Alabama hospitals seeing severe margin declines

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Alabama hospitals have been faring far worse than hospitals in most other states in terms of margins and operating incomes, with healthcare facilities across the state seeing a 79% decline in median operating margins from 2019 to 2022, according to a new Kaufman Hall analysis.

Without federal stimulus funds, the decline would have been closer to 103%.

Operating income hasn't fared much better, sinking by $738 million last year, or $936 million when subtracting the stimulus. 

Total expenses in 2022 for Alabama hospitals were nearly $2.6 billion higher than pre-pandemic levels, and a 20% growth in expenses has outpaced a 15% increase in revenue over the same period. Rising expenses for both labor and medical supplies have contributed to the increase, and total expenses are cumulatively well above pandemic levels, the numbers showed.

Discharges, patient days, surgical cases and emergency department visits in Alabama hospitals are lower than pre-pandemic levels. An increase in length of stay relative to 2019 suggests that patients who are visiting hospitals have more severe health needs than prior to the pandemic, Kaufman Hall found. And labor shortages in post-acute settings are preventing timely discharge of patients from hospitals, leading to increased expense without a commensurate increase in revenue.

Unluckily for the state, there doesn't appear to be relief in sight. Total lost income for Alabama hospitals over the last three years amounts to $1.5 billion, data revealed.

Hospitals also are facing a host of other related challenges, including workforce shortages and supply disruptions.

WHAT'S THE IMPACT?

Other metrics continue to paint a challenging picture. For instance, hospitals in the state spent 30% more on labor in 2022 than in 2019, translating to about a $1.4 billion difference – due to both higher staffing and contract labor expenses.

Wage and salary expenses in 2022 for Alabama hospitals were more than $1 billion above 2019 levels. While wage and salary expenses were 35% higher during that stretch, benefit expenses have only grown 13%. Altogether, this represents 75% of the total increase in labor expenses. Benefit expenses, meanwhile, were $75 million above pre-pandemic levels.

Contract labor expenses have played a significant factor in rising labor expenses, comprising roughly 24% of the labor expense increase for Alabama hospitals in 2022 relative to 2019. Contract labor expenses for Alabama hospitals were roughly $324 million higher in 2022 than before the pandemic.

Overall, hospital discharges, patient days, surgical cases and ED visits in Alabama hospitals were lower in 2022 compared to 2019, as care continues to shift out of the hospital, the analysis found. 

Patient days decreased less than discharges in 2022, leading to increases in average length of stay. An increase in length of stay translates to higher expenses for hospitals without a corresponding increase in revenue.

THE LARGER TREND

Last year was the worst financial year for hospitals and health systems since the start of the COVID-19 pandemic, with operating margins taking a particular hit, according to a Flash Report Kaufman Hall released last week.

December was the only month in which hospitals realized positive margins. Despite the end-of-year upswing, about half of U.S. hospitals finished 2022 with a negative margin as growth in expenses outpaced revenue increases.

Hospitals faced prolonged increases in labor expenses last year. The increases were driven in part by a competitive labor market, as well as hospitals needing to rely on more expensive contract labor to meet staffing demands. Increased lengths of stay due to a decline in discharges also negatively affected hospital margins.

What's more, expense pressures are unlikely to recede in 2023, analysts project. Hospitals that embrace better workforce management strategies, secure more stable supply lines, and more effectively negotiate with payers are likely to have better financial years in 2023. Hospitals should also leverage their outpatient footprint and improve relationships with post-current patient volume trends, according to Kaufman Hall.
 

Twitter: @JELagasse
Email the writer: Jeff.Lagasse@himssmedia.com