While elevated expenses persist in battering not-for-profit hospital operating margins, the sector received one dose of good news this week as the federal government raised the Medicare payment rate for inpatient care.
Hospitals can expect more than $2.6 billion of additional payments under the Centers for Medicare and Medicaid Services’ fiscal 2023 Hospital Inpatient Prospective Payment System and Long-Term Care Hospital Prospective Payment System final rule issued Monday. Federal law requires annual updates.
Hospitals will generally see a 4.3% increase. “The increase in operating and capital IPPS payment rates, partially offset by decreases in outlier payments for extraordinarily costly cases, will generally increase hospital payments in FY 2023 by $2.6 billion,” CMS said. It’s the highest increase over the last two decades and is driven in part by higher expected growth in compensation prices for hospital workers.
Some hospitals will take a hit in other areas as CMS projects Medicare disproportionate share hospital payments and Medicare uncompensated care payments will fall by $300 million while payments for inpatient cases involving new medical technologies will decrease by $750 million.
The sector praised the increase but warned it’s not enough.
“This update still falls short of what hospitals and health systems need to continue to overcome the many challenges that threaten their ability to care for patients and provide essential services for their communities,” Stacey Hughes, executive vice president of the American Hospital Association, said in a statement. “This includes the extraordinary inflationary expenses in the cost of caring hospitals are being forced to absorb, particularly related to supporting their workforce while experiencing severe staff shortages.”
In June, hospitals and health systems saw a sixth consecutive month of negative margins as rising levels of patient volumes and revenues couldn’t offset higher expenses, according to Kaufman Hall’s National Hospital Flash Report. That reverses the prior six-month trend of positive margins for the last six months of 2021.
“Margins are rising, but have a long way to go,” the report said.”Halfway through 2022, hospital margins are still in the red.”
June margins did improve from May by 30.8% as revenues ticked up and expenses were down month-over-month but expenses remained high compared to pre-pandemic levels and so margins were stuck in negative territory with June numbers down 49.3% from June 2021.
Gross operating revenue was up 1.2% in June compared to a month earlier and is up 6.2% so far this year. Total expenses declined by 1.3% from May as expensive contract labor waned due to reduced demand but inflationary pressures are still running higher as the numbers were up 7.5% from June 2021.
Inflationary expenses and labor shortages that are driving up wages contributed to total costs climbing 9.5% so far this year, according to Kaufman Hall.
“To say that 2022 has challenged healthcare providers is an understatement,” said Erik Swanson, a senior vice president of data and analytics at the financial advisory firm. “It’s unlikely that hospitals and health systems can undo the damage caused by the COVID waves of earlier this year, especially with material and labor costs at record highs this summer.”
The picture remains clouded. “Although hospitals are seeing improved volumes and reduced expenses month-over-month, they will likely end up with historically low margins for the remainder of the year,” the report warned.
The future course of COVID-19 infections from variants and the level of future hospitalizations remain unclear as does the future course of inflation amid the Federal Reserve’s efforts to tamp it down with interest rate hikes.
Kaufman Hall uses data from Syntellis that comes from more than 900 hospitals, the majority of which are not-for-profit providers.
Fitch Ratings last month warned that the sector will need to raise rates, cut costs and implement “transformational” change to combat inflationary-driven pressures and setting back the sector’s COVID-19 pandemic recovery.
“Improvement in operating margins from reduced levels will require hospitals to make transformational changes to the business model” over the long term, while in the near- to mid-term they will manage “cost pressures through a combination of rate hikes and relentless, ongoing cost-cutting and productivity improvements,” the report said.
The vast majority of rated credits have strong balance sheets that will offset lower margins for a period of time and allow for operational improvements but without more substantial changes to the current business model, or with additional coronavirus surges this fall or winter, the balance sheet cushion could eventually erode, which would lead to negative rating actions, Fitch said.
Inflationary pressures also will contribute to an ongoing wave of sector consolidation as hospitals seek to generate economies of scale and gain skills to enable them to take on additional risk contracts, Fitch said. One mitigating factor on that front is heightened regulatory scrutiny launched by the Biden administration last year over concerns that consolidation would hurt competition and drive up prices.