Hospitals seeing ‘enormous losses’, margins mired in red for 7th straight month

The latest Kaufman Hall report found more bad news, with declining volumes and higher expenses. Hospitals could be on pace for their 'worst financial year' in a long time.

Hospitals have faced financial headaches throughout the year, and they appear to be getting worse.

Health systems saw declining volumes in July while they continue to battle higher costs, according to Kaufman Hall’s latest “National Hospital Flash Report,” which was released Monday.

Hospital operating margins remained in the red for the seventh consecutive month as hospitals continue to struggle financially in the COVID-19 pandemic, Kaufman Hall reported. The Kaufman Hall Year-To-Date Operating Margin Index was -0.98% through July.

The report’s leading takeaway: “Seven months into 2022, organizations accrued enormous losses, but they lack the federal funds to offset the damage.”

Erik Swanson, a senior vice president of data and analytics with Kaufman Hall, put the troubling year in perspective.

“July was a disappointing month for hospitals and put 2022 on pace to be the worst financial year hospitals have experienced in a long time,” said Swanson said in a statement.

“Over the past few years, hospitals and health systems have been able to offset some financial hardship with federal support, but those funding sources have dried up, and hospitals' bottom lines remain in the red," he said.

Nonprofit hospitals have been raising warning signs over their difficulties, but there’s growing alarm over their financial performance.

Fitch Ratings recently revised its outlook for nonprofit hospitals and the health sector as “deteriorating.” Kevin Holloran, senior director at Fitch Ratings, said this month that hospitals are reeling due to higher labor costs and investment losses, contributing to a more challenging year than expected.

Hospitals had been making some improvement in the past couple of months, but those signs of progress dissolved in July, the Kaufman Hall report stated.

Federal funds kept hospitals afloat throughout the pandemic, hospital leaders have said. But they’ve also said the government hasn’t offered enough support to hospitals for the waves of COVID-19 patients in the Delta and Omicron variants. Rick Pollack, president of the American Hospital Association, said last month, “We haven’t received a dime for Delta and Omicron.”

Overall, hospitals’ gross operating revenue fell 3.6% from June to July, although it is up 1.2% compared to July 2021, and has risen 5.5% year-to-date.

Outpatient revenue also declined 4.8% from June to July. Outpatient revenue has climbed 7.1% year-to-date, but is just slightly ahead of July 2021 (an increase of 0.6%).

Inpatient revenue dropped 0.7% from June to July and is 1.5% lower than in July 2021, although it is up 3.6% year-to-date.

Hospitals saw a noticeable drop in operating minutes in July, as patients appear to be shifting to procedures in outpatient settings or ambulatory surgical centers. Operating room minutes dropped 10.3% from June to July and are down 7.7% compared to July 2021, according to the report.

More patients are opting for surgical centers, which the report said signals “a larger shift to ambulatory care and new ways of accessing care outside of the hospital.”

At the same time, the Kaufman Hall report offers more evidence that hospitals are admitting sicker patients. The average length-of-stay for patients rose 2% from June and is 3.4% higher than it was in July 2021, the report stated.

Patient days rose 2.8% from June to July, although they are down 2.6% year-over-year. Emergency department visits rose 2.6% from June to July, although they are only slightly higher than in July 2021, an increase of 0.7%.

Total expenses actually dipped a bit from June to July, a 0.4% drop, but expenses are 7.6% higher than in July 2021. Labor expense per adjusted discharge increased 3.5% from June and have jumped 13.9% so far in 2022, which the report cited as “a sign that the labor shortage is still going strong.”

Hospitals have been seeing higher costs because they are treating sicker patients requiring longer stays, the American Hospital Association said in a report earlier this month.

Employers are concerned about the possibility of higher healthcare costs due to patients delaying non-COVID health needs during the pandemic. The Business Group on Health surveyed large employers and found that some were seeing more late stage cancers, and anticipated seeing more in the future due to deferred care in the pandemic.

Health systems and hospitals can likely expect higher labor costs to be a reality going forward, according to Fitch Ratings.

“Even if macro inflation cools, labor expenses may be reset at a permanently higher level for the rest of 2022 and likely well beyond,” Holloran said in a statement.

Some industry analysts, including Kaufman Hall, have suggested some ailing hospitals may have to consider merging with other systems in order to keep their doors open.