Healthcare providers continue to focus on rising costs, as nationwide labor shortages, inflation, and the depletion of COVID-19 relief funds have pushed health systems' operating margins into loss territory.

However, experts warn that despite hospital executives' best efforts in cost management, 2024 will not bring relief for most systems' thin operating margins.

"2024 will not be significantly better; it's certainly not the V-shaped recovery we hoped for," said Kevin Holloran, senior director at Fitch Ratings. "Nonprofit hospital margins are still below pre-pandemic levels—but more importantly, they will be below the 'magic number' of 3% operating margin."

Analysts differ on the degree of gloom in the healthcare provider sector. The three major credit rating agencies—Fitch Ratings, Moody's Investors Service, and S&P Global Ratings—all forecast a negative to stable outlook for the industry this year.

However, neither the credit rating agencies nor industry experts believe that this struggling industry will achieve a full financial recovery in 2024. Experts say the prospects for individual providers depend on their ability to combine the right levers to boost revenue and compress costs.

Providers will invest in outpatient care and divest expensive service lines

This year, health systems will increase investment in outpatient care centers, continuing the trend from the second half of 2023, when hospitals sought to expand their geographic footprint at relatively low cost and cater to changing patient preferences.

Experts say that as technological advances make more outpatient procedures possible and systems begin to see returns on initial investments, hospitals may be more motivated to invest in 2024.

"Healthcare is moving in the direction patients want," said Danny Schmidt, senior healthcare analyst at consulting firm RSM US. "Standalone sites in convenient locations can adopt emerging technology trends, attract repeat customers, and are less capital-intensive than traditional large hospital campus construction."

Major health systems have announced expansion plans. HCA made amulti-billion-dollar bet on emergency serviceslast year, includingthe acquisition of standalone care sites. Ascension announced plans toshift its focus to outpatient services。

Fitch's Holloran said health systems may choose to buy existing facilities like HCA did, or build from scratch depending on their strategy. In November, nonprofit Kaiser Permanente purchased land near its San Jose, California facility,for possible outpatient expansion。

On the other hand, Holloran said struggling hospitals may make painful decisions this year to close or scale back underperforming service lines.

Experts say that in 2024, closures of obstetrics services, inpatient rehabilitation services, or behavioral health units are most likely to occur at small hospitals or rural facilities.

Nationwide, rural hospitals have begun toclose more expensive service linesto keep hospital operations running. Hospitals that have closed services say they lack the financial reserves to staff low-volume service lines.

Although hospitals want to keep service lines open, economic conditions and fee-based reimbursement models may force more hospitals to follow suit this year.

Service closures can have a devastating impact on patient care—especially for patients of color—forcing some to drive hours to another facility, according to research by Alecia McGregor, assistant professor of health policy and politics at the Harvard T.H. Chan School of Public Health.

Patients may have to rely on non-traditional settings—such as freestanding emergency centers—to access services, according to a spokesperson for the Center for Health Quality and Payment Reform.

Hospitals will insource in key areas but outsource where possible

Hospital executives acknowledged onearnings calls this yearthat post-pandemic labor cost increases have become the new normal.

But while executives say they will pay premiums to attract nurses and physicians in the future, hospitals are not ready to give up efforts to control labor spending.

In 2024, health systems will further invest in "grow-your-own" nursing programs, where systems partner with or acquire nursing schools to establish direct recruitment pipelines, according to experts.

Executives at HCA, Tenet, and CHS said nursing programs played a significant role in boosting recruitment last year.

Nursing program partnerships will become the industry "norm" this year as hospitals further invest in grow-your-own nursing programs. However, health systems will be less willing to spend on IT and administrative departments.

A wave of IT and administrative layoffs occurred in late 2023, including atKaiser Permanente and Mass General Brigham, as providers cut, automated, or outsourced positions.

Experts say multi-state systems in particular will consolidate administrative and technical operations to improve efficiency.

"We expect increased outsourcing to third parties next year—especially for IT and revenue cycle services," Wiggins said. She added that candidates for potential offshoring include "highly repeatable" tasks such as medical billing and coding, transcription services, and telehealth support services.

But health systems may be constrained by union contracts when attempting layoffs. This fall, 75,000 Kaiser Permanente employees negotiated outsourcing protections into their employment agreements. When Kaiser later announced layoffs,no union members were affected。

Future labor organizers may take note of this victory and negotiate similar terms, said John August, program director at Cornell University's School of Industrial and Labor Relations.

Consolidation continues—despite regulatory and physician opposition

Providers will continue to explore consolidation as economic pressures highlight the operational advantages of merged management. However, experts differ on the paths health systems may take.

With healthcare mergers more likely to face strict scrutiny this year—following the Federal Trade Commission and Department of Justice's announcement of new merger oversight guidelines in December—some experts bet health systems will pursue "roll-up acquisitions," gaining market share through a series of transactions.

Health systems may partner with non-traditional partners, including tech giants, retailers, or telecommunications companies, as "the industry experiences greater convergence pressures," said Wendy Gerhardt, senior manager at the Deloitte Center for Health Solutions.

Large system-to-system mergers in non-adjacent markets will continue. However, they may face delays in closing due to antitrust review, said Suzie Desai, sector lead for U.S. nonprofit healthcare at S&P Global Ratings.

M&A activity declined during the pandemic, but according to Kaufman Hall,larger mergers are expected post-pandemic。

But not all physicians will be satisfied with consolidation. In a survey conducted last year by the Physicians Advocacy Institute, nearly 60% of physicians employed by hospitals and other corporations saidnon-physician ownership harms care quality. Physicians cited reduced time with patients, and 44% of respondents said they would consider joining a union if one were available.

Cornell's August said he has received inquiries from physicians seeking guidance on how to organize or leverage their professional association memberships to drive change as healthcare consolidation continues.

"I'm not sure I've seen something this aggressive happen so quickly in an industry as with physicians," August said. "But I think we're at a tipping point where the conversation is fast, intense, and nearly identical across the country."

August said consolidation could also put pressure on existing healthcare unions. Mergers can bring new players into decades-old labor relations partnerships and potentially damage trust between parties, he said.

"I think in the coming year and beyond, we will see continued confrontation in major healthcare negotiations," August said. "I'm very concerned that conflict will overwhelm solutions."