Hospital operating margins sink, expenses rise as relief aid runs out

Healthcare organizations are battling increasing expenses and limited COVID-19 relief aid after the omicron variant surge, creating a challenge for hospital margins.

The median operating margin for hospitals and health systems fell by 11.8 percent from January to February and by 42.4 percent from February 2020, a March 28 Kaufman Hall report found.

The median operating margin was negative for both February and January, at -3.45 percent and -4.25 percent respectively.

The climbing expenses have been worsened by global supply chain issues and labor shortages, the report also found. The labor shortages have caused hospitals to ramp up retention and recruitment efforts, a costly endeavor. 

One health system, Renton, Wash.-based Providence, reported operating expenses of $28 billion for the 12 months ended Dec. 31, according to financial documents it released March 9. This represents an 8 percent increase from 2020. Additionally, Providence's labor costs rose by 10 percent year over year, pushed by higher wages, increased agency staffing costs and overtime. The system had an operating loss of $714 million in 2021, compared to a loss of $306 million in 2020.

Another health system, Detroit, Mich.-based Henry Ford Health, reported $7 billion in expenses for 2021, an 11 percent increase from the year before at $6.3 billion, according to its financial results released March 14. Like Providence, salaries, wages and benefits represented a large chunk of expenses at $3 billion in 2021, an 8 percent increase from 2020 at $2.8 billion. Henry Ford ended 2021 with an operating loss of $168.2 million, compared to an operating income of $225.6 million in 2020.

On a state level, the pandemic brought Minnesota hospitals' median operating margin down to 1.2 percent in 2020, according to an April report by the Minnesota Hospital Association. Without federal and state assistance, this number would have been -2.3 percent.

The association credited rising staffing costs to workforce shortages, while the costs of supplies also rose dramatically.

"In order to retain and recruit staff, as well as to compete with the temporary staffing agencies, hospitals and health systems took several steps, such as increasing base pay, overtime pay, providing retention bonuses and increasing benefits such as paid time off to address workforce quarantine needs, illness, and child care concerns," the report said.

California hospitals are also struggling, an April 19 Kaufman Hall report showed. California hospitals saw about $6 billion in financial losses in 2021. They also experienced a 26 percent decrease in median operating margins in 2021, compared to pre-pandemic levels. Additionally, 51 percent of California hospitals have negative operating margins, and 4 percent have unsustainable operating margins.

California hospital expenses rose by 15 percent in 2021 compared to pre-pandemic levels, the report also found. Contract labor costs have nearly doubled in the state, and staff wages are rising. Since 2019, supply expenses have risen by about 20 percent, drug expenses have increased by 41 percent, and purchased or outsourced sources have gone up 14 percent.

These expense increases come as HHS says that federal relief aid, called a lifeline by hospitals during the COVID-19 pandemic, has been tapped out. While hospitals and the White House have requested more aid to help offset expenses from the COVID-19 pandemic, Congress has yet to pass new funding. In its most recent report from March, Kaufman Hall stated that these financial challenges likely won't end quickly.

"Recovery from the omicron surge likely will continue to be slow in the coming months, and hospitals could face additional setbacks if other variants — such as the BA.2 omicron subvariant — lead to new surges," Kaufman Hall said. 


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