Hospital Revenue Margins Remain Depressed as Labor Expenses Rises

Across the country, hospitals and health system finances are being strained by rising labor costs, global labor shortages, and dwindling revenue margins, according to a recent National Hospital Flash Report from Kaufman Hall.

The report found that overall hospital performance in November remained below pre-pandemic trends as the increase in expenses exceeded revenue growth.

Compared to pre-pandemic levels in 2019, the median change in operating margin dropped by 22.1 percent, not including CARES Act funding.

However, hospital margins experienced increases month-over-month that month. Compared to October 2021, the median change in operating margin (less CARES Act funding) was up by 8.1 percent, proceeding two months of month-over-month drops.

Hospital performances margin were inconsistent throughout the US, with health systems in the West, South, and Great Plains experiencing year-over-year (YOY) margin declines in November. The Midwest and Northeast/Mid-Atlantic experienced YOY increases.

Overall, hospital volumes softened in November with month-over-month declines across volume metrics. Discharges, patient days, and ED visits declined due to surges in COVID-19 cases compared to the previous month of October. Specifically, discharges declined by 4.8 percent, adjusted discharges dropped by 3.9 percent, and adjusted patient days dropped by 2.4 percent month-over-month.

These findings suggest consumers are delaying care for non-COVID-19 conditions, researchers said.

Meanwhile, hospitals saw average length of stay increase by 0.8 percent month-over-month and 8.6 percent versus November 2019 as the facilities saw more complex cases requiring longer hospital stays.

The report also shows that nationwide labor shortages and global supply chain challenges triggered a steady increase in per-patient expenses across all measures. For example, total expense per adjusted discharge grew 24.7 percent, labor expense per adjusted discharge grew 26.4 percent, and non-labor expense per adjusted discharge grew 20.5 percent relative to pre-pandemic levels. 

Highly elevated labor expenses caused by national workforce shortages contribute to significant operational challenges such as lower staffing levels, according to researchers. 

The report discovered that labor expense per adjusted discharge jumped 26.4 percent compared to pre-pandemic trends and 2.7 percent month-over-month regardless of the 1 percent decline in full-time equivalents per adjusted occupied bed.

Additionally, facilities located in the West saw labor expense per adjusted discharge increase by 28.8 percent year-over-year, which is the most significant labor expense increase for the month.

“Widespread labor shortages are driving up already high labor expenses, posing significant operational challenges for our nation’s hospitals,” Erik Swanson, a senior vice president of data and analytics with Kaufman Hall, said in a public statement.

“Hospitals are grappling with higher labor costs despite lower staffing levels, due to intense competition for qualified healthcare workers. In addition, the highly contagious Omicron variant could put more pressure on hospitals in months to come.”

The decrease in month-over-month volume influenced a drop in overall hospital revenue in November, with gross operating revenue (not including CARES Act funding) declining 0.6 percent, inpatient revenue dropping 2.6 percent, and outpatient revenue falling 0.7 percent versus October rates.

Gross operating revenue increased 18 percent, inpatient revenue increased 15.8 percent, and outpatient revenue was up 17.3 compared to November 2019, emphasizing elevated year-to-date and YOY revenues in both 2019 and 2020 levels for a ninth consecutive month.