Hospitals could slash services amid rising labor, supply costs

Hospitals across the United States and in Nebraska are considering cutting some health care operations as federal COVID-19 funding runs out.

Federal financial relief in 2020 and 2021 helped hospitals stay afloat, when the health care systems were primarily treating COVID-19 patients and not patients needing elective surgeries, which are big sources of hospital profits. Nebraska hospitals are still seeing a high volume of patients while also managing higher wages, inflated equipment prices and increasing pharmacy costs.

One of the hospitals impacted by this dynamic is Great Plains Health whose CEO, Ivan Mitchell, said the financial shortfalls may force some hospitals to cut some of their services.

“You have to figure out what you’re going to stop doing,” Mitchell said. “There are some services that make money and some services that don’t make money. Sometimes you have to jump out of those services that don’t, which a lot of times are the services that communities need.”

Mitchell said Great Plains Health, along with other Nebraska hospitals, is also feeling the impact from a worker shortage in skilled nursing facilities. The nursing facilities don’t have the personnel to take in new patients, forcing hospitals to hold those patients, who are mostly on Medicare and Medicaid.

Mitchell said if a patient is on government-funded health care, the hospital will have to foot the bill for time not covered by the insurance.

Hospitals from the Great Plains to the Pacific Northwest halted services like dialysis and behavioral health treatments. The hospital systems pointed to a lack of staff and budget shortfalls as the reasons for these cuts.

Before the pandemic, hospitals typically had a profit margin between 3% to 5%. However, nationwide labor costs are expected to grow by $86 billion by the end of the year, which could bust hospital budgets.

“If your labor costs go up 10%, that erodes really quick,” Mitchell said.

Add that to the inflated cost of supplies and pharmaceuticals, the North Platte hospital leader said costs are further pushing budgets into the red.

“Most well-run hospitals will have 300-plus days cash on hand, so they can lose a little bit for a while and be fine, but you're going to see some that, over time, will really struggle,” Mitchell said.

The trend may continue, according to Chicago-based health care consulting firm Kaufman Hall. In its fall 2022 update of hospital financing, the firm reports the “optimistic” outlook for hospitals, considering billions of dollars lost by the end of the year, is a negative 37% operating margin. Worst case scenario – if another variant surge appears, for example – hospitals could be looking at a negative 133% operating margin.

Erik Swanson, a senior vice president with Kaufman Hall, said hospitals may get to the point where they’re considering cutting more than just one or two services.

“Ultimately, prolonged periods of this level of performance will ultimately lead to closures,” Swanson said.

Swanson said care centers in rural areas often feel the financial squeeze more.

“They are small to begin with. They don’t have the ability to adjust staffing expense levels, the volumes that larger organizations may have,” Swanson said. “Those organizations are particularly at risk of closure or poor operating performance than the nation as a whole.”

Swanson said hospitals will need to look at shifting their services to better collect revenue.

Data collected by Kaufman Hall show patients are now preferring outpatient centers, such as urgent care centers, retail pharmacies and telemedicine, over hospital visits. Swanson said hospitals will need to jump on opportunities like those to claw back some sort of profit.

“Hospitals will need to continue to think strategically about how they position themselves to take care, and in some ways, cater to patient populations that are more interested in accessing that care,” Swanson said.