A 2022 American Hospital Association report highlighted the financial and operational challenges facing our health systems and hospitals. Triggered by the COVID-19 pandemic and subsequent rising inflation, hospital expenses (drugs, supplies and labor) have risen significantly in recent years. Unfortunately, higher patient volumes can’t keep pace with the fast-growing costs of care. As a result, about one-third of all U.S. hospitals currently operate on negative margins.
In addition to building projects, a healthcare organization’s capital resources must go toward modernizing technology, upgrading existing physical infrastructure and acquiring additional partners.
These challenges mean that substantial capital expenditures can rapidly outpace cash flow in today’s healthcare climate. This gap drastically restricts a healthcare organization’s ability to invest in large-scale construction projects or acquisitions.
To meet their current and long-term needs, health providers need a new revenue model that is less reliant on net patient revenues, debt issuance, philanthropic gifts or savings. This emerging model, however, demands fundamental shifts in long-held assumptions about expenditures and income.
Instead of increased patient volume, the new revenue model focuses on performance metrics such as improved patient outcomes, length of stay and operational efficiencies. Combined with initiatives like virtual care and telehealth solutions, outpatient and home care, reduced energy use and lower maintenance costs, all can add valuable points to the bottom line.
Increases in patient volume, while still required for long-term quality improvements, can become an expense, such as specific routine diagnostics—especially when they come with needs for more space and equipment. Any large capital construction project therefore must demonstrate that it will leverage technology and increase operational efficiencies to reduce the demand for physical space.
Health providers that embrace this new revenue model will be able to secure the funding required to move forward with capital construction projects while maintaining a growing profit margin well into the future.
HOK’s Healthcare Consulting group collaborates with health systems and hospitals to ensure their facilities and operations meet the needs of patients, staff and the community. For more information, reach out to Anthony Roesch.