Key Takeaways on CFO's 2024 Budgets
Budgets grew by 23% from the prior year: In 2023, CFOs reported a 4.3% average increase in overall budgets. But for 2024, we saw an even more robust (5.3%) average budget increase.
Seventy-eight percent of respondents noted that the rebound in demand for services was improving their financial performance, while 74% cited better reimbursement rates as improving performance and allowing greater budget allocation.
AI tops the list of new spending: Across the top areas where CFOs are increasing spend, 92% report greater spend on AI-enabled solutions and 82% on cybersecurity infrastructure. Neither are surprising after this past year.
Budget relief with travel nurses continues: Contract labor costs are continuing to decline. As the percent of systems relying on travel or locums staff falls, 44% report decreasing spend on travel nurses.
Other areas for spending declines are less obvious. Interestingly, 37% and 30% of CFOs are decreasing spending on outsourced rev cycle and supply chain operations, respectively.
It’s not news that health systems faced significant financial challenges in 2022 and 2023. But as 2024 margins have tipped up (at 2.9% through Q1 on average compared to 2.0% across 2023), it’s been an open question how much budgets would follow. The question has been: do CFOs feel comfortable increasing spending?
To answer this question, The Health Management Academy conducted a quantitative survey of 25 Leading Health System (LHS) CFOs to better understand current budgets, the cost management outlook and projections for revenue growth. Here is a short overview of our insights on LHS finances based on CFOs’ survey responses:
Financial Outlook for Health Systems Trending Positively
Negative trends are stabilizing, with recovery slow but encouraging
Compared to 2023’s average operating margins (2%), we largely see that the average operating margins in 2024 (2.9%) are continuing to improve. The biggest drivers for margin growth include:
Increasing outpatient revenue and operating room capacity.
Average length of stay going back to normal levels.
Increasing ED volumes.
Notably, median operating margins in 2024 were lower than the average, indicating the role regional dynamics play. Generally, larger systems with strong market share, good payer mix, and a well-established acute and outpatient/specialty footprint are financially stronger.
Leading Health System’s margins are still below the pre-pandemic average (3.5%). This is reflective of the new reality for health systems, where revenues are largely fixed, but costs (e.g., labor) have become highly variable.
Health System Budgets Are Ramping Up
Improved reimbursement and demand help mitigate perennial areas of cost pressure.
In 2023 the LHS we surveyed reported a 4.3% average increase in overall budgets. But for 2024, we saw an even more robust (5.3%) average budget increase.
Above are the biggest factors driving positive and negative impacts on LHS budgets, according to CFOs.
CFOs overwhelmingly (78%) agreed that improvements in demand, likely driven by increased ambulatory diversification, helped improve their financial performance.
Better reimbursement rates are another big factor boosting financial performance. This could stem from a combination of better denials management and prevention, service line optimization, and systems getting tougher with health plans, which is something COO and finance leaders have discussed.
Unsurprisingly, CFOs agreed that labor, drug, and supply costs continue to present significant challenges, and there is little reason to expect to see these shift appreciably in the near future.
Spending Driven by Tech, Sites of Growth, and Stabilizing Workforce Costs
While staffing strategies orient around efforts to attract, retain, and upskill staff
Health systems are growing their spending strategically by focusing on areas that will generate savings on operating costs and ensure long term growth. Specific focus areas include:
Workforce solutions: Health systems are continuing to invest in permanent clinical staff and AI-enabled solutions to stabilize turnover and alleviate administrative burden for care teams. By investing in these areas, health systems will be able to streamline workflows and invest in professional development opportunities that keep clinical staff engaged.
Service line growth: With many health systems focused on growing their cardiology, neurology, and oncology service lines, there is a clear business case for investing in imaging, surgical equipment and pharmaceuticals.
Cybersecurity: The rising frequency of cyberattacks on health systems has CFOs working proactively investing in infrastructure that would mitigate the likelihood or financial impact of a cyber event.
Labor Remains Top Cost Center, But Attention Shifts to Permanent Staff
While staffing strategies orient around efforts to attract, retain, and upskill staff
Contract labor costs are continuing to decline as health systems focus more resources on retaining permanent staff. As the percent of systems relying on travel or locums staff falls, 44% report decreasing spend on travel nurses. Instead, most CFOs reported some increase in spending for APPs (85%) permanent physicians (81%) and permanent nurses (67%).