March 25, 2022

Will Higher Costs Drive Healthcare Systems into Austerity Trap?

Industry Resources
Thought Leadership
Products and Solutions

Today’s Poor Long-Term Financial Outlook

Health systems, despite some recent signs of improvement in patient volumes and revenues, continue to report negative margins in the first quarter of 2022.  They also continue to report significant costs well above 2021 and 2020 levels.

COVID merely accelerated trends that were already in place, including skyrocketing labor costs, a mass labor exodus and imminent retirements, as well as a limited pipeline of new workers entering the workforce.  Yes, the supply chain also contributed to increasing costs, but labor is by far the biggest driver.  More importantly, the labor issue is not going away.  

Macro-demographic trends in the United States have the number of working-age-people (20-65 years of age) falling to 2.5 persons for every non-working person by 2040.  As a result, we will see a much smaller labor pool compared to the number of elderly that require care.

Another trend that is not going away is the increased prevalence of chronic disease and, by extension, those with more than one chronic condition.  Chronic disease already accounts for 80% of the cost of healthcare today , and COVID may have made this trend worse.  Patients who delayed medical care and screenings may now start to present with more intense healthcare needs and require more expensive healthcare resources.

Additionally, the pandemic crisis itself has stressed the health system significantly.  Many professionals believe population growth and our global connectivity will lead to more frequent pandemics or endemics as the new norm in healthcare.

These pressures on both the supply and demand side will likely lead to poor long-term financial performance for many healthcare systems.

Healthcare Cost Cutting and the Austerity Trap

Financial pressures often result in shrinking capital budgets. Some healthcare organizations will double down on the same business models and seek to squeeze out costs to improve the bottom line.  Essentially, they reduce transformational spending and instill an operational cost cutting discipline on the current business model.  

Doing more of the same  will not help most health systems.  Many older healthcare business models, conceived during an earlier era, cannot address the overwhelming healthcare drivers and challenges that we see today.

Cost cutting does serve its purpose. However, constant cost cutting can also lead to what is known as the “austerity trap” – where increasing portions of the budget are dedicated to supporting old and costly infrastructure, processes, systems, and organizational structures.  Cash flow becomes severely constrained, and there is no budget to take advantage of new opportunities.  Once stuck in the austerity trap, there is limited access to capital to help transition to a more sustainable business model.

Business Models and Economies of Scale

Mergers and acquisitions have grown significantly over the last 10 years, producing ever larger health systems.  Larger health systems, in turn, often have cost savings that can be spread over a larger volume of services, making existing business models more sustainable through economies of scale.  However, larger health systems also have the disadvantage of holding on to old business models too long with limited ability to change quickly when market drivers signal that change is needed.

In addition, new marketplace disruptors leveraging their existing large retail models (e.g., Walgreens, CVS) have had good success with introducing clinical services that offer patient convenience, but they don’t fully address the bigger challenges of workforce constraints and population health trends.

Many online clinical services have also been added to the marketplace recently.  Some smaller providers are promoting innovative and convenient digital clinical offerings that go beyond standard telehealth, as well as enhanced services that patients are willing to pay out of pocket.  More importantly, they’re also attracting scarce clinicians looking to work from home and enjoy flexible work hours.

Is This Healthcare Insanity or an Imperative to Do Things Differently?

Healthcare systems are faced with significant constraints at a time when they are already under severe stress:

  1. Do more with less
  2. Do it seamlessly across increasing disparate specialties and care settings
  3. Do it with better outcomes and less waste

Healthcare systems that want to avoid the austerity trap will need to keep a strategic focus, make room for transformation, accelerate value, and do things differently to avoid death by a thousand cuts.

Since there will never be enough relative resources available to address the growing population of elderly and the overall diminishing health of the population, the introduction of new business models that are based on “leverage” has become an imperative for health systems.


At the core of the problem – how to do more with less, is leverage.  Creating leverage often requires doing things differently, including:

  • Moving work from physicians to lower cost resources
  • Moving work from clinicians to patients and their families
  • Moving care from health facilities to the home
  • Leveraging community and employer partnerships and making impact investments
  • Re-aligning business around ongoing chronic conditions
  • Establishing shared services for common activities across multiple specialties
  • Establishing new ways of delivering care using technology

Digitally-Enabled Care Delivery

Delegating work from Physicians to Physician Assistants, for example, can actually be more costly. The key to leverage is the establishment of proper controls, informed knowledge, decision support, and oversight.  Mundane tasks and repeatable workflows are easier to delegate and automate.

Technology also has a big role to play in enabling new roles and procedures of any highly leveraged business model.  Many healthcare systems are considering doubling down on their EMR investments as  enablers for a leveraged business model.  EMRs play an important role in the healthcare operations, but by themselves, will not significantly increase leverage of ongoing care delivery to address today’s new challenges.

By design, EMRs mutually reinforce episodes of care by physician specialty: pre-visit documentation, case notes, orders, diagnosis, prescribing, coding, reimbursements, and administration. EMRs have significant patient-record limitations and are not  likely to transform into AI solutions.  They typically are not able to provide a complete picture of the patient and can’t extend the patient record to include patient-generated information, device data, social determinants, and wellness data.  EMRs are severely limited in their design to engage in ongoing care delivery directly with patients and their families, community organizations, and employers.

The technology solutions driving highly leveraged care delivery today include: AI, telehealth, online-care, secure messaging, moderated health communities, remote patient monitoring, remote examinations, self-registration, self-scheduling, self-testing, notifications, alerts, extended patient care records, integrated care plan, as well as community and employer supports.

In the end, healthcare systems will win or lose based on their ability to:

  • Transform to business models that value and leverage scarce physicians and other specialists in order to deliver significantly more value, efficiencies, and volumes
  • Transform patient engagement by leveraging technology to deliver ongoing care in unified and frictionless way that empowers patients to take on more responsibility, as well as support patient self-serve
  • Partner and leverage the power of local community organizations and employers in Social Determinants of Health and wellness matters
  • Make impact investments in communities that improve outcomes


  • National Hospital Flash Report: April 2022, Kaufman Hall, May 2, 2022
  • Why Health-Care Workers are Quitting in Droves, Ed Yong, Atlantic, Nov 16, 2021
  • The Complexities of Physician Supply and Demand: Projections from 2019 to 2034, AAMC, June 2021
  • Potential support ratio (20-64/65+) by region, subregion and country, World Population Prospects, United Nations, 2019
  • Prevalence of Multiple Chronic Conditions Among US Adults, 2018 CDC, Sept 17 2020