Plagued by High Expenses, Half of Hospitals Finish in the Red

Last year was the worst financial year for US hospitals and health systems since the start of the COVID-19 pandemic, reports healthcare consulting firm Kaufman Hall.

The firm’s latest “National Hospital Flash Report” recorded some financial improvement in December 2022, with a median year-to-date (YTD) operating margin index of 0.2 percent. However, that was the only month last year in which hospitals saw positive YTD margins.

Furthermore, about half of US hospitals finished the year with a negative margin as they struggled to keep revenue up enough to cover rising expenses in 2022. The report was based on data from more than 900 hospitals from Syntellis Performance Solutions.

Physicians also felt the brunt of overall rising costs, according to the “Physician Flash Report,” an accompanying analysis of more than 200,000 physicians and advanced practice providers from 100 different specialties. Labor and non-labor-related expenses leading to continuing negative operating margins despite significant improvements in productivity and, therefore, revenue.

“As we saw throughout 2022, the labor market was unkind to hospitals and provider groups,” Erik Swanson, senior vice president of Data and Analytics with Kaufman Hall, said in a press release. “Given that labor and non-labor expenses are unlikely to recede in 2023, hospitals can embrace better workforce management strategies and leverage their relationships with post-acute care settings to maximize current patient volume trends.”

Increasing labor expenses were front and center last year as a highly competitive market and generally greater reliance on expensive contract labor shot up hospital costs. Hospital labor costs increased by 2 percent from November to December, according to the report. Kaufman Hall also reported that longer hospital stays observed in 2022 led to a decline in discharges, which also negatively impacted hospital margins.

For provider groups, the firm found that the median investment/subsidy per provider full-time equivalent (FTE) decreased to $187,801 in the fourth quarter of 2022. The metric was down by 5 percent versus the fourth quarter of 2021.

Group practices should “seek to improve individual provider productivity and efficiently integrate advanced practice providers to meet the increase in volume and successfully bend the cost curve,” said Matthew Bates, managing director and Physician Enterprise service line lead with Kaufman Hall.

Both hospitals and practices saw patient volumes increase last year after years of instability in the wake of COVID-19. However, volume has generally shifted to the outpatient setting as patients avoided emergency department visits.

Higher volumes across service lines are unlikely to save hospitals and practices this coming year. Kaufman Hall predicts expense pressures to persist in 2023.

“Hospitals that embrace better workforce management strategies, secure more stable supply lines, and more effectively negotiate with payers are likely to have better financial years in 2023. Hospitals should also leverage their outpatient footprint and improve relationships with post-acute settings to maximize current patient volume trends,” the firm stated in the report.