The Longer-Term Inpatient Hospital Financial Landscape Remains Ominous

Jan. 6, 2023
Despite a slightly brightening outlook in terms of inflation and in the outpatient sector, inpatient hospitals are facing sustained cost and financial headwinds

As we reported on Jan. 4, “Hospital-based organizations finally saw modest financial improvement in November, after expenses declined in that month, even as inpatient revenues remained flat; but hospital-based organizations were rescued by improving outpatient revenues, according to the latest report from the Chicago-based Kaufman Hall consulting firm. The results, announced on Kaufman Hall’s website, show modest improvement after a largely difficult year through most of 2022. According to the ‘National Hospital Flash Report: December 2022,’ ‘Hospitals experienced a slight increase in operating margins in November—though margins remained negative for 2022 to date—according to the latest National Hospital Flash Report from Kaufman Hall.  Lower expenses and increased outpatient revenue drove improved month-over-month performance.’”

The Kaufman Hall experts wrote in their report that “Hospitals experienced improved margins in November, up 12 percent from the previous month. The median Kaufman Hall Year-To-Date Operating Margin Index reflecting actual margins was -0.2 percent in November.” The key difference from earlier in the year? “A decrease in volume and shorter lengths of stay contributed to a 1-percent decrease in total expenses in November. While the slowdown led to less revenue, hospital expenses declined in November, resulting in improved margins. Labor expenses, a significant driver of healthcare costs, also decreased by 2 percent in November.”

In other words, decreases in overall inpatient volumes and shorter average lengths of stay helped to modestly bring down hospital expenses at a time when margins remain very slender. Indeed, while Kaufman Hall’s experts wrote that “Hospital outpatient clinics and services have been a bright spot in hospitals’ revenue column in 2022,” and that, “While inpatient service continue to hamper margins, hospitals could lean on their outpatient services to buoy margins,” their report also noted that inpatient margins remain highly fragilized. Nationwide, by bed size, they were as follows when comparing November 2022 results to October 2021 results: 0-22 beds, +2 percent; 26-99 beds, -1-percent; 100-299 beds, -1 percent; 200-299 beds, -1 percent; 300-499 beds, -2 percent; 500 or more beds, -2 percent.

Those margins are honestly pretty terrible overall, and what’s worse, staffing costs, most especially for nurses, remain very high. One of the key impacts of the COVID-19 pandemic on hospitals over the medium term was that large numbers of bedside nurses left inpatient hospital work, either moving over to a variety of different outpatient care settings, or even leaving healthcare altogether. And as has widely been reported, many of the nurses leaving bedside inpatient care are younger—in their 30s and 40s, not in their 50s and 60s—with their departure leaving potential gaps for many years.

To be sure, nurse staffing was and is only one major cause for such difficult ongoing revenue margins among hospitals. Indeed, the American Hospital Association, in a report published to its website last spring, cited four key longer-term financial issues for hospital organizations: “workforce and contract labor expenses; drug expenses; medical supply and PPE expenses; rising economy-wide inflation.”

With regard to the issue of drug expenses, the AHA noted in its report last year that “A study by GoodRx found that in January 2022 alone, drug companies increased the price of about 810 brand and generic drugs that they reviewed by an average of 5.1 percent. These price increases followed massive price hikes for certain drugs often used in the hospital such as Hydromorphone (107 percent), Mitomycin (99 percent), and Vasopressin (97 percent).17 For another example, the drug manufacturer of Humira, one of the most popular brand drugs used to treat rheumatoid arthritis, increased the price of the drug by 21% between 2019 and 2021.” The AHA report went on to note that “A study by the Kaiser Family Foundation found that in Medicare Part B and D markets, half of all drugs in each market experienced price increases above the rate of inflation between 2019 and 2020 – in fact, a third of these drugs experienced price increases of greater than 7.5 percent. At the same time, according to a report by the Institute for Clinical and Economic Review (ICER), eight drugs with unsupported U.S. drug price increases between 2019 and 2020 alone accounted for an additional $1.67 billion in drug spending, further illustrating that drug companies’ decisions to raise the prices of their drugs are simply an unsustainable practice. As hospitals have worked to treat sicker patients during the pandemic, they have been forced to contend with sky-high prices for drugs, many of which are critical and lifesaving for their patients,” the AHA report noted. “For example, in 2020, 16 of the top 25 drugs by spending in Medicare Part B (hospital outpatient settings) had price increases greater than inflation — two of the top three drugs, Keytruda and Prolia — experienced price increases of 3.3 percent and 4.1 percent, respectively.”

Core inflation does seem to be moderating now in the U.S. economy; but hospitals are particularly impacted by any broader economic trends that make supplies more expensive.

And if those stats from Kaufman Hall, the AHA, and those other organizations are alarming, the Center for Healthcare Quality & Payment Reform released a report on Jan. 3 that painted an even more dire picture, particularly among rural hospitals. The leaders at CHQPR wrote that “More than 600 rural hospitals—nearly 30 percent of all rural hospitals in the country—are at risk of closing in the near future.” The at-risk hospitals, CHQPR wrote, “have lost money on patient services over a multi-year period (not including the first year of the pandemic). The losses will likely be greater in the future due to the high costs that all hospitals, particularly small rural hospitals, are experiencing because of inflation and workforce shortages.” Rural hospitals also “do not have sufficient net assets including pandemic-related funding but excluding buildings & equipment) to offset the losses on patient services for more than six years.”

Even worse, CHQPR noted, “Over 20 of these rural hospitals are at immediate risk of closing.” Those 200-plus rural hospitals “were losing money on patient services prior to the pandemic and they did not have sufficient sources of other funds to cover those losses.” They also have very low financial reserves. “The hospitals have more debts than assets, or the hospitals’ net assets (including pandemic-related funding, but excluding buildings & equipment) could offset their losses for at most 2-3 years.”

Added to everything else, the cost of cybersecurity insurance, all cybersecurity experts note, is exploding, adding to hospital-based organizations’ financial burdens. One trend that is emerging is that of cybersecurity accreditation and certification programs for healthcare organizations. Yet that trend, too, adds to cost burdens; and many experts are predicting that it will become an intolerable one for smaller and independent hospitals.

The bottom line in all this is that, apart from a slight moderation in economic inflation in the overall U.S. economy, all the medium- and longer-term cost trends in U.S. healthcare are looking to be sustained over time, especially for hospital-based organizations.

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