Sustainability at Risk: Reexamining Healthcare Cost Structures to Empower Innovation and Outcomes (Part 1 of 2)

The healthcare sector is at a critical juncture, where rising costs and flat or declining reimbursement put significant pressure on financial sustainability. During a recent webinar titled “Sustainability at Risk: Reexamining Healthcare Cost Structures to Empower Innovation and Outcomes,” three XiFin leaders, Kyle Fetter, Chief Operating Officer, Harley Ross, Chief Commercial Officer, and David Pope, Chief Pharmacy Officer, discussed these pressing challenges and the strategies needed to adapt and persevere. This two-part blog series summarizes the key insights from the discussion.

The Reimbursement Dilemma: Decoupling of Cost and Payment

One of the most striking insights from the webinar came from a poll asking participants how accurately they believed reimbursement for services reflects the actual cost plus a reasonable profit margin for delivering those services. The results were telling:

This illustrates a fundamental problem: Many healthcare providers deliver services at a financial loss or, at best, break even. The widening gap between the cost of delivering care and the reimbursement received is unsustainable, especially as inflation and other factors heighten operating costs.

Four Major Drivers of Rising Healthcare Costs

The discussion then focused on the four key areas driving healthcare costs: workforce and human capital, technology and data, regulatory compliance, and operational infrastructure. Each of these areas presents unique challenges—as well as opportunities for strategic innovation.

1. Workforce & Human Capital
   • The industry is grappling with widespread clinician and staff shortages, compounded by rising labor costs and recruitment challenges. Wages for nursing professionals, for instance, have surged, and hospitals face significant hurdles in attracting and retaining top talent.
   • Notably, according to the AMA and IQVIA, the projected physician deficit by 2034 could range from 38,800 to 125,100. This shortfall pressures other clinicians, such as physician assistants, nurse practitioners, and pharmacists, to fill the gap, although these professionals are also in short supply.
2. Technology & Data
   • The rising costs of maintaining cybersecurity and implementing new technology, such as electronic health records (EHRs) and telehealth platforms, are squeezing healthcare organizations. Cyberattacks and the increasing complexity of healthcare systems further exacerbate the financial burden.
   • While artificial intelligence (AI) offers potential efficiency gains, integrating AI into clinical settings requires a new category of professionals, including data analysts and chief digital officers, adding another important yet expense layer.
3. Regulatory & Compliance
   • Regulatory changes, including the No Surprises Act and evolving payor requirements, add to the administrative burden borne by hospital staff and other healthcare providers. Keeping up with these changes, such as prior authorization protocols and Medicare Advantage updates, drains resources.
   • A significant issue raised during the webinar was the impact of the 340B Drug Pricing Program. Despite efforts by manufacturers to limit the pharmacy network, the program has continued to expand, with sales exceeding $100 million.
4. Operational & Infrastructure
   • Inflation is hitting healthcare operations hard. The cost of maintaining facilities and equipment and supply chain disruptions has skyrocketed, creating what one panelist called “the perfect storm” of rising overhead.
   • The shift toward outpatient and distributed care models, such as specialty physician practices, remote monitoring, and home health, is a growing trend but requires significant investment in infrastructure and interoperability.

A key takeaway from the discussion is the increasing importance of outpatient services in the healthcare revenue model. Outpatient care and service are becoming more prominent as healthcare systems look for ways to deliver care more efficiently and at a lower cost—and elevate patient outcomes. While acute care has traditionally been a core revenue stream for hospitals, more care is now transitioning to outpatient settings. This shift presents both challenges and opportunities.

The Hidden Costs of Healthcare

Healthcare organizations often face hidden costs that can substantially impact financial performance. These include:

• Administrative burdens, such as patient registration and discharge processes, which consume significant resources in acute and outpatient settings.
• Coordination of care, especially in emergency and critical care, where inefficiencies can lead to higher costs.
• Support departments, including information technology and revenue cycle management, which are crucial to the overall functioning of a healthcare organization.

To navigate these challenges, the webinar panel emphasized the need to streamline operations and explore new models of care that reduce unnecessary administrative tasks and improve patient care experiences.

Moreover, a reexamination of cost structures is essential. The rising labor, technology, and regulatory compliance costs and declining or flat reimbursement rates are squeezing healthcare organizations’ margins. In Part 2, we will explore actionable strategies to optimize cost structures, enhance reimbursement models, and leverage emerging technologies for long-term sustainability.

Watch the full webinar to dive more deeply into healthcare cost structures and empowering innovation and outcomes.