May 1, 2023 - Health

Hospitals face rough waters from high costs

Illustration of a tidal wave of money about to overtake a red cross.

Illustration: Aïda Amer/Axios

The patients are back — but health systems are facing post-pandemic cost pressures driven by inflation and workforce shortages.

Why it matters: These financial pressures are threatening the recovery of the industry, mainly the most vulnerable organizations, experts tell Axios.

What they're saying: "While so many have moved on from dealing with COVID, we have not because we're now dealing with the aftermath," American Hospital Association CEO Rick Pollack said speaking at a conference in Washington, D.C., last week.

  • The problems, he said, include "financial challenges, a surge in inflation, workforce shortages, cracks in the supply chain, uncertain funding streams from the government at every level and inadequacies in our public health system."

Between the lines: "Almost every hospital for Q1 of this year is doing better than they were last year," Erik Swanson, senior vice president at consulting firm Kaufman Hall, told Axios.

  • But that's not necessarily saying much since hospitals financial performance suffered during COVID's Omicron wave in the first part of 2022 and the year itself was reportedly dubbed "the worst operating year we’ve ever seen" by Fitch Ratings.
  • While hospital performance has been improving consistently throughout the course of this year, Swanson said, the overall number of patient discharges — one measure of patient volume — are still generally down compared to pre-COVID levels and "expenses across the board are highly elevated."

What's happening: Inflation has been a strain on many hospitals, but workforce shortages are contributing to cost pressures, too.

  • In particular, labor costs are still very high in some regions, Gary Young, a health policy professor at Northeastern University, told Axios. "Recruiting a nurse can be incredibly expensive on the West Coast and other parts of the country. There's still margin pressure," he said.
  • Shortages throughout the health care sector are hurting hospital balance sheets. One reason: They have to board patients after inpatient care is no longer necessary as they struggle to find post-acute care settings they can discharge patients to, Swanson said.
  • Additional pressures are also tied to the end of COVID such as the potential loss of Medicaid by millions due to redetermination that could drive up uncompensated care, as well as headaches over the flexibilities that will be lost next week with the end of the public health emergency expiration.

Reality check: The balance sheets of many large health systems are doing just fine, experts tell Axios. Even the cash position of many vulnerable hospitals, such as rural and public hospitals, benefited immensely from federal relief funds during the pandemic, Young said.

  • "Some hospitals are doing very well, not necessarily because they deserve to, but because of consolidation" as well as strong payer mixes, said Alan Sager, a health policy professor at Boston University.
  • On the other hand, he said, "many are hurting badly" — mainly in low-income urban areas or rural areas — and are seeking revenue they truly need to avert closing more maternity units or shutting down entirely. "It's a decidedly mixed picture."

Details: The cost of care has increased 18% over the last three years while Medicare rates rose less than half that amount, Pollack said.

  • But some of those cost increases are a problem of the hospital industry's own making, said Ge Bai, an accounting and health policy professor at Johns Hopkins University, told Axios.
  • "During COVID, they got so much money from the relief fund, their overall profit and the rock bottom line actually got better. This actually wasn't a good thing," Bai said.
  • "Why? Because they have complacency. OK, don't have to worry too much about cost control .... Many hospitals have a bloated cost structure and now they're suffering."

What we're watching: With interest in site-neutral payments, surprise billing enforcement, 340B reform and antitrust oversight, hospitals are facing growing bipartisan congressional scrutiny over their business practices.

  • "I've not seen this much concentrated attention and unity around this," said Mark Miller, executive vice president of health care and former executive director of Medicare Payment Advisory Commission told Axios.
  • "They may be coming to it for different reasons, but there is unity around it."
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