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September 20, 2022

Charted: Why hospital margins are 'one surge away from crisis'

Daily Briefing

    Hospitals and health systems are currently facing a "critical situation" as their margins continue to drop, and over half are expected to end 2022 with negative margins, according to a new report from Kaufman Hall and the American Hospital Association (AHA).

    Over 50% hospitals to experience negative margins this year

    According to the report, this year's hospital operating margins are expected to remain lower than they were before the pandemic. During the first six months of 2022, hospital margins were down 102% compared to pre-pandemic levels. On the low end, projections predict that margins will be down 37% by the end of the year compared to pre-pandemic levels, but they could drop as low as 133% below pre-pandemic levels.

    Overall, more than 50% of hospitals are expected to experience negative margins this year, up from 36% in 2021. This increase in the percentage of hospitals with negative margins is largely due to the omicron surge at the beginning of the year, as well as a lack of additional federal pandemic funding.

    In addition, expenses are expected grow through the remainder of 2022, increasing by almost $135 billion compared to 2021.

    In particular, labor expenses are projected to grow by $86 billion. Of the increasing labor expenses, $57 billion is expected to be from employed labor, and $29 billion is expected to be from contract labor. Currently, contract labor expenses remain elevated and are almost 500% higher than pre-pandemic levels.

    Non-labor expenses are also expected to increase by $49 billion in 2022, particularly for supplies, purchased services, and drugs. In general, all non-labor expense categories are expected to remain roughly 20% to 25% higher than pre-pandemic levels, with supplies and drugs seeing the largest increases.

    Currently, it is not expected that hospitals will receive additional federal support, and potential Covid-19 surges in the fall and winter could lead to sicker patients, increased expenses, and more that will significantly strain their resources.

    "Most hospitals are one surge away from crisis," said Michael Slubowski, president and CEO of Trinity Health in Michigan.

    Commentary

    According to AHA president and CEO Rick Pollack, the American Rescue Plan provided funds to hospitals during the height of the pandemic. But since then, "not a dime" was given to address the delta and omicron surges, which has significantly affected hospitals' margins and limited access to care for many patients.

    In an interview with "60 minutes" that aired on Sunday, President Biden said, "the pandemic is over," which, according to the Washington Post, "may complicate his administration's so far unsuccessful efforts to secure additional funding from Congress for more" pandemic-related aid.

    "The bottom line is America's hospitals are under severe financial pressure as they experience stark workforce shortages, broken supply chains, and rapid inflation that has increased the cost of care," Pollack said. "These realities translate into access to services being put in jeopardy and this deserves the immediate attention of policymakers at every level of government to ensure that we're able to keep people healthy, and also maintain essential public services that our communities depend on."

    To ensure that patients continue to have access to care and hospitals nationwide can be financially stable, AHA has asked Congress to prevent any additional Medicare cuts going into effect next year and extend government assistance programs for rural hospitals. The organization has also asked Congress to make certain critical pandemic-era waivers permanent and to hold payers accountable for plans that delay access to and increase the cost of care.

    According to HealthLeaders, the report highlights the "critical situation" hospitals are currently facing, and industry leaders are concerned about what it could mean for the future of the U.S. health care system.

    "The American healthcare system is one of the best in the world and we cannot let it fail," said Jack Lynch, president and CEO of Main Line Health. "We must continue to make changes on the provider side which will be difficult in an environment where consumers have higher expectations than ever."

    "However, without the care provided to government beneficiaries and appropriate rate increases from commercial payers the ability to assure access to timely care in rural, suburban, and urban communities will be at risk," he continued. "In my 35 years in healthcare, this is the most fragile I've ever seen the American healthcare system." (Schiavo, HealthLeaders, 9/16; Morse, Healthcare Finance News, 9/16; Kaufman Hall/AHA report, accessed 9/19; Pollack, AHA News, 9/16)

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