Hospitals' growing labor expenses drive another month of shrinking margins, Kaufman Hall says

Hospital finance
Rising workforce expenses canceled out softer inpatient volumes in October, causing industrywide hospital margins to decline for a second consecutive month, Kaufman Hall reports. On the other hand, non-labor expenses saw a monthly decline while outpatient revenue continues to recover. (Getty/utah778)

Hospitals’ margins weathered another hit through October as escalating workforce expenses offset slowdowns in delta-variant-driven high-acuity cases, according to monthly industry data from Kaufman Hall.

Hospitals’ median change in operating margin dipped 12.1% from September to October excluding CARES funding (4.1% with), representing the second consecutive month of margin declines, the group wrote in its latest report.

“Hospitals and health systems nationwide are feeling the pain of stubbornly high expenses,” Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said in a statement.

“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,” he said.

Hospitals located in regions bearing the brunt of the delta surge felt the tightest squeeze, with Kaufman Hall highlighting year-over-year margin declines across the West, South and Midwest regions during October. The Western U.S. led the way here with a 54% year-over-year decline in the median change of its operating EBITDA margin without CARES Act funding, according to the report.

Industrywide, the group reported a median hospital operating margin of 3.2% without CARES funding (4.1% with).

RELATED: Lower volumes, higher wages, supply chain disruption all dragged down hospital margins in September

October’s volumes showed declines in patient days (0.5%) and average length of stay (1.5%) after three straight months of increases for both metrics. The reduction in patient acuity “is likely correlated with decreased hospitalization rates” and a relaxing of new delta cases, Kaufman Hall wrote, although both metrics are still high compared to where the industry was during October 2020 and 2019.

Although the dip in inpatient volume drew a 0.9% month-over-month decrease in hospitals’ inpatient revenue, year-to-date and year-over-year gross operating revenues maintained their eight-month increase over what Kaufman Hall saw back in 2020 and 2019.

Also of note was a rise in outpatient revenue, which, according to the report, was up 1.2% from September and 8.6% from October of last year.

“This suggests that recent pandemic trends have not significantly deterred healthcare consumers from seeking outpatient care,” Kaufman Hall wrote.

RELATED: Kaufman Hall: COVID-19 will force permanent changes to hospital staff, supply systems

Despite this encouraging trend, “stubbornly high” labor expenses dragged on hospitals’ bottom lines.

According to the report, total labor expense was up 2.7% from September, 12.6% from October 2020 and 14.8% from October 2019.

At the same time, full-time equivalents per adjusted occupied bed decreased 4.5% [year-over-year] versus 2020 and 4.1% [year-over-year] versus 2019, suggesting higher salaries prompted by nationwide labor shortages are driving up labor expenses rather than increased staffing levels,” Kaufman Hall wrote.

In contrast, non-labor expenses including supplies, drugs and purchased services all saw a decline from September yet still remain high compared to previous years.

Kaufman Hall’s monthly reports incorporate data from more than 900 U.S. hospitals.

The growing emphasis on expenses has been a recurring theme among hospital executives and the consulting firm. A recent survey of 73 hospital and health system leaders conducted by the latter suggested widespread roadblocks tied to staffing and the supply chain, which Kaufman Hall said underscores the need for organizations to overhaul their processes in the coming months.