The economic headwinds that hospitals and health systems across the nation now face are fierce. Daily we read media reports about the financial pressures impacting health care providers and the erosion of their finances.

In a September 2022 analysis by Kaufman Hall, it was estimated that more than half — 53% — of U.S. hospitals were expected to lose money that year. Compared to pre-pandemic performance, operating margins are expected to fall 37% in an optimistic scenario, and 133% in a worst-case scenario.

Their predictions are proving to be right on. 2023 is worse.

At Boston’s venerable Mass General Brigham, a $432 million operating loss was seen in 2022. The Cleveland Clinic realized a $200 million loss, and Philadelphia’s storied Main Line Health suffered a loss of $102 million.

Western Pennsylvania is not immune from this trend. The newly formed organization that merged Excela Health and Butler Health System is experiencing operating losses, as are UPMC and AHN, among others.

So what are the reasons behind these significant declines?

To be sure, it’s a perfect storm. Factors include ongoing and lingering effects of the pandemic (now in its fourth year), inflation, cost increases, declines in reimbursement, erosion of the stock market, staffing shortages, increased labor costs, competition for staff and declines in patient volumes, to name a few.

One could legitimately ask, “Hospitals certainly saw this coming; why didn’t they do things to stem the tide?”

Good question.

The ground zero answer to that is the pandemic. While it has lessened to some extent as of late, COVID-19 and its negative impact on hospitals’ expenses remains significant. Labor costs across the entire health care system — especially in nursing — have risen exponentially and remain at their peak. Since fiscal year 2019, the increase in labor costs alone exceeds 25%.

Pharmaceutical expenses have risen 12% since last year. Providers are caring for higher acuity (sicker) patients in the hospital setting, with a corresponding increase in length of stay and a capped payment regardless of how long patients are in the hospital.

Because of technology and a long-term trend toward outpatient care, hospital admissions and surgeries have been on the decline for well over a decade.

Add all of these factors together, and they get far worse when you consider a reality in hospitals, unlike virtually all other businesses. We cannot respond to these pressures by simply increasing our prices. Medicare, Medicaid and other insurance contracts don’t work that way. We are subject to the policy and politics of government, and the willingness of remaining private payers to acknowledge these realities and negotiate new rates.

How will we do it?

Our new system is facing these challenges head-on. We are approaching these challenges as an opportunity, and more importantly, an obligation. An obligation to become more efficient, consumer-driven, accessible, convenient and easy to use. And above all else, produce excellent, affordable outcomes for patients and families.

We accept the tasks at hand and understand that a financial turnaround is not an easy nor painless initiative. We will achieve long-term sustainability and organizational health. We are challenging ourselves on all fronts — in the way we think, operate and manage.

We intend not just to survive, but to thrive, in this new reality of health care economics.

We are working very closely with our physicians to bring together two stellar medical staffs. Their talents and skills are amazing. We are combining our technologies, program strengths and growth opportunities into a true system of care for our region.

We will increase ambulatory care access across our enterprise and expand subacute, post-acute and home health services.

We are eliminating waste and becoming more efficient.

The scale of our new system, coupled with new efficiencies and effectiveness, will improve our access to capital, its cost and its terms, thus allowing us to pursue and add significant care improvements for our communities.

We will continue to recruit and retain top physician, nursing and allied health talent.

We are and we will continue to be the relevant and essential health system in our community, providing the highest quality of care in the most-affordable setting.

As the major employer in Westmoreland and Butler counties, we owe this to our patients, our staff, our supporters and the 750,000 residents of the communities we serve.

I look forward to the challenges ahead with confidence and enthusiasm. I know what we can do because I know the people who will be doing it. Regardless of roles or responsibilities, our people are seasoned and accomplished professionals. It will be our people that make the difference and be the determining factor in our success. The caliber and character of our staff do not show on a balance sheet.

In the final analysis, that is and will be our most important and valued asset.

Ken DeFurio is president and CEO of the recently merged Butler Health System and Excela Health. This column originally appeared in the April edition of Business Matters.