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October 25, 2022

'The most difficult year': Why hospital finances are so strained

Daily Briefing

    According to a new report from Kaufman Hall, 2022 has been "the most difficult year financially" for health care organizations since the start of the Covid-19 pandemic, particularly as staffing shortages, sky-high labor costs, inflation and more continue to impact both revenue and expenses.

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    Hospitals continue to struggle with labor shortages and costs

    For its 2022 State of Healthcare Performance Improvement Report, Kaufman Hall surveyed 86 hospital and health system leaders across the United States.

    Overall, Kaufman Hall found that 2022 was "the most difficult year financially for healthcare providers since the COVID-19 pandemic began." In fact, one interviewee with 40 years of health care experience said the current situation was the most difficult operating environment he had ever seen.

    One of the most pressing issues for hospitals right now is the workforce. In the survey, two-thirds of hospital leaders said their facilities have been running at less than full capacity because of staffing shortages.

    Because of this, many hospital leaders reported an increase in the length of stay for inpatients over the past year. Fifty-one percent of respondents also said more patients were leaving the ED without being seen.

    In addition, a need for contract labor, such as travel nurses, has contributed to "skyrocketing" labor expenses. For example, Tenet Healthcare reported that its contract labor spending has continued to increase, going from 6% of total salary and benefit spending in the second quarter to 7.4% in the third quarter.

    According to STAT+, this increase in contract labor was largely due to this summer's Covid-19 surge, which led to 10% of Tenet's total clinical staff being out sick at some point in July.

    "The fact is, contract labor rates have not come down this year the way we anticipated back in our February guidance," said Saum Sutaria, Tenet's CEO. "There's no way to escape that in terms of the labor rates."

    When it came to non-labor expenses, 63% reported these expenses increasing between 6% and 15% over the past year. Over 20% said that their non-labor expenses increased by over 15%.

    How hospitals are tackling these problems

    According to the report, all respondents said they have adopted recruitment and retention strategies to address the current workforce shortage.

    Overall, 98% of respondents reported increasing starting salaries or minimum wage for their workers. In addition, 67% said they had seen wages increase by more than 10% for clinical staff.

    To reduce labor costs, many organizations have begun reducing their use of contract workers. For example, HCA Healthcare decreased its contract labor costs by 19% in the third quarter.

    According to HCA CEO Sam Hazen, the reduction in contract labor expenses allowed the company to keep its overall spending on salaries, wages, and benefits stable in the third quarter instead of going up. "That's the first quarter in a while where we've seen stabilization in labor costs," Hazen said.

    A significant portion of respondents (63%) also reported outsourcing certain services, including  revenue cycle services, environmental services, and IT, as a way to reduce labor costs.

    Although automation technologies, including self-registration kiosks, robotic process automation, and artificial intelligence, are becoming more common, relatively few organizations are using them extensively. In total, only 18% of respondents said their organization's investment in such technologies was "significant." (Robinson, Kaufman Hall, 10/18; AHA News, 10/18; Bannow, STAT+ [subscription required], 10/21; Gooch, Becker's Hospital Review, 10/18)

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