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The financial crisis facing hospitals across the nation demands new solutions

Article

read time: 4 minutes

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Management & Operations

In financial terms, 2022 will likely finish as “the most difficult year for hospitals and health systems since the beginning of the pandemic,” according to a report prepared for the American Hospital Association,1 with combined losses of billions of dollars and the majority of hospitals operating at a loss for the year.

As healthcare executives are acutely aware, hospitals have been operating under financial strain since the onset of the COVID-19 pandemic in early 2020. Compared to 2019, margins were on average down 25% in 2020, and down 4% in 2021 (thanks in large part to an influx of federal funds). The picture is far more grim for 2022, according to the report. Profit margins were 102% below their 2019 level for the first half of the year, and  it is expected that hospitals overall will finish the year at best 37% below what they experienced in 2019, and possibly as much as 133% below 2019 margins.

The financial crisis is widespread, with over half of hospitals expected to show a loss in 2022, compared to only 34% in 2019. The report’s optimistic projection indicates 53% of hospitals will end the year in the red, while their pessimistic projection suggests 68% will. Data for the report are drawn from more than 900 hospitals nationwide.

Rising costs with no relief in sight

Rising expenses have been the driver of this crisis. Expenses are projected to be $135 billion more in 2022 than they were in 2021 across the hospital sector. Labor expenses are the largest portion of every operation, accounting for $86 billion, with non-labor expenses accounting for $49 billion.

Hospitals have faced enormous increases in the costs of labor, both employed and contract workers. Of that $86 billion, two-thirds ($57 billion) is due to employed labor costs, while one-third ($29 billion) is due to contract labor costs. The pandemic imposed unprecedented strains on the hospital workforce, and many systems dramatically increased their reliance on contract labor to meet their increased demands for skilled personnel. As a result, contract labor expenses are now almost 500% higher than they were before the pandemic. There is currently no expectation of renewed federal relief for hospital labor expenses.

Growth of non-labor expenses is driven by multiple factors, including inflation and increased need for purchased services to supplement or replace work formerly done by employed labor. The expense for purchased services is projected to rise by $7 billion in 2022, while drug expenses are expected to rise by $1 billion. The report estimates that “all expense categories are projected to remain approximately 20-25% above pre-pandemic levels, with drugs and supplies increasing the most.”

The right partner can help meet the challenge

The combination of dramatically higher labor and non-labor costs, an increase in sicker patients because of pandemic-delayed care, continued COVID-19 surges, and continued challenges of aggressive payer negotiations may lead to “incredibly difficult financial challenges,” the report concludes.

As hospital administrators look ahead toward another financially uncertain year, they must continue to find creative new ways to support their margins. For many systems, one strategy to meet these challenges has included partnering with a diagnostic lab to reduce in-house costs. Even in the face of rising costs for labor and supplies, the right partner can offer the advantage of economies of scale that are unavailable to the individual hospital, with savings of 8% to 15% of the total lab spend (not including blood products). There are multiple models to consider:

  • Supply chain partnership: the partner takes responsibility for contracts, buying, and sourcing materials, allowing the hospital to outsource major cost drivers and benefit from reduced cost of goods.
  • Consulting: advisory support specific to an institution’s challenges, which may include provision of on-site expertise and oversight of some operations, and evaluation and fine-tuning of the current test menu, with the goal of reducing unnecessary tests and prioritizing tests and test panels that provide the best actionable results.
  • Lab partnership: In this model, the partner is responsible for some or all staffing, and many or all operations within the clinical lab. 

A lab partner can’t solve every problem faced by hospitals in these uncertain times, but they can offer a solution that can have an important impact on the bottom line.

Page Published: January 11, 2023
1. Kaufman, Hall & Associates, LLC. The current state of hospital finances: Fall 2022 update. Prepared for the American Hospital Association.

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