DEXT CAPITAL QUARTERLY INDUSTRY UPDATE Q322

DEXT CAPITAL QUARTERLY INDUSTRY UPDATE Q322

Hospitals and health care systems continue to manage through unprecedented increases in supply, drug, and labor costs however, there is some relief as travel nurse compensation decreased by 17% year over year. To further combat labor costs, CFOs are contemplating reductions in administrative staff to help reduce costs.

Hospital Financial Performance

U.S. hospital margins continue to fluctuate in 2022, making it likely hospitals will end the year in the red, according to strategic consulting company Kaufman Hall. Fluctuations are due to high expenses and low volume compared to pre-pandemic levels, according to the Oct. 3 National Hospital Flash Report. The median year-to-date operating margin index was down 0.3 percent in August. Margins improved slightly by a median of 4.2 percentage points over July 2022 but remained down by a median of 2.1 percentage points from August 2021, according to the report.

Key takeaways from the report:

• Outpatient volume increased in August due to an increase in elective procedures.

• As a result, operating room minutes increased 13.6 percent from July 2022 and were up 5.5 percent year-over-year; however, they remain down compared to pre-pandemic levels.

• Patient lengths of stay dropped 2.1 percent from July 2022 and 2.7 percent from August 2021.

• Patient days rose 0.7 percent from July 2022 to August but were down 7.9 percent compared to August 2021.

• Emergency department visits increased by 1.1 percent from July 2022 to August.

Erik Swanson, senior vice president of data and analytics at Kaufman Hall, said August was a better month for hospital patient volumes with elective surgeries and discharges up, combining to improve revenues. "Despite the short-term improvements, though, overall hospital performance is still well below pre-pandemic levels. In addition, hospitals need to reckon with new market entrants, like urgent care centers and free-standing surgery centers, that are chipping away at hospital outpatient revenues and overall margins," Mr. Swanson said.

Volume increases improved hospitals' revenue performance in August, with gross operating revenue up 9.1 percent from July 2022. Meanwhile, outpatient revenue climbed 10.9 percent month over month while inpatient revenue increased 4.9 percent.

Expenses kept pace with revenue, with total costs increasing 3.3 percent from July 2022 and 6 percent from August 2021. Supplies and medications were significant drivers of the increase, with total labor expenses up 1.3 percent from July, according to Mr. Swanson.  

"Hospitals fared slightly better in August than they did in July, but they still face an extremely difficult path forward. Competition for outpatient care could make the journey longer and bumpier than anticipated," Mr. Swanson said. 

Nine months into an extremely challenging year characterized by dramatic fluctuations in the margin, U.S. hospitals and health systems are still operating substantially below pre-pandemic levels. Most metrics improved month-over-month in August as revenues increased and expenses slowed their climb compared to July. However, organizations are still in poor shape, with a negative median operating margin. 

• The median Kaufman Hall Year-To-Date (YTD) Operating Margin Index reflecting actual margins was -0.3% through August, unfortunately highlighting the continued losses hospitals have experienced this year, although demonstrating signs of improvement. The operating margin improved by a median of 4.2 percentage points from the depths of last month but remain down by a median of 2.1 percentage points from last year. Operating EBITDA margin also demonstrated monthly improvements with a median increase of 3.7 percentage points and remain down by two percentage points from last year.

• Outpatient volumes rose as more patients likely returned to the hospital for elective procedures following a backlog created by the summer Covid surge. Operating Room Minutes rose 13.6% from July and were up 5.5% year-over-year (YOY). Length of Stay (LOS) dropped 2.1% from July and decreased by 2.7% compared to August 2021. Patient Days rose 0.7% from July and dropped 7.9% from August 2021 levels. Adjusted Discharges jumped 7% month-over-month and were up 5.4% compared to August 2021. Emergency Department (ED) Visits rose 1.1% from July but were down 2.4% YOY.

• Volume increases, largely from outpatient activity, contributed to improved revenue performance in August. Gross Operating Revenue was up 9.1% from July and 5.5% YOY. It is also up 5.5% YTD. Outpatient (OP) Revenue jumped 10.9% from July levels and is up 10.6% YOY. It is up 7.8% YTD. Inpatient (IP) Revenue also rose 4.9% from the previous month but is down 3.5% from August 2021. It is up 2.3% YTD.

• Total Expenses rose 3.3% from July to August and jumped 6% from August 2021, likely driven by supplies and drug costs. Total Expenses are up 8.9% YTD, although Total Labor Expense is up just 1.3%MOM, as compared to 10.6% YTD. Labor Expense per Adjusted Discharge dropped 5.3% from July, indicating that contract labor utilization and rates are gradually cooling. However, this metric is up 9.9% YTD. Full-Time Employees Per Adjusted Occupied Bed (FTEs per AOB) is down 3.3% from July, indicating that the labor shortage is still very much in effect.

• Volumes were higher in August than in July, boosting revenue. However, costs still climbed slightly month-over-month as hospitals and health systems continue to shoulder heightened expense loads. Expenses rose, but not as much as revenue. Supplies and expensive drugs contributed to this uptick more than labor costs, which remain elevated. Outpatient revenue slightly drove up the margin. This metric is substantially higher than it was in August of 2021. It demonstrated the most growth month-over-month as patients scheduled more elective procedures. Hospitals are still facing extreme difficulty. Nine months into a challenging year, margins have fluctuated wildly. Although most metrics improved from July to August, organizations are still operating with negative margins and well below pre-pandemic levels. New market entrants present strategic challenges. As disruptors chip away at outpatient volume, hospitals should reimagine how to deliver care in nonhospital settings as part of their long-term planning. 

Hospital Workforce Reductions 

As health systems find themselves in untenable financial positions and the looming risk of an economic recession, job cuts and layoffs in hospitals and health systems are increasingly likely. In a report released Oct. 18 from Kaufman Hall based on responses from 86 health system leaders, 46 percent said labor costs are the largest opportunity for cost reduction — up significantly from the 17 percent of leaders who said the same last year.  

Job cuts at hospitals may seem counterintuitive given the nation's widely known shortages of healthcare workers. But as hospitals whether one of their most financially difficult years, some are reducing their administrative staff, eliminating vacant jobs, and reorganizing or shrinking their executive teams to curb costs.  

Decisions to reduce administrative labor tend to garner quieter reactions compared to budgetary decisions to end service lines or close sites of patient care, including hospitals. While the implications of administrative shakeups may be felt throughout a health system, the disruption they pose to patients is less immediately palpable. Few people know the name of their community hospitals' senior vice presidents, but most do know how many minutes it takes to travel to a nearby site of care for an appointment during a workday or a tolerable amount of time to wait for said appointment.  

It doesn't hurt that hospital and health systems' administrative ranks have ballooned compared to their patient-facing counterparts. While the number of practicing physicians in the U.S. grew 150 percent between 1975 and 2010, the number of healthcare administrators increased by 3,200 percent in the same period. More broadly, administrative spending accounts for 15 to 30 percent of healthcare spending in the U.S., and at least half of that "does not contribute to health outcomes in any discernible way," according to a report published Oct. 6 in Health Affairs. 

Health systems have a lot to weigh. Their administrative layers are thick, varied and necessary to a degree, meaning this broad category of workers still poses tough decisions when it comes to cost containment efforts. But in a very simple view, laying off people who care for patients will only hurt health systems' chances of recruiting and retaining clinical talent — in a time when no health systems' odds of doing so are especially outsized. 

Improving Rural Health Care 

U.S. Department of Agriculture (USDA) Rural Development Under Secretary Xochitl Torres Small announced that USDA is awarding $110 million in grants to improve healthcare facilities in rural towns across the Nation. These grants will help 208 rural healthcare organizations expand critical services for nearly 5 million people in 43 states and Guam. 

The investments USDA is announcing will help build, renovate and equip healthcare facilities like hospitals and clinics in rural areas. They also include more than $9 million for 12 rural healthcare organizations to help 187,000 people living in energy communities, which are areas with high concentrations of coal-dependent jobs. This funding will help communities that are vital to our country’s energy production as the nation transitions to a clean-energy economy. 

The investments will be used for projects such as those to help rural hospitals and healthcare providers implement telehealth and nutrition assistance programs, increase staffing to administer COVID-19 vaccines and testing, build or renovate facilities, and purchase medical supplies. They will also help the region. partnerships, public bodies, non-profits, and Tribes solve regional rural healthcare problems, which will help build a stronger, more sustainable rural healthcare system in response to the pandemic. For example: 

• In New Hampshire, Families Flourish Northeast will use a $1 million grant to renovate a residential treatment center to help address substance-use disorders among mothers. Rates of substance-exposed pregnancies and the severity of maternal substance use have risen in Grafton, Carroll, and Coos counties throughout the COVID-19 pandemic. The facility will provide patients with easier access to public transportation, educational and employment opportunities, public school for their children, outpatient treatment, and social activities.

• In Minnesota, Kittson Memorial Hospital will use a $51,700 grant to renovate the clinic exam room and the clinic nurse's station. Funds also will be used to build an isolation room for patients with infectious illnesses or those who are susceptible to infections, keeping them away from other patients, visitors, and healthcare staff.

• In Virginia, Appalachian Sustainable Development in Duffield will use a $467,900 grant to help food pantries expand food distribution services to help people who need it most.

The investments USDA is announcing today will expand health care services in Alabama, Arizona, Arkansas, California, Colorado, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Missouri, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wyoming, and Guam. 

Hospital Price Transparency 

Health technology company Turquoise Health published its first "Price Transparency Impact Report" on Oct. 18, which found that nearly 5,000 hospitals and 80 insurance carriers have posted negotiated rates.  

The report tracks the healthcare industry's progress to date on price transparency compliance and provides a road map for achieving industry-wide adoption, according to an Oct. 18 news release. The Hospital Price Transparency Rule went into effect in January 2021. A law requiring payers nationwide to publish the cost of nearly every healthcare service they've negotiated with providers went into effect on July 1, 2022.  

"We expect the initial phase of price transparency adoption to take five years," Turquoise Health CEO Chris Severn said in the release. "After seven quarters of transparency, progress is evident. 65% of hospitals have published robust negotiated rates. Additionally, 80 carriers have also published rates, representing over the majority covered lives in the United States."  

Turquoise said in the report it visits every price transparency URL for every hospital in the U.S. on the first of the month of every quarter. It downloads the machine-readable file present on the hospital's page whether or not the file has been updated recently. Turquoise writes a custom code to translate the contents of the files into a common database ontology. It then analyzes the contents of the files relative to 60 data attributes correlated to the CMS requirements: list price, cash price, and payer-negotiated rates for all items and services. Turquoise then gives a transparency score from one to five based on weighting algorithms relative to seven different hospital subcategories.  

Inflation Infiltrates Healthcare 

Despite little growth in the cost of medical services over the last year, inflation has finally caught up with healthcare. As of September, medical services costs have risen 6.5 percent year over year, according to a Bureau of Labor Statistics report released Oct. 13.  

Analysts like Fitch have said the rise in costs will lead to payers raising insurance premiums across the board because of the growing cost pressures on providers, including workforce disruptions. 

Studies have already confirmed that employers are preparing for higher healthcare expenditures next year because of inflation. Aon analysts said on Aug. 18 that U.S. employers' healthcare costs are expected to rise by an average of 6.5 percent, or $13,800 per employee, in 2023. The rise in insurance costs could begin to appear when employees sign up for employer-sponsored coverage during their next enrollment period, a trend that could continue through at least 2024, according to the Post. 

Nurse Recruitment and Retention 

Nurse recruitment and retention is top of mind for every hospital and health system executive in 2022, particularly those responsible for ensuring health systems' financial stability.  

The 2022 NSI National Health Care Retention & RN Staffing Report features input from 272 hospitals in 32 states on registered nurse turnover, retention, vacancy rates, recruitment metrics, and staffing strategies. It found that the average cost of turnover for one staff RN increased 15 percent from 2020 to 2021, to $46,100, among other dollar figures and statistics that are helpful to understand the financial implications of one of healthcare's most challenging labor disruptions.  

Here are some numbers that illustrate the cost of nurse turnover, according to the most recent edition of the report.  

1. In 2021, the turnover rate for staff RNs increased by 8.4 percent, resulting in a national average of 27.1 percent.

2. The average cost of turnover for a staff RN is $46,100, with the range averaging $33,900 to $58,300. This is up from the average cost of turnover for an RN in 2020, which was $40,038.

3. Each percent change in RN turnover will cost or save the average hospital $262,300 per year.

4. More than 60 percent of respondents said the RN vacancy rate in their hospital tops 15 percent; 6.5 percent said they have an RN vacancy rate of less than 5 percent.

5. The RN Recruitment Difficulty Index is 87 days on average, regardless of specialty, meaning it essentially takes three months to recruit an experienced RN.

6. For every 20 travel RNs eliminated, a hospital can save $4,203,000 on average.

7. From 2020 to 2021, the percent change in regional RN turnover ranged from 3.2 percent to 12.2 percent. The Northeast saw the high end of this range, while the North Central region saw the low end.

8. Over the past five years, RNs in step-down, emergency services, behavioral health, and telemetry were most mobile, with a cumulative turnover rate between 101.3 percent and 111.4 percent. "Essentially, every five years, these departments will turn over their entire RN staff," the report states.

9. RNs in surgical services, women's health, and pediatrics were less mobile, with 2021 turnover rates of 18.8 percent, 19.5 percent, and 19.6 percent, respectively, compared to the national average of 27.1 percent.

Other Items: 

• The average weekly travel nurse pay in September in the U.S. was $3,066, down 17.34 percent from$3,709 during the same month in 2021, according to a report from Vivian Health, a national healthcare hiring marketplace. This represents the largest year-over-year decrease Vivian Health has seen this year. "It can in part be attributed to the decrease in travel nurse pay because of the industry shift towards permanent roles and diminishing federal funding," the healthcare jobs marketplace told Becker's. "The year-over-year change is also so significant because travel pay rates spiked this time last year to fill the need brought on by COVID outbreaks."

• HCA Healthcare saw a 19 percent reduction in contract labor costs in the third quarter of 2022 compared to the second quarter, CFO Bill Rutherford said on an Oct. 21 earnings call with investors. The reduction meant that the 182-hospital, the for-profit health system was able to absorb much of the market-based wage adjustment costs for its employee workforce, Mr. Rutherford said on the call. CEO Sam Hazen said that the system's salary, wages, and benefit costs per hour were flat in the second quarter, which he called "encouraging."

• Mr. Hazen also said HCA continued to invest significantly in its workforce, including with the opening of one more Galen College of Nursing campus. Mr. Hazen said these investments produced improvements in new hires and retention in addition to reducing contract labor expenses.

• Patients ill with respiratory syncytial virus filled pediatric intensive care units across Fort Lauderdale, Fla.-based Broward Health in mid-October, prompting the system to open overflow units. Symptoms are usually more severe among children who are immunocompromised and those who have other underlying cardiac or respiratory issues. Children's hospitals nationwide are being inundated with patients sick with respiratory viruses. In addition to RSV, many hospitals are seeing patients with the flu, enterovirus, and rhinovirus.

• Mayo Clinic received a $100 million multiyear commitment from the Fred C. and Katherine B. Andersen Foundation to nearly double appointment access at the system's proton beam facility in Rochester, Minn. Mayo Clinic first began offering proton beam therapy in 2015 with the construction of its Jacobson Building in Rochester. Since the program has routinely approached its appointment capacity of 1,200 patients per year. The $100 million gift will fund the expansion of the Rochester facility with the addition of a new facility: the Fred C. and Katherine B. Andersen Building. Mayo expects to treat 900 additional patients per year with the expansion to meet the site's estimated demand of 2,000 patients who will need proton beam therapy each year by 2025.

• Apple will start to offer health insurance in 2024 as it looks to build on the health data it has acquired from the Apple Watch, an analyst has predicted. CCS Insight believes that Apple will take its tentative first steps into the U.S. health insurance market in partnership with a major insurer, using the health data it’s already collecting to give it a competitive edge over rivals. Apple already collects data such as blood pressure, blood oxygen levels, ECG readings, and body temperature from the Watch, as well as helping people regulate their medication. With accompanying devices, the Watch and iPhone can also be used to monitor conditions such as diabetes. The analysts believe having access to such rich data will give the company a head start in the insurance market and allow it to cut costs for consumers.

“They are in such a strong position to do this,” said Ben Wood, chief analyst at CCS Insight. “They’ve got a wealth of personal health data through Apple Watch. If they join some of the dots together, they can become a very competitive health insurance player, and that potentially is going to have quite an impact on the structure of the healthcare market in the U.S.”

• CMS IPPS Rates

• Rising interest rate environment

• Cost containment

Scott Eshleman, MBA

Chief Risk Officer

Dext Capital

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