SAN FRANCISCO—Ascension Health has charted a $2.5 billion economic recovery plan executives say will help the health system weather ongoing operational challenges and staffing and inflationary pressures.
As part of economic recovery initiatives, the Catholic system has targeted billions of dollars of opportunities in cost optimization and service line and revenue growth, executives said Tuesday. "This work is underway and we believe that will help stabilize operations and allow us to continue to make strategic investments," Joseph Impicciche, president and CEO at Ascension Health, told a room full of investors and other JPM attendees Tuesday.
Through these initiatives, the health system aims to stabilize its labor costs, specifically expensive contract labor, while also investing in ambulatory care and ancillary services to drive higher patient volumes as more care shifts from inpatient to outpatient settings, executives said.
Like many of its health system peers, Ascension continues to face significant financial and operational headwinds such as workforce shortages and wage inflation driving up expenses, COVID-19-related disruptions to patient volumes and inflationary and recessionary pressures. These headwinds come as more care continues to shift from inpatient to outpatient settings.
Ascension Health took a financial hit in the first three months of 2022, posting an operating income loss of $671 million for the three months ending March 31 and its operating margin dropped to -10% on $6.7 billion in revenue.
For the three months ended June 30, the 144-hospital health system posted an operating income loss of $239 million with an operating margin of -3.4% on $7.1 billion in quarterly revenue.
Ascension closed its 2022 fiscal year with an $879.1 million operating loss and a net loss of more than $1.8 billion, according to investor disclosures for the period ended June 30. The health system saw its operating margin fall from fiscal 2021’s 2.5% to -3.1%.
The health system's economic recovery plan initiatives are starting to bear fruit for its financial performance, according to executives.
By the fiscal year 2023 first quarter ending Sept. 30, Ascension started to see a change in the trajectory. The organization posted a $119 million operating loss and a -1.6% operating margin on $7.2 billion in revenue.
"Although our operating performance is certainly not where it's been traditionally or where we expect it to be, we have seen good improvement over the first three quarters of this year," said Elizabeth Foshage, executive vice president and chief financial officer.
Ascension charted an 8% increase in operating revenue in the first nine months of 2022, she noted. The health system's expenses, including salaries, wages and benefits, have remained relatively flat for the first nine months of 2022.
"In our fiscal year '21, our preceding fiscal year, our expenses were up about 12% and salaries and wages were up about 10.5%. So, building on that huge base, we've now been able to stabilize those expenses," she said.
As with many other health systems, contract labor, premium and overtime expenses were major drivers of Ascension's overall higher expenses.
Ascension saw a 100% increase in its contract labor premium and overtime expenses from fiscal year 2021 to 2022. Those labor costs totaled $1.8 billion in fiscal year 2022, of which just over $1 billion of that was contract labor, Foshage noted.
During the first quarter of 2022, the health system implemented rigorous procedures to mitigate contract labor trends.
"We saw rapid escalation month by month last year with contract labor. Once we understood what was happening, we really went to work helping our hospitals understand when to bring in contract labor by putting together business cases to make sure was it better to keep an area closed or to open it up with contract labor," she said.
She added, "We consolidated down, and it was a little bit of a risk, to one vendor for contract labor across our whole system. But that was able to drive the rates down by almost 40%. So both the rate and the number of contracts had come down significantly. Our most recently ended quarter in September, we are actually below contract labor, premium and overtime [expenses] where we were a year ago. We expect that to continue to come down as we move further into calendar year '23."
The health system has taken steps to reduce the hourly rate for contract labor by 36%, said Eduardo Conrado, executive vice president, chief strategy and innovations officer at Ascension.
Other labor stabilization initiatives include recruiting employed nurses with market-appropriate rates and implementing a new care model to improve acute care productivity by managing total labor cost of care, he noted.
A recent New York Times report alleged that the nonprofit health system created its own nurse workforce challenges by downsizing in order to improve profitability. Ascension published a detailed response to the NYT article, emphasizing that it is "deeply committed to providing a positive workplace culture for our nurses, as well as other clinicians and associates."
Ascension said in its blog post that its hospital staffing levels, particularly bedside nursing staffing, had actually increased in the years leading up to the COVID-19 pandemic.
Ascension also evaluated its patient volumes, which represent a significant percentage of its revenue. The health system continues to see a decline in inpatient discharges compared to pre-COVID levels.
"We don't think that volume is coming back," Foshage said. "People are seeking care and other places. We're not seeing as many inpatient discharges, which is why our strategy is focused on more of the ancillary and outpatient."
Looking at surgical visits, outpatient surgeries have returned to pre-COVID levels. "But we have seen escalating decline in our inpatient surgery visits. Again, we don't expect to get that volume back. We do think this is a fundamental change in how many surgeries will be performed on patients," she said.
Ascension has been making strategic capital growth investments to build out ambulatory and ancillary services such as imaging, ambulatory surgical centers, outpatient rehabilitation facilities and at-home care services. The health system spent about $1.7 billion on these brick-and-mortar investments in 2022 and plans to invest the same amount in 2023, executives noted.
"We're really looking at, where do our patients want to receive their care? How can we take some of the friction out of the patient journey, and then what types of care facilities do we need?" Foshage said.
The system is investing $105 million on 184 new imaging sites, with more in development, and also will invest $150 million on 73 new ASCs in 2023.
"When we're looking at bricks-and-mortar inpatient [facilities], it's really in our growth markets and we define those as Tennessee, Indiana, Texas and Florida, some of those where our population is growing and where we need to continue to invest in those in order to keep up with the population," she said.
"Our recovery plan is very thoughtful in terms of the leverage that will have with areas of revenue, areas of content, areas that we can influence rates. We have a line of sight over the next three years on how to get there," Conrado said.