THE OUTLOOK FOR HEALTH CARE IN 2023:

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April 28, 2022

Charted: The 4 factors increasing hospital expenses

Daily Briefing

    As the pandemic stretches into its third year, hospitals continue to struggle financially, as their labor, drug, and other expenses continue to surge, according to a new report from the American Hospital Association (AHA).

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    Hospitals struggle to keep up with rising expenses

    According to AHA, hospitals have faced many challenges throughout the pandemic as they worked to expand treatment capacity, hire new staff to meet demand, and maintain sufficient supplies and personal protective equipment (PPE) for both patients and staff.

    Over the past two years, hospitals have experienced billions of dollars in losses, and over a third of hospitals are now operating on negative margins.

    Total hospital expenses per patient have increased by 20.1% since the beginning of the pandemic, according to data from Kaufman Hall. In addition, drug, labor, and supply expenses per patient have also seen significant increases.

    4 factors influencing hospital expenses

    Currently, hospitals and health systems must contend with several key factors that could exacerbate their expenses going forward, including:

    Workforce and labor costs

    Even before the pandemic, labor costs typically made up more than 50% of hospitals' total expenses. Staffing shortages and an increased reliance on contract travel nurses have caused labor expenses to jump sharply.

    In 2019, travel nurses made up a median of 4.7% of total nurse labor expenses—a figure that rose to 38.6% by January 2022. In addition, a quarter of hospitals reported that travel nurses made up over 50% of their total nurse labor expenses.

    According to AHA, these high labor costs may be due to increases in the hourly rates charged by health care staffing companies. Data from Syntellis Performance Solutions found that between January 2019 and January 2022, the hourly rates staffing companies charged hospitals for travel nurses increased by 213%.

    These staffing companies have increased the hourly rates billed to hospitals more than the hourly rates paid to travel nurses, AHA writes, effectively retaining a higher "margin" for themselves. In 2019, the average "margin" kept by staffing agencies for travel nurses was roughly 15%. As of January 2022, this average margin has increased to 62%.

    Drug costs

    At the end of 2021, hospitals' total drug expenses were 28.2% higher than pre-pandemic levels. Similarly, drug expenses per patient grew 36.9% between 2019 and 2022. As a share of all non-labor expenses, drug expenses have grown from 8.2% in 2019 to 10.6% in January 2022.

    According to AHA, a significant driver of drug costs has been increasing prices of existing drugs, as well as new, expensive drugs entering the market.

    For example, a study from GoodRx found that drug companies increased the prices of around 810 brand name and generic drugs by an average of 5.1% in January 2022 alone. Similarly, certain drugs that are often used in hospitals (Hydromorphone, Mitomycin, and Vasopressin) saw significant price increases.

    Higher acuity patients during the pandemic also led to increased drug utilization, which has in turn increased costs. One notable drug is Remdesivir, one of the primary treatments for hospitalized Covid-19 patients. Although the federal government initially covered the drug, hospitals must now purchase the drug directly, and at an average price of $3,120, it has become the top spend drug for many hospitals.

    Medical supply and PPE costs

    Hospitals' supply expenses were up 15.9% by the end of 2021 when compared with pre-pandemic levels. In particular, hospital departments that are most directly involved in caring for Covid-19 patients, such as ICUs and respiratory care departments, saw the highest increases in supply expenses.

    According to data from Syntellis Performance Solutions, ICUs saw their medical supply expenses increase 31.5% during the pandemic, while respiratory care departments saw their supply expenses increase by 22.3%. When accounting for changes in patient volumes, medical supply expenses per patient increased by 31.8% for ICUs and 25.9% in respiratory care departments.

    Inflation

    With inflation of consumer prices hitting record highs, several factors could impact hospital prices. 

    For example, hospital employees may demand higher wages or total compensation packages as cost-of-living increases. In addition, an increase in the costs of raw goods needed for hospital supplies and medical devices could further add to hospital expenses.

    Higher inflation may also result in decreased demand for health care services, particularly if inflation outpaces wage growth. Lower demand for health care services could reduce overall hospital volume and revenue in the long term. 

    So far, hospital prices have largely remained unaffected by general inflation, although experts say that could change soon. According to data from the Bureau of Labor Statistics, hospital prices have grown an average of 2.1% every year for the past decade, which is around half of the average annual increase in health insurance premiums.

    Commentary

    According to AHA, hospitals continue to face financial challenges from the Covid-19 pandemic, particularly as new variants emerge.

    "While we hope that our nation is rounding the corner in the battle against COVID-19, it is clear that the pandemic is not over," AHA said. "During the week of April 11, there have been an average of over 33,000 cases per day, and reports suggest that a new subvariant of the virus (Omicron BA.2) is now the dominant strain in the U.S. As a result, the challenges hospitals and health systems are currently facing are bound to last much longer."

    In January, AHA asked the federal government for $25 billion to combat labor shortages and rising expenses. So far, HHS has released an additional $2 billion in funding for hospitals.

    "America's hospitals and health systems, and our caregivers, have been on the front lines in fighting the pandemic for over two years now, facing numerous challenges along the way," said Rick Pollack, AHA's president and CEO. "While we have made great progress in the fight against the virus, this report shows that we are not out of the woods yet when it comes to addressing the need to repair and rebuild our hospitals.

    "The dramatic rise in costs of labor, drugs, supplies and equipment [continues] to put enormous pressure on our ability to provide care to our patients and communities," Pollack added. "The pandemic has clearly demonstrated that America cannot be strong without its hospitals and health systems being strong."

    "We continue to urge Congress to provide additional support to address these challenges, including by reversing harmful Medicare cuts, replenishing the Provider Relief Fund, granting flexibility on accelerated and advance Medicare repayments, and extending or making permanent critical waivers that have improved patient care," Pollack said. (Goldberg, Bloomberg, 4/25; Morse, Healthcare Finance News, 4/25; American Hospital Association report, 4/25)

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