Reeling hospital industry shouldn’t anticipate a turnaround anytime soon

Amid persistent financial and operational turbulence for hospitals, it appears unrealistic to expect significant improvement in ensuing months — and perhaps not even in upcoming years.

Through August, the sector’s year-to-date operating margins remained in negative territory, at -0.3%, according to Kaufman Hall’s latest monthly report. And two health economists say the factors that continued to erode performance this year will be entrenched concerns.

“While it’s tempting to view these challenges as transient shocks, a rapid recovery seems unlikely for a number of reasons,” Andrew Sudimack and Daniel Polsky wrote in Health Affairs. “Thus, hospitals will be forced to take aggressive cost-cutting measures to stabilize balance sheets. For some, this will include department or service line closures; for others, closing altogether.”

The factors they cite are familiar by now to hospital and health system finance professionals:

• A labor crunch that likely won’t ease in the foreseeable future
• Payment rates that will continue to lag behind costs
• Disruptions in patient volumes, especially for elective procedures at a time of stretched household budgets

Slight reasons for labor optimism

In data published Oct. 25, Fitch Ratings reported short-term improvements in hospital labor trends, with job openings falling for two consecutive months through August. The 7.7% vacancy rate for the healthcare and social assistance sector remained higher than at any time pre-pandemic, however.

Another positive trend was a reduction in the quit rate from 3.1% in November 2021 to 2.3% in August. But that won’t be enough to ease staffing shortages or reduce the reliance on contract labor, Richard Park, a director with Fitch, said in a news release.

In a recent survey of 86 hospital and health system leaders, Kaufman Hall found that 100% of organizations have adopted some type of recruitment and retention strategy in response to pandemic trends, while 98% have raised their starting salary or minimum wage. In addition, two-thirds have increased wages for clinical staff, and a similar share has operated at less than full capacity due to shortages.

With respect to opportunities for cost reduction, 46% of respondents cited labor costs — up from 17% in a similar survey the year before. Such opportunities may come via reductions in the use of contract labor and increases in the deployment of automation, but meaningful cost decreases “likely will not be realized in the short term,” the report states.

“As wages reset at a higher level, it will be difficult to reduce them in the future,” the report adds.

While coping with the stress and strain arising from staffing shortages, hospital employees are benefiting in the form of higher pay: Average weekly earnings have risen by 21.1% since February 2020, significantly outpacing the rest of the private sector (13.6%), Fitch reported.

The earnings increase for staff in ambulatory care venues during that 2 ½-year period was only 12.6%, a trend that may accelerate the migration of care away from inpatient settings, Park noted.

While nursing vacancies have more than doubled during the pandemic, to 17%, according to data cited in the Health Affairs analysis, a shortage of allied health professionals also is hampering clinical operations. A survey of more than 1,000 healthcare facilities, conducted by AMN Healthcare, found 85% experiencing a shortage of those positions.

Better news for children’s hospitals

Some financial metrics are more positive for children’s hospitals than for the rest of the industry, Fitch noted in a separate report. That subsector experienced a 31% increase, to 325%, in ratio of cash to adjusted debt, according to audited 2021 data.

In addition, the median EBITDA margin climbed to 17.1%, the highest rate reported since 2013.

“Children’s hospitals have not been immune to the staffing shortages pressuring the overall healthcare industry,” Park said. “That said, children’s hospitals generally experience lower turnover levels and have more balance sheet and margin flexibility to recruit and retain staff.”

Still, Fitch projects labor shortages for children’s hospitals to linger, putting pressure on balance sheets as hospitals increase compensation in efforts to recruit and retain staff. The data also don’t account for the daunting fall and winter that appear to be in store for children’s hospitals amid a convergence of COVID-19, influenza, and surging rates of respiratory syncytial virus and other respiratory illnesses. ABC News recently reported that 71% of pediatric beds were full, the highest rate in two years.

In addition, Park said, “The pandemic has exposed the sector’s need for additional investment and better care models for behavioral health.”

A cascading effect on health and healthcare

The Health Affairs authors describe ongoing impacts on care access and quality stemming from the hospital industry tumult, with disproportionate effects in rural areas. They note that “when rural hospitals close, the surrounding communities lose access to the entire care continuum. As a result, individuals within these communities are more likely to forgo treatment, testing or routine preventive services, further exacerbating existing health disparities.”

In areas without closures, they added, hospitals still may be forced to shut down unprofitable service lines.

“Historically, these measures have disproportionately impacted minority and low-income patients, as they tend to include services with high Medicaid populations (for example, psychiatric and addiction care) and crucial services such as obstetrics and trauma care, which are already underprovided in these communities,” they wrote.

The authors note that the long-term challenges present an opportunity to bolster hospital operations if policymakers implement “targeted, evidence-based policies” that curb hospital costs while continuing to support “crucial community and rural services.”

For example, they wrote, policies could seek to improve coverage of digital and telehealth services or encourage more extensive utilization of mid-level providers: “By relying on targeted, evidence-based policies, policymakers can mitigate the negative consequences and allow for a more efficient and effective system to emerge.”