Hospitals suffer second consecutive month of margin declines in October

The outlook for hospitals and health systems remains uncertain

Increasing labor expenses weighed overall hospital performance in October, dragging down margins for the second consecutive month, according to Kaufman Hall’s National Hospital Flash Report. The margin declines came even as pressures from treating high levels of serious COVID-19 cases eased. With COVID cases and related hospitalizations increasing in recent weeks, and with the Omicron variant lurking, the future outlook for hospitals remains uncertain.

The median change in operating margin was down 12.1% from September to October, and 31.5% compared to pre-pandemic levels in October 2019, not including federal funding from the CARES Act. Hospitals in regions hit hard by the Delta surge were most affected. The median Kaufman Hall Operating Margin Index was 3.2% in October, not including CARES. With the aid, it was 4.1%.

Labor expenses continued to rise, driving up overall expenses as hospitals felt the impacts of nationwide labor shortages. Total Labor Expense increased 2.7% from September to October. At the same time, staffing levels — as measured by full-time equivalents per adjusted occupied bed — decreased 4.5% year-over-year. This suggests that higher pay and benefits are pushing up labor expenses despite lower staffing levels. Non-labor expenses, including supplies, drugs, and purchased services, all declined from September to October after months of increases, but overall expenses remain highly elevated relative to pre-pandemic levels.

“Hospitals and health systems nationwide are feeling the pain of stubbornly high expenses,” said Erik Swanson, a senior vice president of Data and Analytics with Kaufman Hall, in a statement. “Broader economic trends such as U.S. labor shortages are adding to the extreme pressures of the pandemic. Hospitals face greater uncertainties in the coming months as a result, as COVID-19 cases and hospitalizations appear to once again be on the upswing before many have even had a chance to recover from the last surge.”

Inpatient volumes showed signs of softening in October following steep increases from the Delta surge. Patient Days were down 0.5% compared to September while average length of stay decreased 1.5% following three months of increases. Operating room minutes rose 6.8% month-over-month, suggesting a return of patients seeking elective procedures.

The inpatient volume declines contributed to a 0.9% decrease in inpatient revenue from September to October, which brought gross operating revenue (not including CARES) down slightly at 0.1% over the same period. However, gross operating revenue and inpatient and outpatient revenue continued to rise both year-to-date and year-over-year for an eighth consecutive month compared to 2019 and 2020 levels. Outpatient revenue rose across all measures in October, up 1.2% from September.