BY Tina Wheeler, Partner, Health Care Leader, Bill Laughlin, Principal, Life Sciences and Health Care, Temano Shurland, Health Care Finance, Jason Barnes, Partner, Risk & Financial Advisory, Maulesh Shukla, Executive Manager, Madhushree Wagh, Senior Research Analyst, Deloitte
The health care industry has struggled with profitability for the past decade, and these challenges have intensified since the start of the COVID-19 pandemic. This has hindered organizations’ efforts to achieve their mission of delivering innovative, high-quality, equitable, and affordable care. Traditionally, health care finance leaders have relied on cost reduction as the primary strategy to boost profitability. However, in the face of various headwinds such as economic volatility, workforce management issues, and supply chain disruptions, many health care CFOs are now actively exploring innovative tools and methods to enhance their financial performance.
The most recent survey, which included more than 60 finance leaders from US health plans and health systems, found that focusing solely on cost reduction is not enough. About 25% of the finance leaders surveyed reported that their operating margins fell short of their goals over the past three years. At the same time, efforts to improve margins are becoming increasingly challenging as organizations juggle many issues, including persistent economic and inflation pressures, workforce struggles, evolving utilization trends, increasing competition, and supply chain problems. These challenges have led many finance leaders to recognize the need for new tools and profitability levers. In fact, the survey showed that cost reduction ranked last among the top priorities and concerns of finance leaders in 2024.
Finance leaders focus on a range of levers to help reach their ambitious operating margin targets
Operating margin goals are a key priority
Improving their organization’s operating margin is among the top three organizational priorities for 78% of the finance leaders we surveyed. When asked about their margin improvement goals, finance leaders said they have ambitious plans to improve their margins over the next three years, and nearly one-third aim to improve their margins by three or more percentage points.
The health care industry has been experiencing a period of low profitability, with operating margins averaging 1% to 4% in the past five years for many organizations—and some even experiencing losses. To help achieve their organizations’ financial goals, finance leaders should implement new levers, technologies, or methods—and they should act quickly. If they fail to reach their margin goals, they might need to reduce their services and offerings, merge with or be acquired by another organization, or cut operational expenses to the point that it affects quality, which might conflict with their mission.
A comprehensive mix of operating margin transformation levers across four major categories—strategic growth, revenue growth, cost reduction, and capital deployment—could be key to achieving these goals. Most of the CFOs we surveyed assigned nearly equal importance to all these categories when considering their influence on their organization’s operating margin.
Finance leaders are creating a more diverse portfolio of margin improvement levers
We asked health care finance leaders what levers they are prioritizing under each category. Marketing and branding emerged as the greatest strategic growth priorities for both health plan and health system CFOs. In addition, better network management, better member retention, and greater cross-selling opportunities, especially for health plans, came up as high-priority growth levers.
Many health care executives have relied on these levers to boost growth, but now they may need newer and more innovative ways to generate additional opportunities for margin growth. For example, as more patients turn to the internet for medical information, health care organizations have significantly boosted their digital marketing efforts and are tailoring their online presence to better connect with their audience.
However, this amplified focus on digital customization, while important, does tend to introduce increased risk. The use of digital data and tools, fundamental to these marketing efforts, can present new challenges around ensuring patient privacy and data security. According to our survey, 84% of finance leaders are investing in advanced cybersecurity technologies and 60% are prioritizing investments in core technologies like customer relationship management solutions.
Health system CFOs also identified nontraditional revenue models as a growth priority. In fact, nearly two in three of the executives surveyed are planning venture investments in health or non-health startups within the next two years. Several large health plans have already added newer revenue models in addition to their risk business.
For surveyed finance leaders, while cost reduction is no longer the dominant focus for margin improvement initiatives, it is still an important part of the portfolio for both health system and health plan finance leaders. Emerging technologies, like generative AI, can be useful for workforce management strategies, potentially leading to substantial cost savings.
Currently, optimizing the workforce is the primary lever for cost reduction, according to the surveyed CFOs. This focus is particularly important, as many health care organizations are grappling with dual workforce challenges: an increase in employee turnover and burnout, coupled with increasing labor costs. Our recent research shows how the strategic use of technology and innovative practices can help leadership improve efficiency and foster a sense of purpose within the health care workforce. The findings show significant time savings for specific job roles with the appropriate use of technology and job redesign. For instance, revenue cycle professionals can save up to 50% of their time, and nursing roles can see time savings of up to 20%.
Financial restructuring is a top capital deployment lever for health systems CFOs. Many health care organizations are readjusting their assets and liabilities to strengthen their capital structure. This approach often entails reassessing real estate plans to meet growth and operational needs. Beyond that, it can mean evaluating the necessity of various locations, consolidating services, and providing patients with alternative care settings. Many health care organizations are shifting their focus toward establishing smaller, more cost-effective facilities rather than building larger ones. For health plans, financial restructuring presents an opportunity to determine which assets to grow or phase out to help meet the organization’s growth goals.
Some levers that CFOs consider lower priority may provide better opportunities
While health care finance leaders say they are focusing on multiple levers, some areas that could potentially have a larger impact on profitability may not have been receiving the attention they deserve. Levers that were chosen by fewer than one-third of the CFOs surveyed, yet have the potential to significantly improve their operating margins, include:
Optimize product and service mix: A small proportion of the CFOs we surveyed across health systems (27%) and health plans (20%) consider optimizing their service mix a growth priority. For CFOs, this type of optimization tends to involve adding new products and services and discontinuing offerings that do not add financial value.
Despite the past tendency to “grow at any cost” approach, in the current challenging market, it is important to assess and optimize the mix of products and services for sustainable growth.11 For instance, health systems might need to rationalize their service lines. Our previous research showed that the way consumers want to access care is changing as they push for traditional health care visits and experiences to be more in line with other daily life encounters. Health systems have an opportunity to scale models such as hospital digital twins, hospital-at-home, virtual health, and retail clinics and urgent care centers to increase their scale, reach, and impact on current and even newer population segments. This means finance leaders should rethink their real estate strategy and physical locations, given that efficient financial restructuring is a top capital deployment priority.
Similarly, health plans should assess the optimal growth and diversification strategies. Some health plans are extending beyond their traditional lines of business and should carefully consider where they can branch into to achieve market success. Others are investing in care delivery assets to increase vertical integration and create new revenue streams, which involves a thoughtful approach. In their traditional lines of business, they should assess and optimize the product mix and geographies in which they can reasonably expect to offer competitive products with sustainable margins.
Pursue alliances and ecosystems: In the current era of convergence, health care organizations risk slower growth and poorer performance if they operate alone. And yet, only 24% of health system and 20% of health plan CFOs surveyed are focusing on alliances and partnerships. Despite the apparent popularity of traditional growth methods like mergers and acquisitions, many surveyed CFOs said their organizations face regulatory hurdles (49%) and market uncertainty (41%). Increased scrutiny from regulatory authorities (Federal Trade Commission and Department of Justice) has made dealmaking more challenging in the past year.
Value-based partnerships between health plans and providers can open greater revenue opportunities and lower costs for both. To date, however, these relationships have had mixed financial results. This is driven, in part, by inadequate capabilities and reluctance to accept downside risk. Emerging models that align growth and operating margin goals can enhance revenue stability, lower care costs, and accelerate growth for both parties.
In addition to pursuing partnerships, health care organizations can form tech platform-based ecosystems to co-develop unique products and services, expand customer reach, access new capabilities, achieve economies of scale, and increase revenue. In this model, numerous stakeholders collaborate with the goal of increasing consumer engagement, improving outcomes, and reducing costs. Finance leaders can contribute significantly to areas like financial due diligence, risk assessment, and establishing financial and operational KPIs to monitor alliance performance.
Look for outsourcing and offshoring opportunities: This is another area the surveyed finance leaders identified as a low priority, yet it could provide significant cost savings. Only a minority of respondents (24% from health systems and 30% from health plans) said that their organizations are prioritizing outsourcing or offshoring as a mechanism to reduce costs.
As discussed in our previous section, workforce challenges continue to be one of the biggest organizational concerns, especially for health systems. Outsourcing might help remove some of that pressure. Along with giving clinical staff more time to spend with patients, outsourcing administrative functions to less expensive labor markets can reduce costs spent on salaries, benefits, and overhead. The approach could also reduce costs tied to recruitment and training. For finance leaders, shifting the balance from in-house capabilities such as shared-services centers to outsourcing and offshoring services can help their organizations stay efficient and competitive. Finance leaders may need to assess and address potential risks such as process control, competencies, data security and privacy, and regulations as they move forward.
Double down on digital and AI technologies: The survey revealed that investing in tech is a higher priority for health plan CFOs (50%) than it is for health system CFOs (36%). However, few CFOs apparently view these investments as margin drivers in the near to mid-term. For instance, we asked CFOs about their organizations’ adoption of gen AI, given its recent proliferation. Three in four surveyed CFOs view gen AI as a longer-term solution for their operations. For health care organizations, gen AI has many uses that can benefit health plans and systems, including improving medical coding and authorization processes, drafting claim denial appeals, and assisting physicians and patients, identifying opportunities for member/patient interventions. Some health care organizations are already implementing these use cases, with early signs of value.
With the potential of gen AI comes challenges that CFOs may need to overcome. Our recent research shows that health care organizations may be overlooking key factors for successful gen AI implementation such as creating a governance model, building consumer trust, and securing workforce buy-in and skills. Deloitte’s cross-industry CFO signals survey shows that the competition for gen AI skills is a top concern, leading CFOs to focus on upskilling existing talent as hiring external talent can be expensive and time-consuming. While most gen AI initiatives in health care aim to reduce costs, the technology can also support other strategic goals. As strategic stewards, CFOs play an important role in leveraging AI for improved productivity, growth, revenue, capital deployment, and consumer engagement, within the right safeguards.
Navigating the road to enhanced profitability in health care
Health care organizations should adopt a more comprehensive approach to improving profitability. Many CFOs have expanded their margin enhancement strategies beyond cost reduction by embracing strategic growth, revenue growth, and capital deployment, albeit in different ways across organizations. Finance leaders should champion the continued broadening of their organization’s perspective and help prioritize investments based on expected returns, implementation costs, available funds, and time to value.
Looking ahead, finance leaders could be in a unique position to spearhead transformative change and guide their organizations toward increased profitability. It seems like the time is now to begin challenging the status quo and exploring novel strategies that will reshape the health care industry’s financial landscape.