October's labor woes drive higher costs, worsened margins for hospitals: Kaufman Hall

October marks 10 months of consecutive negative margins for the nation’s hospitals and a “slight downturn” from three prior months of gradual gains, according to the latest monthly industry report from Kaufman Hall.

High expenses were again a primary culprit with labor costs, inflated material costs and outsourced services like IT and human resources all playing a role in the losses, the advisory firm found.

Discharging difficulties tied to labor shortages in hospitals and post-acute care settings also drove longer hospital stays that “did not translate to additional revenue for hospitals,” according to the report.

At the same time, increased emergency department volumes strained hospitals that were unable to admit patients for inpatient care. “Many hospitals were forced to board patients in the ED leading to increased pressure on ED staff,” Kaufman Hall wrote, echoing recent warnings from physician associations.

“Every aspect of patient care—from being admitted, to treatment, to discharge—is affected by the labor shortage and as we head into the virus season and potential new waves of COVID-19 the pressures on hospitals and their staff could mount,” Erik Swanson, senior vice president of data and analytics at Kaufman Hall, said in a release. “The [October] data reinforce what we have known for several months, 2022 has been and will continue to be a very difficult financial year for the nation’s hospitals.”

Kaufman Hall’s median year-to-date operating margin index for October was -0.5%, a -2% month-over-month decline that virtually replaced the industry’s margin gains since August. The current YTD operating margin also represents a -43% decline from what the firm saw this time last year and a -31% drop from 2019.

Hospitals’ gross operating revenue (excluding relief funds) rose 2% month over month and YTD are up 5% over October 2021.

Inpatient revenue increased 4% month over month but is flat YTD compared to this time last year. Outpatient revenue increased 1% month over month but is up 8% YTD from October 2021. Net patient service revenue per adjusted discharge was up 3% over September, but YTD remains flat over the prior year’s tally.

October saw a 1% decline in month-over-month adjusted discharges though YTD numbers are still up 1% over last year. The firm reported month-over-month and year-over-year YTD increases for adjusted patient days (2% and 3%) as well as average length of stay (3% and 1%). Operating room minutes were up 2% over September but flat YTD.

Hospitals’ total expenses grew 1% month over month and are 8% higher YTD over October 2021, according to the report, with total expenses per adjusted discharge rising 3% month over month and 7% YTD. Labor played an outsized role with increases of 3% month over month and 10% YTD. Non-labor expenses stayed pat from September’s total but YTD remains up 5% from the same time last year.

“Record-high expenses across the economy have not eased up, leaving hospitals in a precarious financial position as we look to the end of the year,” Swanson said. “With the labor market in the healthcare sector still highly competitive, hospitals are feeling the financial pressure of needing to attract and retain workers with significant increases in salaries.”

Kaufman Hall’s monthly reports are based on a sample of more than 900 nationally representative hospitals, the data from which are collected by Syntellis Performance Solutions.