Hospital operating margins have declined for 10 months straight this year, decreasing by 2% from September to October, and hospitals are expected to end the year "in the red," according to Kaufman Hall's latest National Hospital Flash Report.

Hospital margins decline for the 10th straight month

In October, hospitals and health systems saw their operating margins decrease 2% from the previous month. Compared to October 2021, operating margins were down by 13%. So far this year, hospitals and health systems have experienced 10 consecutive months of negative margins.

For the year-to-date (YTD), median operating margins are down 43% compared to 2021, and down 31% compared to 2019. Although hospitals' gross operating revenue, excluding relief funds, increased 2% from September and is up 5% YTD, high expenses, particularly from labor costs, increased supply costs, and outsourced services, have continued to outpace revenue and contribute to operating losses.

Total expenses increased 1% month-over-month and were up 8% YTD compared to October 2021. Labor expenses increased 3% month-over-month and were 10% higher YTD. Although non-labor expenses stayed stable from September, they are still up 5% YTD compared to the same time last year.

"Record-high expenses across the economy have not eased up, leaving hospitals in a precarious financial position as we look to the end of the year," said Erik Swanson, Kaufman Hall's SVP of data and analytics. "With the labor market in the healthcare sector still highly competitive, hospitals are feeling the financial pressure of needing to attract and retain workers with significant increases in salaries."

Difficulties discharging patients to post-acute care settings have also led to longer hospital stays, but "did not translate to additional revenue for hospitals," according to the report. In October, patient discharges decreased by 1% while the average length of stay increased by 3%, largely due to staff shortages.

Meanwhile, ED visits increased by 3%, and operating room minutes increased by 2%. This increased ED volume added to hospitals' strain, with Kaufman Hall writing that "[m]any hospitals were forced to board patients in the ED leading to increased pressure on ED staff."

"Every aspect of patient care—from being admitted, to treatment, to discharge—is affected by the labor shortage and as we head into the virus season and potential new waves of COVID-19 the pressures on hospitals and their staff could mount," Swanson said. "The [October] data reinforce what we have known for several months, 2022 has been and will continue to be a very difficult financial year for the nation's hospitals."

So far, many major health systems have reported significant losses this year, with some surpassing $1 billion in recent quarters, and the hospital sector as a whole is expected to end the year with negative margins. Overall, 2022 is "shaping up to be one of the worst financial years on record for hospitals," Swanson said.

According to Modern Healthcare, hospitals and health systems will likely be dealing with these economic challenges for at least the next few years. To strengthen their finances, some health systems are considering new mergers and acquisitions and implementing employee retention strategies. (Devereaux, Modern Healthcare, 11/30; AHA News, 11/30; Muoio, Fierce Healthcare, 11/30; Swanson, Kaufman Hall, 11/30)