Medicare Advantage covers health care for over half of the older adult population in the United States. However, some hospitals and health care systems are choosing to stop contracting with Medicare Advantage plans due to administration challenges. These include two concerns, in particular: disputes over prior authorizations and the slow pace of payments.

In 2023, Becker’s Hospital Review began reporting on several hospitals and health systems that have cut back on contracting with Medicare Advantage. Becker’s reported that healthcare systems went from “accepting contracts for Medicare Advantage” to “not accepting contracts for Medicare Advantage.” This was said to have five causes. A survey by the Healthcare Financial Management Association of health system CFOs found that these CFOs reported Medicare Advantage payments as being “significantly more difficult” to collect than they were two years prior.

A special report titled “HFMA Health System CFO Pain Points 2024: Margin Challenges & Opportunities for Vendors” offers an in-depth examination of the financial pressures confronting health system Chief Financial Officers (CFOs) in 2024. This analysis provides insights into the key challenges affecting health systems’ margins, CFOs’ strategies to address these challenges, and potential opportunities for vendors and investors.

Key Themes and Findings

1. Margin Pressure Drivers: The report identifies several primary drivers of margin pressure within health systems:
   • Labor Shortages: This is a significant issue, especially in nursing, where shortages in registered nurses (RNs) and licensed practical nurses (LPNs) are acutely felt. These shortages are affecting operational capabilities and leading to increased labor costs as health systems raise wages to retain and attract staff.
   • Supply Chain Price Increases: Rising supply costs are further squeezing margins, a challenge exacerbated by global supply chain disruptions that have persisted post-pandemic.
   • Payer Reimbursement Issues: Health systems are grappling with lower reimbursement rates from payers, particularly Medicare Advantage plans, noted for their stringent authorization requirements and high denial rates. This creates a bottleneck in revenue cycles, contributing significantly to the financial strain.
2. Health Systems’ Response Strategies: To mitigate these financial challenges, CFOs are adopting several strategies:
   • Delaying Technology Investments: As a cost-saving measure, some health systems are postponing investments in new technologies despite the potential long-term benefits of these investments.
   • Increasing Wages: To reduce reliance on expensive contract labor, many health systems opt to increase wages for in-house staff. This move aims to improve retention and reduce turnover, which could stabilize labor costs.
   • Investments in AI/Automation: Despite some skepticism about the cost-saving potential of artificial intelligence (AI), many CFOs are still investing in AI and automation technologies, hoping these will eventually lead to more efficient operations and cost reductions.
3. Future Outlook and Predictions: The report also predicts which departments will see the most significant budget increases over the next two years. CFOs expect investments to focus on areas that can directly impact margin improvements, such as labor management, revenue cycle enhancements, and supply chain efficiencies.
4. Medicare Advantage Discontent: A noteworthy finding is the growing discontent among health systems regarding Medicare Advantage plans. The report highlights that:
   • 19% of health systems have already stopped accepting at least one Medicare Advantage plan in 2023 due to administrative challenges and financial strains.
   • 61% of health systems are either planning to stop or are considering stopping acceptance of these plans in the next 24 months. This trend is driven by frustration over onerous authorization requirements and high denial rates, significantly complicating the revenue cycle.

Analysis and Perspectives

The findings in this report underscore a critical juncture for health systems, where financial sustainability is increasingly challenged by external pressures such as labor shortages, rising costs, and payer dynamics. A significant portion of health systems’ decision to stop contracting with Medicare Advantage plans signals a broader concern about the viability of these plans from a financial perspective. This shift could have profound implications for both patients and providers.

Labor Market Dynamics: The severe impact of labor shortages, particularly in nursing, cannot be overstated. Due to its high costs, health systems’ reliance on temporary contract labor is not a sustainable long-term strategy. The report suggests that increasing wages to attract permanent staff is a necessary, albeit costly, move. However, this approach could lead to wage inflation across the sector, further exacerbating margin pressures.

Technological Investment Delays: Postponing technology investments is a double-edged sword. While it may provide immediate financial relief, it could hinder health systems’ ability to innovate and improve operational efficiency in the long run. Given the rapid pace of technological advancements in healthcare, delaying these investments could put health systems at a competitive disadvantage, particularly in areas like AI and automation, which have the potential to transform care delivery and cost management.

Payer Reimbursement Challenges: Dissatisfaction with Medicare Advantage plans is a significant finding that reflects broader payer-provider tensions. High denial rates and complex authorization processes are not only delaying payments but also increasing administrative burdens on health systems. The potential withdrawal of health systems from these plans could limit access to care for many patients and force payers to reconsider their policies to retain provider networks.

Opportunities for Vendors: The report outlines opportunities for vendors and investors to address these pain points. Companies offering solutions to streamline operations, reduce costs, and improve the revenue cycle will likely find a receptive market among health systems struggling with margin pressures. Additionally, vendors that can demonstrate a clear return on investment (ROI) in AI and automation technologies may have a competitive advantage, especially as health systems look for innovative ways to manage costs.