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Our Take: AHA says more than one-third of hospitals now operating on negative margins because of ‘skyrocketing’ expenses

May 02, 2022

In a report that outlines the key financial pressures the country’s hospitals have had to contend with since the onset of the COVID-19 pandemic, the American Hospital Association (AHA) says the “massive” growth in care-related expenses is “unsustainable.”

Noting that most hospitals were already operating on razor-thin margins before SARS-CoV-2 struck, the AHA said many hospitals are in a more precarious financial situation now and that over a third of them are operating on negative margins.

The organization pointed to sharp increases in workforce and contract labor costs, along with substantially higher drug costs, as the principal contributors to hospitals’ skyrocketing expenses in the last couple of years. Costs associated with medical supplies and personal protective equipment have added to their burden, according to the AH, and rising inflation is poised to compound the problem.

“[T]hese and other factors have led to billions of dollars in losses over the last two year for hospitals,” the AHA stated in the report.

Although the federal government has provided funding for hospitals and health systems through the Provider Relief Fund (PRF), the report noted that PRF money was not there to mitigate rising costs and offset lost revenue during the delta and omicron surges — even though more than half of all COVID-19-related hospitalizations occurred while those surges were taking place.

The industry trade group said there could be additional COVID-19 surges ahead, but even if there aren’t, hospitals and health systems will still face financial challenges in the form of workforce retention and recruitment, disruptions in the supply chain, and “exorbitant” expenses.

After expressing appreciation for the support and resources Congress has provided throughout the pandemic, the AHA called for additional support “to keep hospitals strong so they can continue to provide care to patients and communities.”

Our Take: We all know that the pandemic has battered the vast majority of the country’s hospitals and health systems. This report provides a closer look at the damage.

For example, hospitals’ per-patient drug expenses increased 37% from 2019, before the pandemic, through 2021. The report noted that although some of the growth in prescription drug spending can be attributed to increased utilization (as a result of higher patient acuity), the introduction of new drugs “at very high prices” (e.g., remdesivir) and price increases for existing drugs have also ratcheted up spending.

The report called out “massive” price hikes for several drugs that are commonly used in hospitals: the painkiller hydromorphone (107%), the chemotherapy drug mitomycin (99%), and the antidiuretic vasopressin (97%).

The AHA also called attention to the decisions that more than a dozen of the largest drugmakers have made to “[deny] 340B pricing to eligible hospitals through pharmacies with whom they contract.” The group said that many hospitals have lost millions in 340B drug savings because of this.

Hospitals’ per-patient labor expenses and per-patient expenses for medical supplies both increased by approximately 20% from 2019 to 2021.

Staffing shortages, particularly nursing staff shortages, have been making the headlines for the better part of two years, and for several reasons: employee burnout, intimidation and threats of violence (and, in some cases, actual acts of violence), large-scale strikes by nurses and other workers, allegations of price gouging by staffing agencies for traveling nurses, and the list goes on.

In January, we wrote about the requests made by the AHA, lawmakers, and others for the White House and the Federal Trade Commission to investigate the high prices staffing agencies have charged hospitals for temporary workers.

At the time, we reported that the Department of Health and Human Services had distributed $9 billion from the Provider Relief Fund to more than 69,000 providers just the month before to help them address staffing shortages and labor expenses, and the agency was preparing to distribute another $2 billion to more than 7,600 providers. Hospitals were asking for another $25 billion to be added to the PRF.

The current AHA report states that, in 2019, hospitals spent a median of 4.7% of their total nurse labor expense for contract travel nurses. In January 2022, the corresponding median was 38.6%.

The report provides several other extreme increases, such as a 213% increase in the hourly rates staffing agencies charged hospitals for travel nurses in January 2022 relative to the rates in January 2019 (citing data from Syntellis Performance Solutions). There’s also the increased “margin” that staffing agencies retained for travel nurses (i.e., the difference between the hourly rate the agencies paid to nurses and the rate they charged hospitals): a jump from an average of approximately 15% in 2019 to an average of 62% in January 2022 (citing data from Emsi Burning Glass Market Analytics).

While we understand that hospitals are feeling the pain of having to pay such prohibitive prices to fill staffing gaps, an article written by Sarah DiGregorio and published by The Washington Post on March 14 offers an interesting take on the situation. Essentially, DiGregorio turned the pointed finger back toward hospitals, calling it a “self-inflicted problem.”

She wrote that working conditions for nurses, which weren’t great to begin with, have deteriorated dramatically during the pandemic, and that the root of the problem actually goes back much further. From DiGregorio’s perspective, nursing as a profession has been undervalued since the “dawn of modern American hospitals.” According to her, the real cause of the staffing crises is “our collective failure to value caring.”

We’re not going to step into the weeds here, nor do we want to step on any toes, but the article does provide food for thought.

What else you need to know
The foundation of a Walmart heir is partnering with Washington Regional Medical System to create a “transformative” health care system in northwest Arkansas. The Alice L. Walton Foundation announced the news last week, with Alice Walton stating that the goal is to ensure that residents in the region have ready access to “world-class health care services, including specialty care.” Residents commonly travel outside the area to receive high-level specialty care. To address that issue, Cleveland Clinic partnered with the foundation last year to find ways of providing local access to its specialty care services. Cleveland Clinic will also participate in the new partnership with Washington Regional. A focus will be to strengthen the transformation to value-based care “to ensure high-quality, affordable care for the community.”

Teladoc recorded a $6.6 billion non-cash goodwill impairment charge in the first quarter in connection with its $18.5 billion acquisition of Livongo in late 2020. The company disclosed the write down, which resulted in a record loss of $41.58 per share, during an earnings call late on Wednesday. In after-hours trading, Teladoc’s share price plunged dramatically — shares closed at $55.83 on Wednesday and opened at $31.52 on Thursday. Citing analysts, Healthcare Dive reported that enrollment in Livongo’s chronic care programs has been weak and that expansion efforts have been limited because of difficulties in scaling to different regions.

In good news for Teladoc, the virtual care provider signed an agreement with New York’s Northwell Health that will leverage Teladoc’s collaboration with Microsoft to improve communication among Northwell’s clinicians and expand care delivery across the health system. Implementation will begin with 20 of Northwell Health’s hospitals and will expand to the health system’s other facilities over time.

Blue Cross Blue Shield of Michigan launched a joint venture with Nashville, Tenn.-based Honest Medical Group to offer support to physician practices as they transition to value-based care for patients enrolled in traditional Medicare or Medicare Advantage plans. Honest Medical Group will provide financial and human resources to physician practices that need additional resources as they make administrative and operational changes, such as adding or upgrading electronic medical record systems, billing systems, and virtual care, according to a press release announcing the partnership.

Moderna filed for emergency use authorization of its COVID-19 vaccine in children ages 6 months to under 2 years and those ages 2 years to under 6 years on Thursday. The company noted that the EUA requests are based on a primary series consisting of two 25 mcg doses.

In separate news, the FDA approved the first COVID-19 treatment for young children last week. Gilead Sciences’ Veklury (remdesivir) is now approved for use in weight-eligible patients age 28 days or older who test positive for SARS-CoV-2 if they are hospitalized or are at high risk for progression to severe disease.

CommonSpirit Health has named Wright Lassiter as its new CEO. Lassiter, who has served as CEO of Henry Ford Health since 2016, will take on the role at CommonSpirit when Lloyd Dean retires in August. Lassiter is also the current board chair of the American Hospital Association.

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