Hospital Expenses Skyrocket, Margins Plummet

A perfect storm of factors leads to the median operating margin dropping 18.2% from August to September, not including federal CARES Act funding.

Hospitals and health systems are experiencing an "alarming and sustained" increase in expenses and plummeting margin declines, according to a new report from Kaufman Hall.

The October National Hospital Flash Report describes a perfect storm of factors leading to the median operating margin dropping 18.2% from August to September, not including federal CARES Act funding.

These factors include high numbers of high-acuity patients, overall volume decreases, and rising expenses.

For example, patient days decreased 1.4% from August to September, likely due in part to a decline in COVID-19 patients. However, the average patient length of stay rose, discharges decreased, and patient days remained high relative to pre-pandemic levels.

From August to September, hospitals also saw:

• Adjusted discharges drop 5.1%
   
• Gross operating revenues decrease 1.4%
   
• Total expense per adjusted discharge increase 7.6%

Expenses and revenues in September climbed above both 2020 and 2019 levels, and at the same time there was also a 3.3% drop in outpatient revenue from August.

According to the analysis, this suggests possible consumer worries about accessing care during the recent Delta variant-related surge.

"Multiple factors are contributing to alarming and sustained increases in hospital expenses," the report's author, Erik Swanson, senior vice president of data and analytics, said in a statement. "Growth in labor expenses are outpacing increases in hours worked, suggesting hospitals are paying more due to nationwide labor shortages. Rising supply and drug expenses also point to worldwide supply chain issues."

Here are some additional report findings for hospitals:

• Patient days increased 11.4% year-over-year and 9.3% year-to-date, but dropped 1.4% from August to September, reflecting a decrease in COVID-19 related hospitalizations.
   
• Average length of stay increased across the board, up 4.8% year-over-year versus 2020, and up 8.2% year-over-year versus 2019.
   
• Gross operating revenues (not including CARES) jumped 16.6% year-to-date and 12.3% year-over-year, versus 2020 and 10.4% year-to-date and 18.2% year-over-year versus 2019.
   
• Total expense per adjusted discharge was up 2.6% year-to-date and 12.9% year-over-year.

Kaufman Hall also published a Physician Flash Report for October, which showed that physician groups saw significant revenue and productivity gains in the second and third quarters.

Physician expenses, however, climbed above pre-pandemic levels for a third straight quarter, due in part to increases in non-labor expenses such as drugs and medical supplies.