Kaufman Hall: Labor Costs Keep Hammering Hospital Margins

Dec. 2, 2021
A new report from the Kaufman Hall consulting firm finds U.S. hospital organizations struggling mightily right now, along multiple dimensions, including margin declines and labor expenses

The multiple impacts of the COVID-19 pandemic continue to hammer U.S. hospitals and health systems, a just-published report from the Chicago-based Kaufman Hall consulting firm has found. On Tuesday, Nov. 30, Kaufman Hall industry analysts reported that “U.S. hospitals and health systems were hit with a second consecutive month of margin declines in October as mounting labor expenses continue to weigh down overall hospital performance, according to the November issue of Kaufman Hall’s ‘National Hospital Flash Report.’ The margin declines in October came even as pressures from treating high levels of serious COVID-19 cases eased. And with cases and related hospitalizations on the rise in recent weeks—coupled with the uncertainties of the newly emerging Omicron variant—the future outlook for hospitals remains uncertain,” the press release announcing the publication of the report, said.

Indeed, the analysts found, “The median change in Operating Margin was down 12.1 percent from September to October, and 31.5 percent compared to pre-pandemic levels in October 2019, not including federal funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Hospitals in regions still reeling from the Delta surge were most affected, with the West, South, and Midwest all experiencing year-over-year margin declines for the month. Actual hospital margins remained tight. The median Kaufman Hall Operating Margin Index was 3.2 percent in October, not including CARES. With the aid, it was 4.1 percent.”

What’s more, “Labor expenses continued to rise, driving up overall expenses as hospitals felt the impacts of nationwide labor shortages,” the report found. “Total Labor Expense increased 2.7 percent from September to October. At the same time, staffing levels — as measured by Full-Time Equivalents per Adjusted Occupied Bed — decreased 4.5 percent year-over-year. This suggests that higher pay and benefits are pushing up labor expenses despite lower staffing levels. Non-labor expenses, including supplies, drugs, and purchased services, all declined from September to October after months of increases, but overall expenses remain highly elevated relative to pre-pandemic levels.”

“Hospitals and health systems nationwide are feeling the pain of stubbornly high expenses,” said Erik Swanson, a senior vice president of data and analytics with Kaufman Hall. “Broader economic trends such as U.S. labor shortages are adding to the extreme pressures of the pandemic. Hospitals face greater uncertainties in the coming months as a result, as COVID-19 cases and hospitalizations appear to once again be on the upswing before many have even had a chance to recover from the last surge.”

In addition, “Inpatient volumes showed signs of softening in October following steep increases from the Delta surge. Patient Days were down 0.5 percent compared to September while Average Length of Stay decreased 1.5 percent following three months of increases. Operating Room Minutes rose 6.8 percent month-over-month, suggesting a return of patients seeking elective procedures. The inpatient volume declines contributed to a 0.9% decrease in Inpatient Revenue from September to October, which brought Gross Operating Revenue (not including CARES) down slightly at 0.1% over the same period. However, Gross Operating Revenue and Inpatient and Outpatient revenues continued to rise both year-to-date and year-over-year for an eighth consecutive month compared to 2019 and 2020 levels. Outpatient Revenue rose across all measures in October, up 1.2 percent from September.”

The report makes clear that hospital and health system leaders are being faced with challenges on numerous fronts. “Inflation rose sharply in October, hitting a three-decade high up 6.2 percent YOY [year over year], as global supply shortages and sustained strength in consumer demand continued to push prices up. Unemployment edged down to 4.6%, its lowest rate since the start of the pandemic. U.S. employers added 531,000 jobs to the economy in October, marking the biggest jump in non-farm payrolls since July. In line with market expectations, the Federal Reserve announced that it will begin tapering asset purchases in mid-November, with the goal of no new net purchases by mid-2022.”

The report emphasizes the combination of hits to hospitals and health systems, noting that “Hospital margins declined month-over-month in October. Overall, hospital expenses remain high, while volumes remain low, relative to pre-pandemic levels. Performance could continue to suffer in the coming months as hospitals face sustained labor increases and the uncertainties of the emerging Omicron variant.”

Still, there were a few good signs, among them: “Patient days and average length of stay declined in October for the first time in months, which is likely correlated with decreased hospitalization rates.”

The full text of the report can be found here.

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