in 2023, Shehata said. While merger activity has been relatively slow during most of the COVID-19 pandemic, more hospital deals have taken place in recent months.

Earlier this month, Atrium Health and Advocate Aurora Health announced they had completed their merger. The systems formed a new organization, dubbed Advocate Health. With $27 billion in combined revenue, it is now one of America’s largest hospital systems.

Like other analysts, Shehata said it could serve as a blueprint for similar hospital deals.

“A lot of the national health systems are looking at further mergers, moving into larger national markets,” he said.

“You will see more and more of the large health systems look for those natural synergies,” Shehata said. “And it just, you know, it makes sense, right? I mean, when we look at the implications of buying power and the capabilities around contracting, and being able to bring scale around capital improvements, I think you're going to see more and more.”

A former hospital administrator, Shehata recalled a time when a health system with $500 million or $1 billion in revenue “was considered huge.”

But he expects to see deals to create far bigger systems in the coming years.

“I do think we are going to see, in the next decade … $30, $40, $50 billion health organizations,” he said. “So I think we are starting to kind of step into this model where health system consolidation is really going to pick up again.”

Some health systems may look to sell hospitals in markets where they aren’t as competitive, Shehata said. “Organizations are looking at shedding those kind of nonstrategic markets, areas that they haven't been able to recoup some of the investments,” he said.

Mid-sized and smaller systems could also be looking to find partners, either out of necessity due to their financial difficulties or to get access to more specialty services, Shehata said.

“Number one is going to be the ability to step into better contracts and relationships,” Shehata said. “But the second one, which I think is a very complicated area, is really finding the specialty resources and services.

“So if we believe those specialty practices are being kind of bought out by payers and private equity, they're going to have to find a way to enter into that market,” he said. “And essentially, they're paying premiums now to retain those physicians. So I think that's going to move a lot of those organizations that are kind of in that middle tier to potentially join larger affiliations.”

Telehealth

While telehealth usage has surged during the pandemic, it has dipped from the peak months in 2020. With the uncertainty about federal support for telehealth, some companies looking to enter virtual care may be waiting to get a better handle on reimbursements before moving forward, Shehata said.

The federal government issued waivers to greatly expand telehealth, but those waivers are tied to the federal public health emergency for COVID-19. It’s unclear how much longer President Biden’s administration will continue the emergency designation.

Lawmakers in Congress have pushed legislation that would extend telehealth waivers through 2024, but it’s unclear if lawmakers will be able to approve the package and get it to Biden before the end of the year, and the congressional session.

“I would say the likelihood of it being expanded broadly will be somewhat contentious, because you're essentially asking for expansion of Medicare and Medicaid funding,” Shehata said.

That may not be easy, with Republicans controlling the house and a presidential election year coming in 2024, he said.

“Forget about the technology for a moment, the net is they're asking for additional funding in perpetuity,” Shehata said.

“Now, I think what's reasonable to think is there might be another extension of the waiver,” he said. “It might be extended in certain areas like mental health, it might also be part of programs that are promoting health and wellness, maybe through insurers.”

Role of the consumer

Amid the challenges expected in the coming year, healthcare leaders and life sciences companies should see great opportunities in reaching consumers, who are increasingly engaged in health.

“Healthcare and life sciences have an opportunity to lead now with the consumer,” Shehata said.

“We've awakened this community, this market, people who want to be engaged with healthcare because of COVID,” he said. “And health and wellness, I think this is a tremendous opportunity.

“I'm not expecting big leaps in ’23. But the investments and the seedlings I think need to be kind of put in the ground, so we can begin to reap those benefits in ’24.”

Consumers are likely to be more selective in choosing their healthcare providers, particularly as transparency around data and pricing improves, Shehata said.

They may also be more motivated by rising healthcare costs.

“If the insurance rates start to grow and more out of pocket costs get pushed to the consumer, we're likely going to see a greater awareness of those tools when the pocketbook becomes a bigger part of the decision,” Shehata said.