The American Hospital Association is sounding the alarm over evidently widespread acceptance of 0% operating margins—or even negative margins—as a sort of “new normal” for U.S. hospitals and health systems.  

In a blog post that went up Aug. 1, Bharath Krishnamurthy, the AHA’s director of health analytics and policy, points out that calendar year 2022 was the worst period for hospital finances since COVID-19 entered the scene and punished hospitals’ bottom lines until early 2023. Up to then, median hospital operating margins were persistently in the red.

Why did costs exceed revenues over so protracted a period? Not least because, in many areas, patient volumes still have not recovered from pandemic-initiated scalebacks of service lines. 

But Krishnamurthy singles out two other pain points.

One, hospitals’ total costs increased 17.5% between 2019 and 2022. Two, labor costs spiked even harder, “driven in part by increased reliance on exorbitant rates charged by contract labor agencies” during that period.

More:

“The recent median margin data also mean that essentially half of hospitals and health systems are still operating at a financial loss, with many more just barely covering their costs.”

With the grounds for distress established, Krishnamurthy cuts to the chase.

Can’t go on like this forever

Citing recent data from Kaufman Hall showing hospitals again straining under the weight of continuing financial pressures, Krishnamurthy writes:  

“Some analyses seem to suggest that anything above a zero percent margin is inherently bad, as though the operating goal of hospitals and health systems should be to incur financial losses. This would be financially reckless and ignores the reality that hospitals and health systems need some margin to keep pace with new life-sustaining advances in medicine, help support their workforce and continue to keep their doors open to care for their patients and communities.”

He strikes a note of exasperation when he concludes, in bold type, that hospitals and health systems “need to be financially strong and healthy so that they can continue to keep their patients and communities healthy.”

Also in the mix of headwinds besetting hospitals and health systems, Krishnamurthy notes, are looming Medicaid redeterminations and disenrollments, along with Congressional consideration of new proposals to cut hospital payments.

Taking CMS to task

Here Ashley Thompson, the AHA’s senior VP for public policy analysis and development, extends the focus of the wakeup call to CMS’s 2024 final rule for long-term care hospitals and the Inpatient Prospective Payment System.

“The AHA is deeply concerned with CMS’s woefully inadequate inpatient and long-term care hospital payment updates,” Thompson writes in a statement released to the press, also on Aug. 1. “The agency continues to finalize rate increases that are not commensurate with the near decades-high inflation and increased costs for labor, equipment, drugs and supplies that hospitals across the country are experiencing.”

More Thompson:

“[W]hile we appreciate CMS adopting some of our suggested improvements in its long-term care hospital outlier threshold calculation, it still finalized a figure that is 55% higher than it is currently. Most long-term care hospitals cannot afford to absorb such financial losses. We are concerned it will harm their ability to care for the sickest patients—a population they provide care for already at a considerable financial loss.”

Krishnamurthy’s full blog post is here, Thompson’s statement here.