How CFOs can help transform health care organizations amid an uncertain economic environment

Deloitte’s 2022 Pulse Survey of US Consumers found that inflation was affecting US consumers’ ability to afford health care. Since then, the industry’s cost and pricing issues appear to have grown. Based on findings from the CFO survey, finance leaders are still grappling with these issues—and the affordability outlook may be grim.

Current cost structures and operating models weigh heavily on finance leaders

When asked to identify their No. 1 concern, most health care CFOs pointed to the current economic situation. While not surprising, inflationary pressure has likely brought the challenges of a cost-heavy operating model to the fore, especially for health systems (figure 2). Higher care delivery, labor, and supply costs are major factors that are structurally elevating these organizations’ operating costs.⁴

On the other hand, revenue growth appears to have slowed due to inconsistent volume recovery as well as changes in payer mix and care modalities. As a result, more than 40% of health system finance leaders predict that their health systems may need more than two years to reach the profit levels they generated before the COVID-19 pandemic. Health plans are in a similar situation. In fact, Deloitte’s health plan financial performance research shows that health plan profitability is at one of its lowest levels in a decade due to increasing medical and administrative costs.

For an industry in which its workforce comprises more than half of all expenses, health care organizations—especially health systems—may face unique challenges. While showing signs of improvement from last year, staff burnout and nurse shortages tend to remain issues for health systems. The CFOs we surveyed are, overall, spending more time and resources on role retention and arresting attrition, efforts that result in elevated workforce costs. This has prompted many of the finance leaders to pay closer attention to their workforce needs and look for innovative solutions such as automation, upskilling, and increased flexibility, among others.

Finance leaders may be overlooking potential high-impact levers to achieve profitability  

Cost reduction has always been a priority for finance leaders. But in the current environment, it may be a greater challenge across all industries than ever before. Deloitte’s cross-industry CFO Signals^TM survey, conducted in second-quarter 2023, showed that cost reduction is the top area CEOs are asking CFOs to focus on this year. Our health care CFO survey also mirrored the trend. Three in four health care finance leaders said reducing costs is a more significant concern this year compared to previous years.

The question likely won’t be if these leaders can reduce costs and improve profitability, but rather how. When asked about factors that can help improve profitability, the finance leaders generally chose traditional ways to seek efficiencies. Health system finance leaders rated improving revenue cycle—including shorter payment times, process redesign, etc.—as the biggest driver to improve profitability (52%). For health plan leaders, improved offerings (60%) and better medical cost management (57%) were the biggest improvement drivers. In addition, strengthening supply chains was also among the top three levers for both health systems and health plans (figure 3).

Health care finance leaders may have focused on these conventional levers over the years to seek efficiencies and improve profitability. However, these traditional solutions have generally provided diminishing returns over the past few years. Moreover, to overcome the headwinds caused by the inflationary pressure and an uncertain macro environment, leaders should consider other profitability levers. Some of the levers such as digital transformation and service model optimization that may be lower on finance leaders’ radars may be more effective profitability drivers.

Enterprisewide digital transformation initiatives can help health care organizations achieve several key organizational goals. Our prior research of health care executives showed that consumer engagement, revenue growth, and cost efficiencies are among the top outcomes of digital transformation. It could be a good time to challenge the status quo of cost-heavy operating models considering shifting consumer preferences and a rapidly changing health care ecosystem. One option may be to think about optimizing service models by identifying areas ripe for business restructuring, outsourcing/offshoring opportunities, or even creating pilots using emerging technologies like generative artificial intelligence (AI).

In addition to pulling broader organizational levers to reduce costs, finance leaders are also considering transforming their own finance department. Overall, the surveyed CFOs consider finance transformation strategies such as optimizing cost allocations, cost improvement benchmarking and analytics, analytics-led cost recovery, and agile liquidity management to be key areas of focus in achieving greater efficiencies.

Transforming organizations to thrive in a high-cost environment

Both health systems and health plans are likely seeking new ways to navigate an uncertain economy, a high-cost environment, and evolving consumer needs. Some organizations may still view traditional cost-cutting strategies as a way forward. However, to thrive in the long run, health care organizations require a transformative approach that includes building new capabilities, relationships, and competencies. While potentially promising, this approach may need to take place through a series of incremental changes. As financial stewards, CFOs are well positioned to both enable and drive these transformation efforts. For a greater probability of success, they should consider focusing on:

• Transforming care delivery: Our recent research found that consumers tend to have rapidly changing preferences about where they receive care. Consumers increasingly prefer retail clinics, urgent care centers, and virtual visits over a hospital or physician office visit. Strategic investments in these alternative sites of care can help health care organizations improve offerings, build trust with their consumers, and secure better finances.
• Optimizing operating models: It can be tough for health care organizations to be agile enough to keep pace with rapidly evolving skills and technologies and uncertain supply chains. Some organizations may try to find the right balance between the capabilities and assets they need to retain and those they can outsource or seek a partner for. For their various business units, finance leaders should consider a spectrum of models—ranging from fixed price and everything as a service to risk-based, capability-focused, and outcome-based—to achieve the optimal balance between cost and benefit.
• Prioritizing workforce investments: Many health care organizations continue to struggle with attracting and retaining staff. CFOs should partner with their talent counterparts to prioritize investments in workforce experience and development. Some key actions include retaining (e.g., retention bonuses for key talent), reengaging (e.g., clear career paths, upskilling), and reimagining (e.g., workplace experience) the work, workplace, and workforce.
• Adopting a digital strategy: Many health care organizations have started their digital adoption journey, but some are far from achieving the ideal digital state. CFOs can help pivot investments toward a coherent digital strategy rather than simply pursuing ad hoc incremental digital initiatives. Key tenets of this strategy can include making investments in digital engagement to address evolving consumer needs and establishing digital connected platforms for business units across the entire organization. Emerging technologies, such as generative AI, likely have further leapfrogged digital as a key focus area. Organizations should contemplate how they can seamlessly integrate such technologies to assist workforce, reduce inefficiencies, and improve patient care. As they move their organizations toward that path, CFOs should ensure that the technologies are trustworthy and ethical and continue to invest in cybersecurity.

Such transformation efforts likely won’t succeed unless finance leaders create solutions that address existing challenges related to budget and return on investment (ROI), data access and quality, and compliance/regulations. Some survey respondents shared the difficulties they face in funding transformation initiatives and in articulating the ROI. As financial stewards, health care CFOs have a key role to play in solving these challenges and in supporting their respective organization’s overall transformation journey. This could be a CFO’s opportunity to go beyond their conventional responsibilities and assume a larger strategic function within their organizations.