Financial analysts said 2022 could have been the worst year for hospital finances over the decades. This year looks set to be another year of financial shortfalls, with rural suppliers in particularly dire circumstances.
What drives this grim financial reality? It’s “mostly a cost story,” said Eric Swanson, senior vice president at Kaufman Hallthe practice of a data analyst.
“Cost growth is significantly outpacing revenue growth – from last year’s pre-pandemic levels and even the year before – so margins end up shrinking. And the average operating margin of hospitals is still below zero on a cumulative basis,” he said, referring to 2021 and 2020.
Here’s some context on how dire this situation is: Even in 2020, a year in which hospitals suffered extraordinary losses in the first few months of the pandemic, they still being reported operating margins of 2%.
What’s even more troubling is that hospitals are underperforming financially almost across the board, Swanson said.
For example, the financial statements for the three largest non-profit health systems in the country – Ascension, Cheers to CommonSpirit and Trinity health — revealed that everyone is struggling. Ascension reported a A loss of $118.6 million in the third quarter of 2022, CommonSpirit published a $227 million lossand Trinity published a A loss of $550.9 million.
Rural hospitals are in even worse shape, but more on that below.
Other hospitals have been forced to do so blind service lines to compensate for these financial losses. Some also turn to integration and consolidation.
For example Hermann Regional Hospital in Missouri said last month that he is looking for a “deeper connection” with Thank you Health or other supplier. That announcement came after the hospital eliminated its home health agency as a cost-cutting measure. In December, the hospital projected a $2 million loss for 2022.
We can also look at the megamerger between Atrium Health and Advocate Aurora Healthwhich it was completed last month. The deal, which is designed for cost synergies, creates the fifth largest integrated not-for-profit health system in the US
The merger was finalized a day after North Carolina Attorney General Josh Stein expressed concern on how the deal could affect rural communities. He said that while he had no legal basis under his office’s limited legal authority to block the deal, he was concerned that it could further limit access to health care in rural and underserved communities.
Stein raises an extremely valid concern. The poor financial situation of rural hospitals is becoming increasingly worrying – in fact, around 30% of all rural hospitals are at risk of closing in the near future, according to a recent report from Center for Healthcare Quality and Payment Reform (CHQPR).
A crucial reason for this is that it is more expensive to provide health care in rural areas—usually due to lower patient volumes and higher staffing costs. Another factor is that the payments that rural hospitals receive from commercial health plans are not enough to cover the cost of providing care to patients in rural areas, said Harold Miller, CHQPR chief executive.
“Many people assume that private commercial insurance plans pay more than Medicare and Medicaid. But for small rural hospitals, it is the opposite,” he said. “In many cases, Medicare is their best payer. And private health plans actually pay them well below their costs — well below what they pay their larger hospitals. One of the biggest drivers of rural hospitals’ losses is the payments they receive from private health plans.”
According to Miller, rural hospitals have two main functions: to take care of sick people in the hospital and to be there for people in case they need to go to the hospital.
To accomplish the latter task, rural hospitals must operate 24/7 emergency departments. These hospitals get paid when there is an emergency, but not when there isn’t — even though the hospital incurs costs by operating and staffing these units.
“Rural hospitals have a doctor on call 24/7 who is available for emergencies. But most payers don’t pay them for it. Medicare pays them for it, but other payers do not. If the hospital does two different things, we have to pay them for both. Hospitals should be paid for what I call “standby capacity,” Miller said.
He supported his argument by pointing to these analogies: Do we only pay firefighters when there is a fire? Do we only pay policemen when there is a crime?
It’s also important to remember that rural hospitals are in the midst of transitioning to a post-pandemic environment, now without the pandemic-era funding they received from the government. said Brock Slabach, chief operating officer of the National Rural Health Association.
“Rural providers are looking to move into the future without the benefit of these additional payments. And they’re in a really high inflation environment. This is over 8% and for some healthcare goods and services it will be over 20% at increased prices. Wages have also increased significantly. But the number of patients has remained below average or average. All of this presents a huge challenge,” Slabach said.
Rural providers across the country are dealing with the stressors Slabach described and are calling for more help from the government. For example, on Michigan Health and Hospital Association asked for more money from the state last month after it became necessary get 1700 beds offline.
Many rural hospitals cannot avoid their fate. From 2010 to 2021 there were 136 closures of rural hospitals. There were only two closures in 2021, and Slabach said 2022 saw a similarly low number. But these low amounts are due to government relief, he explained. Slabach said he expects an increase in rural hospital closings in 2023.
When a rural hospital closes, it means community members have to travel long distances for emergency or hospital care. Miller pointed to another problem: In many rural communities, the hospital is the only place people can go to get lab or imaging work done. The hospital may also be the only source of primary care for the community. Closing these hospitals would be a huge blow to rural Americans’ access to health care.
In the face of these potentially devastating hits to patient access, the outlook for financial analysts is bleak.
Higher inflation and expensive labor costs will continue to have a negative impact on hospitals – both in rural and urban areas – in 2023, according to analysis from Moody’s. Costs will also continue to increase due to supply chain bottlenecks, the need for more robust cybersecurity investments, and longer hospital stays due to higher levels of patient attention.
All this doom and gloom begs the question – are any kind are hospitals doing well financially?
The answer is yes, a select few. Let’s take a look at the nation’s three largest for-profit health systems – Community health systems, HCA Healthcare and Tenet Healthcare. As of 2020, these three public health systems account for about 8% of US hospital beds
All three of these systems had positive operating margins for most of the pandemic, including at the latest in the third quarter of 2022.
Large public health systems have shareholders to answer to and stock prices to worry about. Does that mean they’re more likely to deny care to patients who can’t afford it while other hospitals pick up the slack?
Slabach said it’s hard to say.
“Obviously, hospitals are trying to reduce their exposure to risk when it comes to patient care. Most hospitals do a really good job of providing services and care to people who don’t have insurance or can’t afford to pay. But this is highlighted in the current financial environment. So there may indeed be cases where what you suggested may happen, but not because they want to deny services or care. That’s because they have a bigger picture to uphold,” Slabach said.
And the big picture, involving dollar signs for hospitals, looks pretty bleak in 2023.
Photo: Jaiz Anuar, Getty Images