Hospitals this year are seeing more red than black as growing financial challenges, like spiked labor costs and inflation on medical supplies, puts them on pace to have the worst financial performance into the pandemic thus far.
More than half of hospitals (53% of more than 900 sampled) are projected to have negative margins by the end of the year, compared to 39% in 2019, according to a September report from management consulting firm Kaufman Hall, on behalf of the trade group American Hospital Association (AHA).
The firm put the median operating margin for hospitals at about -1%, which could mean service cuts, and for more vulnerable hospitals, including rural ones, closing their doors.
But why is the financial outlook so bleak for hospitals? A few factors are conspiring:
Labor costs
The top reasons hospitals are struggling financially in 2022 are “labor, labor, and labor,” said Kevin Holloran, senior director at Fitch Ratings. The healthcare labor shortage doesn’t just extend to nurses, but across the board, from medical technicians and physical therapists to IT staff. In some cases, hospitals are paying pre-pandemic rates multiple times over—particularly for travel or contract nurses—while also feeling pressure to pay more for staff who are stretched thin, said Erik Swanson, Kaufman Hall’s senior vice president of data and analytics.
Rising supply prices
Blame inflation. AHA reported that the “costs for energy, resins, cotton, and most metals surged in excess of 30%” between fall 2020 and early 2022. “These all are critical elements in the manufacturing of medical supplies and devices used every day in hospitals,” according to AHA’s April 2022 report.
Sicker patients, longer stays
Intensive care units across the country were overwhelmed with Covid-19 patients at the outset of the pandemic, but more recently hospitals have been caring for sicker non-Covid patients, said Aaron Wesolowski, AHA’s vice president for policy research and analytics. That could be because some people delayed or avoided getting care earlier in the pandemic when many hospital beds were occupied by Covid patients, he said.
Longer patient stays drive up hospitals’ already rising labor costs and increase spending on drugs and supplies. A health system can’t pass on those extra costs because hospitals have fixed contracts with private insurers and Medicare and Medicaid, Swanson said, meaning that spend can eat into its margins.
Fewer money-making procedures
Many hospitals rely on money made from more lucrative care, like cardiac and orthopedic surgeries, to offset other costs. But that too has taken a hit as more people are choosing to go to outpatient surgery centers instead of having procedures done at hospitals. As Kaufman Hall has reported, it’s “a sign of a larger shift to ambulatory care and new ways of accessing care outside of the hospital.”
Declining investment returns
A tough economy drives down hospitals’ return on their investments, even for financially sound systems like the Cleveland Clinic. The health system lost nearly $627.5 million, or -7.6%, on its investment returns in the first two quarters of 2022, compared with a gain of $565.8 million, or 9.2%, during the same period in 2021, according to its most recent earnings release.
Less governmental help
The federal government subsidized hospitals and other healthcare providers in the first two years of the pandemic by providing relief funds during the pandemic to the tune of more than $178 billion through the CARES Act and the American Rescue Act. But in 2022, that spigot has all but been turned off and is instead a drip from the firehose that had helped buoy the industry.
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Hospital finances aren’t expected to get better soon, Swanson said.
Industry conditions are deteriorating, and Swanson said he expects hospitals will face the same challenging conditions for at least the next year. Closures or acquisitions could be on the table, he added, unless hospitals start to see an influx of ideal patients, such as people with great insurance and illnesses that require fewer resources for treatment.
If hospital operating margins remain below zero, systems might be able to eke by in the short term. As for the long term?
“That’s certainly unsustainable,” Swanson said.