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Many of the largest U.S.
hospital systems reported negative net income from 2022, a list that includes
Kaiser Permanente, Mass General Brigham, and the Cleveland Clinic, each of
which lost at least $1 billion. Although some prominent hospital systems’ red
ink is due to negative investment income, the latest available data suggest
that inpatient volumes are down from their pre-pandemic baseline and are
likely to stay that way. As a result, experts tell AIS Health hospitals are
likely to be even more aggressive with payers than they have been in recent
rate negotiation rounds to replace some of that lost revenue and expired
federal pandemic relief funds.
Labor costs drive higher
unit costs
- Consulting firm
Kaufman Hall & Associates, which compiles monthly indices of
hospital finances, found in a March 28 report that the
median hospital operating margin was -1.1% in February, a slight
decrease from January’s -0.8%. The report added that “due to external
economic factors, relatively flat margins are likely to continue in the
near term.”
- “As we look at
how the pandemic has run its course in relationship to hospital
finances, overall, it’s been a rather destructive force,” says Erik
Swanson, senior vice president at Kaufman Hall and author of the monthly
report. “Expenses remained profoundly higher than they were for
pre-pandemic levels, and frankly, have just experienced an incredible
amount of growth over the last few years,” he adds.
- During the
worst surges of COVID-19 infections and hospitalizations, hospitals were
forced to rely on contracted staff to supplement their own strained
practitioner workforces. Although staffing was still a factor that
Kaufman Hall said contributed to hospitals’ losses in 2022, the
situation seems to be improving.
- “It appears
that, because of all the labor negotiations we've had, the data seems to
indicate that in many markets the labor inflation has peaked,” says
Ashraf Shehata, national sector lead for health care and life sciences
at KPMG. “The good news is, we're not going to see the double-digit kind
of growth that we saw last year. The bad news is, it's peaked, but it's
not going to go down, necessarily. Because a lot of contracts have been
renegotiated.”
Financialized balance
sheets also bear blame
- According to new
research published in Health Affairs, investment losses are
actually the primary driver of financial losses at large nonprofit
health systems, rather than increased labor costs. The report found that
2022’s stark stock market declines are likely a key driver of those
losses.
- Ge Bai, Ph.D.,
a coauthor of the research and a professor at Johns Hopkins University’s
schools of business and public health, tells AIS Health that the study does
not “represent all hospitals, especially midsize and small hospitals.”
- That said, she
adds, “the main message of this paper is that the overall margin drop is
not just caused by operations, but also by investor loss. But operations
did go badly for many hospitals.”
- But Michael
Abrams, principal of Numerof and Associates, isn’t sure that investment
income is the main culprit.
- “It’s probably
true that some health care organizations have relied on their investment
portfolios to boost their bottom line,” he tells AIS Health. “These
would be organizations without the market power to extract above-average
reimbursement from commercial payers, and without the financial
discipline to turn a profit at Medicare rates. But unless we assume that
most of these coincidently also had disastrous investment policies, it’s
hard to see how market losses explain bad financials across the
sector.”
- Whatever the
cause, it is clear that hospitals are feeling a financial crunch. This
has a number of ramifications for payers, experts say.
- “I would
imagine that that organizations will continue to pursue negotiations
quite aggressively with payers, given the fact that the expenses are so
high in delivering the care,” Swanson says.
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