Providers struggle as reimbursement increases don’t address all economic challenges

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For a majority of healthcare providers, one of their biggest challenges is dealing with operating losses, which were significant in 2022 for many in the industry. When combined with the recent downturn in investment markets, providers have been continuing to struggle.  

The key driver for operating losses relates to the adjustments providers have had to make regarding staffing levels: there are not enough clinicians to see all the patients. Hospitals, for example, are filling staffing holes with contract labor, which is expensive. Hospitals also are dealing with inflation and its impact on the cost of supplies. Many providers feel that a 20% increase bump in reimbursement from private and public payers is necessary to cover these increased costs. 

Because of this, many providers for the first time are facing the real possibility of failing their debt covenants. Some are initiating difficult discussions with banks about covenant waivers or hiring consultants to examine what they need to do to turn around operations. 

Skilled nursing facilities (SNFs) 

Medicare reimbursement adjustments for SNFs were flat in 2022, especially when considering economic pressures related to increased wages (necessary to keep providers properly staffed) as well as inflation (which has increased provider costs). Providers are also under pressure to increase reporting and outcomes related to healthcare quality measurements, which also has an impact on reimbursement. 

Some states have increased Medicaid budgets. For example, in 2022 Pennsylvania approved a 17.5% increase to Medicaid reimbursement for state nursing homes, equal to an increase of around $35 per resident per day. This was the first increase in nursing home reimbursement since 2014.  

As wages and inflation continue to pressure providers, however, many states are still playing catch up on healthcare reimbursement, which may not be enough for providers to solve some of the fundamental business issues they face. Little to no of the increase in Medicaid funding is targeted at providers’ capital needs, a significant issue as many properties enter their third or fourth decade in use without upgrades that would allow for continued operation. For SNFs to continue operating and to thrive, there needs to be some creative ways to rethink how their delivery model adapts so they can be financially sustainable. 

Hospitals 

The news for inpatient hospitals was a little brighter. Medicare increased reimbursement by 4% for inpatient hospitals for the fiscal year that started in October 2022. Earlier in the year, the proposed increase was only 3%. Some in the hospital industry, however, noted that the increase in Medicare reimbursement should have been closer to 8% due to hospitals’ increased costs. Payments for Medicare dependent hospitals (which are largely in rural areas) decreased, as did Medicare reimbursement for disproportionate share (DSH) hospitals and uncompensated care. 

For outpatient hospitals, Medicare payments increased 3.8% as of Jan. 1, 2023, reduced by 2% as mandated by Congress under its sequester policy. 340b hospitals benefited from court decisions that determined that The Centers for Medicare & Medicaid Services was underpaying these hospitals, leading to an increase in federal reimbursement of almost 30%. This cost will be offset by a 3% cut in non-drug reimbursement. How hospitals fare under these Medicare reimbursement changes is dependent on how much 340b money comes into the hospital. A caveat to the changes in 340b funding – hospitals have extra work to undertake to qualify for higher payments. Any claims submitted after Sept. 28, 2022, will be reimbursed at the higher rates; claims from before Sept. 28, 2022, will have to be resubmitted. 

Medicare reimbursement remains incredibly complex, especially for hospitals. Providers need to pay attention to DSH, uncompensated care, their wage index, Medicare, bad debt, among many other factors. There are so many moving parts that if hospitals do not properly monitor all the public and private sources of revenue they risk leaving money on the table they are entitled to.  

2023 may see more providers looking to right-size their operations, asking questions like, “If this is the staffing level we can get, how can we best manage that?” Some hospitals are looking at their real estate portfolios and to see if they can monetize some offsite facilities or look to combine operations under one roof or in a closer campus. 

For more information on this topic or to learn how Baker Tilly’s healthcare specialists can help, contact our team.