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Rising Labor Expenses Strain Hospital Finances [PODCAST]

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The Hospital Finance Podcast

In this episode, we welcome back Erik Swanson of Kaufman Hall to discuss the results of the latest National Hospital Flash Report that looks at the financial performance of hospitals.

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Highlights of this episode include:

  • Overall Hospital performance
  • Volume softening
  • Why consumers are postponing care
  • Labor expenses and shortages

Mike Passanante: Hi, this is Mike Passanante and welcome back to the award-winning Hospital Finance podcast. Kaufman Hall recently released their National Hospital Flash Report. This comprehensive report looks at the financial performance of hospitals in November 2021. Today, I’m joined by Erik Swanson of Kaufman Hall to discuss the results of the latest report. Erik, welcome back to the show.

Erik Swanson: Thank you, Michael. It’s great to be on again.

Mike: So, Erik, there were four big trends that came out of this report, and I thought we would spend some time talking about each one of those, the first one being that overall hospital performance remained well below pre-pandemic levels. So tell us about that.

Erik: Yeah, that’s correct. Certainly, as we looked at this last report, the November data demonstrated that it was a tough month overall for hospitals across the United States. And so as we look at the data, there are a few things that are driving this depression, if you will, in performance. But a few of those items are, as we look at this, we’re noticing some major trends here of sustained increase in expenses that are really outpacing that growth in revenue and some volume softening. And before we touch about the impact of each of those, I think it’s important to mention here that since the beginning of 2021, organizations, hospitals have found themselves in a position where their overall margins have generally been down relative to pre-pandemic levels. And throughout the course of 2021, we saw some improvements being made to get closer to those pre-pandemic levels. But by around September, October of the year, we began noticing some of those trends decreasing, and that held true through November. So within November, the median operating EBITDA margins were down about 5.8%, and the operating margins were down 3.6% relative to pre-pandemic levels.

And that’s always very troubling when we see some of those changes occurring within those margins. It is worth noting that CARES Funding did go through at least the first half of 2021, and so we know that helps support some of the organizations in the early half of the year. There was recently a Phase 4 distribution of funds that occurred in November as well for some more rural providers, and that also provided some support. But even with all of that, these organizations still, the median margins tend to be below pre-pandemic levels. And again, what’s really driving this stress and margin is both that increase in expense, the softening of volume that is outpacing, if you will, any growth in revenue. So it puts organizations in a spot where they’re still returning on a medium basis, positive margins. But it is not giving them much breathing room and certainly lower margins than they would have expected historically.

Mike: So let’s drive into one of the points you mentioned because one of the major trends is the volume softening in November. But there’s some additional detail around that. So walk us through that, will you, Erik?

Erik: Yes, I will. So within November, as I mentioned, it was a tough month for organizations, and we saw a month-over-month decrease in many of the volume metrics. And to give you a sense, so discharges were down about 5% month-over-month and remain down about 6% relative to pre-pandemic levels. While a few percent may not necessarily sound like a lot for organizations, it certainly is and has a pretty large impact. What’s also worth noting here is with the decreased number of patients that organizations are seeing, we’re also seeing on a year-to-date basis that the patient days is actually above pre-pandemic levels. So what this would describe here is fewer patients are coming through the hospital, but those that are coming in are staying longer. And we note this in a much-increased average length of stay. And this is a really good indicator for what’s happening relative to the types of patients. And so again, this would indicate that we’ve got a higher amount potentially of COVID patients coming in as well, and we’ll talk about this later here, but that some of those less sick patients are potentially postponing that care.

But relative to the volumes, these are really some troubling figures, as we see it. And as we’ve looked historically, is what’s happened with some of these recent surges in cases, the first few surges in cases, then the Delta, and now Omicron, for volumes what you will find is that right at the peaks of some of these main surges, organizations can be stressed. However, when the cases begin to wane and volumes begin to decline, you begin to see some of that. And that’s what we saw here in November’s data. But it is worth noting that the very half of November we started seeing some increase in cases due to Omicron. So we expect some pretty drastic volume figures and probably some reductions in some of these areas in the upcoming issue. But really importantly, here again, ED visits have remained well below historical levels, and we continue to see month-over-month declines in that. ED visits are about 8% below where they were in pre-pandemic levels, and those volumes have just not returned.

This may indicate that patients are seeking care outside of the hospital or in other areas, but it certainly means that the front-door organizations has shifted. And while we occasionally see some increases in operating room minutes which helps us understand how surgical procedures are doing and very often is a nice proxy for electives, we’ve noticed that that is still down nearly 2% relative to pre-pandemic levels. So all this taken together, as you begin to think about what these volume impacts are, it shows a softening in volumes for most types of patients, except that those patients coming in are staying longer and sicker, thus requiring more resources and further, that increase in the length of stay and the decrease in some of those operating room minutes may seem to indicate that patients are also postponing some care or delaying care, if you will, due to some of these COVID surges that may be happening in their communities.

Mike: And that was sort of the third trend here in the report was that consumers may be postponing that care for things that are unrelated to COVID. So they’re just making that choice to stay away and deal with those issues later on.

Erik: That’s correct. And certainly, there’s a lot of ramifications to those choices and behaviors, both from the health of a hospital as well as the health of the patient themselves. So as we look within the report, some other indicators that would seem to point towards those behavioral impacts, if you will, of the patients beyond just even that decline in ED visits is when we look at some of these areas of the in-patient and out-patient revenue mix. So there that helps us understand what proportion of revenue, if you will, is coming from the in-patient side of the hospital versus the out-patient side, recognizing that many of the out-patient revenue areas can be elective areas, and also tend to be the areas where there are higher margins produce. And within our most recent report, as we look at this, we see that that figure is actually down. In other words, there are– the ratio is lower, if you will, than pre-pandemic levels of patients receiving care in an out-patient setting. And again, that tends to impact the organization’s health.

Beyond this, I should mention as well that certainly what we’ve seen, too, is that in these moments of surges when patients begin to delay or postpone care, we do see some expense rising on a delayed basis, be it three, six months after the fact. And again, some of that may be due to that when those patients do then ultimately come back in, they can be sicker, less cared for at the point that they present, and this can lead to some real challenges for organizations as well as the health of the patients themselves. And I should mention that overall, when we look at this, what’s really interesting to note is that for most of the regions, those decreases, if you will, in that in-patient/out-patient adjustment factor, some of that consumer behavior tends to be clustered relatively close which is interesting because, as we know, the COVID cases may rise and fall on a regional basis. So overall, what this would seem to point towards is that some of the behavioral components at play here, as patients begin to worry, hear news, see things about rising COVID cases, even if it’s not directly within their community, it can cause them to delay and postpone care which leads to some of these depressed volumes and some of these impacts that I just mentioned.

Mike: And the fourth trend in the report is probably something that anyone who’s working at a hospital is intimately familiar with and that’s that labor expenses and shortages are posing a significant operational challenge.

Erik: Absolutely. This comes through loud and clear within the data and with the clients that we work with every day. There are major, major challenges here relative to the labor market and labor expenses. Let’s talk through a few of these. So first, just to lay out some facts, and then I’ll add some context around this, when we look at an indicator which is FTEs per average occupied bed, this gives us a sense of how many hours are going into taking care of a patient or a patient day, if you will. And when we look at these, what we notice is that the FTEs per AOB decreased on a month-over-month basis by 1% and relative to pre-pandemic levels are down by 3.2%. This is really important because what this tells us is that there are less hours going into patient care, if you will, being workedF What this indicates is a few things, one– and what may be driving this is a few things. So the first is that there may be some component of this that’s driven by staff and employees themselves becoming sick and needing to leave. So we see some decreases there. And further, we know that the increase in contract labor and some of the rates at which nurses will be paid if they choose to become travel nurses is also leading to some of that shortage. Additionally, when we look at the rates or the actual expenses going in– so I just mentioned to you that the number of hours, the FTEs, are actually down. But when we look at labor expenses, those are up quite significantly.

And when we look at on a volume-adjusted basis, 3% increase month-over-month, labor expense per adjusted discharge, and nearly 20% increase relative to pre-pandemic levels so this would seem to indicate here that the cost of labor has risen extraordinarily high, if you will, and is posing immense challenges to many organizations through a combination of those factors that I just mentioned. When we look at areas like contract labor and agency and the rates at which [those?] occurring, we’ve noted that they have on a medium basis doubled relative to pre-pandemic levels, and in some cases tripled and gone up even more. And that depends on the needs of each organization. One example area that seems to be highlighted in our report that comes out really clear is for the West. And so when we look at the West and the labor expense [per adjusted?] discharge that the West is experiencing, it’s incredibly high. And again, this may be due to travel nursing coming into the West. We know that there are shortages, staffing shortages, in the West as well, as well as just the high cost of living with many of the areas out there is driving some of this. And so those organizations will be really challenged by these labor trends as will many others. So certainly, as we look at these challenges that the labor side of the organization, which makes up more than half of the expenses, is driving, it seems to paint a picture that is going to be very challenging for organizations on both a short-term and a longer-term basis.

Mike: Well, Erik, hopefully, we’re due for some better news soon, but certainly appreciate the deep context and information you provided here today. And there’s so much more in the report itself. If someone wanted to get a copy of that report, where can they go?

Erik: Yeah. Absolutely. So to get a copy of the report, you can navigate to KaufmanHall.com. You’ll notice a link there under Data Analysis and Tools, and from there, you can access the National Hospital Flash Report which is the report we were just speaking about today. We also produce another report called Our Physician Flash Reports which focuses on the provider side of organizations and for which we’ll have a new issue coming out later this month as well. So encourage folks who have any questions or interested in reading further, they can navigate to those areas on our web page, and then they can reach out to us, and we’d be happy to answer any questions.

Mike: Erik Swanson, thanks so much for joining us again today on the Hospital Finance Podcast.

Erik: Thank you so much for having us, Michael.

The Hospital Finance Podcast

 

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