Hospital operating margins fall, spending rises as humanitarian aid dries up
Healthcare organizations are grappling with growing expenses and limited COVID-19 relief aid after the omicron variant surge, creating a challenge for hospital margins.
The median operating margin for hospitals and health systems fell 11.8% from January to February and 42.4% from February 2020, according to a March 28 Kaufman Hall report.
The median operating margin was negative for February and January, at -3.45% and -4.25% respectively.
The rise in spending was compounded by global supply chain issues and labor shortages, according to the report. Labor shortages have prompted hospitals to step up retention and recruitment efforts, a costly undertaking.
One health system, Providence, based in Renton, Wash., reported operating expenses of $28 billion for the 12 months ended Dec. 31, according to financial documents released March 9. grew 10% year-over-year, driven by higher salaries, higher agency staffing costs and overtime. The system recorded an operating loss of $714 million in 2021, compared to a loss of $306 million in 2020.
Another health system, based in Detroit, Michigan, Henry Ford Health, reported $7 billion in spending for 2021, an 11% increase from a year earlier at $6.3 billion, according to its financial results published on March 14. benefits accounted for a large portion of spending at $3 billion in 2021, an 8% increase from 2020 at $2.8 billion. Henry Ford ended 2021 with an operating loss of $168.2 million, compared to an operating profit of $225.6 million in 2020.
At the state level, the pandemic reduced the median operating margin of Minnesota hospitals to 1.2% in 2020, according to an April report report by the Minnesota Hospital Association. Without federal and state assistance, this figure would have been -2.3%.
The association attributed the rising personnel costs to labor shortages, while the costs of supplies have also risen dramatically.
“In order to retain and recruit staff, as well as to compete with temporary help agencies, hospitals and health systems have taken several measures, such as increasing the base salary, overtime pay, providing retention bonuses and increasing benefits such as paid time off to address workforce quarantine needs, illness and child care issues,” the report said.
California hospitals are also struggling, an April 19 Kaufman Hall report watch. California hospitals saw about $6 billion in financial losses in 2021. They also saw a 26% decline in their median operating margins in 2021, compared to pre-pandemic levels. Additionally, 51% of California hospitals have negative operating margins and 4% have unsustainable operating margins.
Hospital spending in California rose 15% in 2021 from pre-pandemic levels, according to the report. Contract labor costs have nearly doubled in the state, and staff salaries are rising. Since 2019, procurement spending has increased by approximately 20%, drug spending has increased by 41%, and purchased or outsourced sources have increased by 14%.
The spending increases come as HHS says federal relief aid, called a lifeline by hospitals during the COVID-19 pandemic, has run out. While hospitals and the White House have asked for more aid to help offset expenses from the COVID-19 pandemic, Congress has yet to pass new funding. In its latest March report, Kaufman Hall said these financial challenges are unlikely to end soon.
“Recovery from the omicron surge will likely continue to be slow in the coming months, and hospitals could face additional setbacks if other variants – such as the BA.2 omicron subvariant – lead to new outbreaks,” Kaufman Hall said.