Mar 28, 2024 - Health

Hospital cuts challenge expectations of post-COVID rebound

Illustration of a pink termination slip shaped like a health red cross.

Illustration: Annelise Capossela/Axios

Even as financial conditions improve at health systems across the U.S., a rash of recent stories about layoffs or unit closures underscore a complex picture for the industry.

Why it matters: High inflation, worsening reimbursement and increasingly fierce competition for outpatient services are challenging the post-COVID rebound hospitals are hoping for as patients seek delayed care.

The big picture: A new Kaufman Hall report showed "a strong start" to 2024, with average hospital margins of 4%, and profitability up 39% across the sector year over year.

  • "It is absolutely true that we are seeing improvement generally overall," said Kaufman vice president Erik Swanson, who cited an uptick in hospital volumes including lucrative elective services.
  • But labor costs, as well as the costs for just about everything, are eating into rising revenues.
  • "Many hospitals are seeing their labor costs now permanently reset at 30% above what they were a few years ago," said Bruce Siegel, CEO of America's Essential Hospitals.

State of play: Recent layoffs at high-profile health systems have called attention to the industry's financial challenges.

  • San Diego's Scripps Health this week confirmed it would lay off 147 employees, largely due to consolidation of an obstetrics unit at one of its hospitals.
  • Minnesota-based North Memorial Health last week said it's eliminating 100 jobs and cutting outpatient mental health services, citing poor reimbursement from government programs.
  • Two of Chicago's largest medical groups slashed jobs last month, while George Washington University Hospital and RWJBarnabas revealed cutbacks in January.

Many of the recent cuts appear to be focused on back-office staff, experts said.

  • "There does seem to be this sense that hospitals and health systems are really trying to find ways to retain their staff, when possible, both to address supply shortages and reduce the need for contract labor, which has been very expensive," said KFF's Zachary Levinson, who studies hospitals' business practices.
  • And when systems are cutting clinical jobs, they tend to be related to unit closures.
  • "When I talk to folks who are facing these decisions, they look at it as, 'Do I continue to maintain this service or this capacity, or I can save five nursing jobs?'" Siegel said.

State of play: The business of health care is quickly changing and forcing health systems to get more efficient, said Ge Bai, professor of health policy and management at Johns Hopkins.

  • Private equity has increasingly acquired providers and competed aggressively for commercially insured patients.
  • Health systems have pushed much of their business to outpatient settings, an area that has been saturated by new entrants such as One Medical, Oak Street Health and VillageMD.

Employers struggling with rising costs are "becoming more sophisticated buyers" and increasingly playing hardball with health systems, Bai said.

  • "In order to maintain the bottom line, they have to make some hard decisions to protect their own financial interest."
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