Hospital margins shrinking as labor expenses grow, finds Kaufman Hall
Not including CARES Act funding, the median change in operating margin was down 12.1% from September to October.
Photo: CasarsaGuru/Getty Images
Hospital margins became even thinner in October due primarily to rising labor expenses, which largely offset reductions in high-acuity COVID-19 cases caused by the Delta variant, according to Kaufman Hall's new November flash report.
Actual hospital operating margins held relatively steady for the fourth consecutive month, with the median Kaufman Hall Operating Margin Index standing at 3.2% in October.
Not including CARES Act funding, the median change in operating margin was down 12.1% from September to October, marking a second consecutive month of month-over-month margin declines. Looking at year-over-year results, the median change in operating margin dropped 31.5% compared to pre-pandemic levels in October 2019.
Hospitals in regions hard hit by the recent Delta surge were most affected, with the West, South and Midwest all experiencing year-over-year margin declines for the month.
WHAT'S THE IMPACT?
Expenses remained on the rise across most metrics and benchmark measures, but non-labor expenses declined month-over-month for supplies, drugs and purchased services.
Overall, labor expenses remained stubbornly high. Total labor expense rose 2.7% from September to October; 12.6% compared to October 2020; and 14.8% compared to October 2019. At the same time, full-time equivalents per adjusted occupied bed decreased 4.5% year-over-year versus 2020 and 4.1% versus 2019 – suggesting higher salaries prompted by nationwide labor shortages that are driving up labor expenses, rather than increased staffing levels.
Hospitals continued to see a softening of inpatient volumes during the month following steep increases from the recent surge. Patient days decreased 0.5% compared to September while average length of stay (LOS) declined 1.5% following three months of increases. Even so, patient days and average LOS remained elevated compared to 2020 and 2019 levels. Meanwhile, operating room minutes rose 6.8% from September.
The decline in inpatient volumes led to a 0.9% month-over-month decrease in inpatient revenue, which in turn brought gross operating revenue (not including CARES Act funding) down slightly at 0.1%.
Year-to-date and year-over-year, however, gross operating revenue and both inpatient and outpatient revenues continued to increase compared to 2019 and 2020 for an eighth consecutive month. Outpatient revenue was up across all measures, rising 1.2% from September and 8.6% compared to October 2020. This suggests that recent pandemic trends have not significantly deterred healthcare consumers from seeking outpatient care.
Inflation rose sharply in October, hitting a three-decade high, up 6.2% year-over-year, as global supply shortages and sustained strength in consumer demand continued to push prices up. Unemployment edged down to 4.6%, its lowest rate since the start of the pandemic.
U.S. employers added 531,000 jobs to the economy during the month, marking the biggest jump in non-farm payrolls since July. In line with market expectations, the Federal Reserve announced that it will begin tapering asset purchases in mid-November, with the goal of no new net purchases by mid-2022.
THE LARGER TREND
The data from October is consistent with a recent report released by Fitch Ratings that found labor shortages and supply chain challenges to be a rising threat to profit margins for healthcare and pharmaceutical companies. The scarcity of workers is likely to increase pressure on some issuers' margins in the near term, but is unlikely to trigger any credit downgrades, the report said.
Multiple factors are contributing to labor pressures, including staff burnout caused by the pandemic and an overall shortage of qualified help, which has resulted in higher costs to hire temporary staff, as well as wage inflation.
Supply chain issues are also adding pressure to profit margins, mainly due to higher transportation costs incurred by distributors. The medical device subsector is also being impacted by the global shortage of semiconductors needed for their manufacturing processes.
This follows the Healthcare Quarterly report from Moody's released in October, which also found that a shortage of nurses and other workers will continue to erode hospital financial performance into 2022.
Washington State healthcare workers have called on hospitals to mitigate the staffing crisis, with the union arguing there are a number of policies hospital administrators could immediately enact that would help alleviate some of the issues.
Meanwhile, vaccine mandates for healthcare workers are also having an effect on the staffing shortage. For example, the state of Washington lost 2% of its healthcare workforce since mandating that all hospital and nursing home staff members receive COVID-19 vaccines.
Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com
