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Hospital margins drop for a second month as labor expense continue to climb

Press releases may be edited for formatting or style | December 01, 2021 Business Affairs
U.S. hospitals and health systems were hit with a second consecutive month of margin declines in October as mounting labor expenses continue to weigh down overall hospital performance, according to the November issue of Kaufman Hall’s National Hospital Flash Report. The margin declines in October came even as pressures from treating high levels of serious COVID-19 cases eased. And with cases and related hospitalizations on the rise in recent weeks—coupled with the uncertainties of the newly emerging Omicron variant—the future outlook for hospitals remains uncertain.

The median change in Operating Margin was down 12.1% from September to October, and 31.5% compared to pre-pandemic levels in October 2019, not including federal funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Hospitals in regions still reeling from the Delta surge were most affected, with the West, South, and Midwest all experiencing year-over-year margin declines for the month. Actual hospital margins remained tight. The median Kaufman Hall Operating Margin Index was 3.2% in October, not including CARES. With the aid, it was 4.1%.

Labor expenses continued to rise, driving up overall expenses as hospitals felt the impacts of nationwide labor shortages. Total Labor Expense increased 2.7% from September to October. At the same time, staffing levels — as measured by Full-Time Equivalents per Adjusted Occupied Bed — decreased 4.5% year-over-year. This suggests that higher pay and benefits are pushing up labor expenses despite lower staffing levels. Non-labor expenses, including supplies, drugs, and purchased services, all declined from September to October after months of increases, but overall expenses remain highly elevated relative to pre-pandemic levels.

“Hospitals and health systems nationwide are feeling the pain of stubbornly high expenses,” said Erik Swanson, a senior vice president of Data and Analytics with Kaufman Hall. “Broader economic trends such as U.S. labor shortages are adding to the extreme pressures of the pandemic. Hospitals face greater uncertainties in the coming months as a result, as COVID-19 cases and hospitalizations appear to once again be on the upswing before many have even had a chance to recover from the last surge.”

Inpatient volumes showed signs of softening in October following steep increases from the Delta surge. Patient Days were down 0.5% compared to September while Average Length of Stay decreased 1.5% following three months of increases. Operating Room Minutes rose 6.8% month-over-month, suggesting a return of patients seeking elective procedures.

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