It is said that with challenges come opportunity. Well, as most every hospital CEO and CFO knows, hospital finances certainly are laden with challenges. Some economists described 2022 as the worst financial year for U.S. hospitals in decades, as expense increases continued to exceed revenue growth. According to data from healthcare data and consulting firm Syntellis Performance Solutions, cumulative hospital expense growth from 2019 to 2022 was 17.5%, while reimbursement by the Medicare Inpatient Prospective Payment System (IPPS) grew only 7.5%.
Labor shortages fueled explosive growth in contract labor expenses, which contributed to overall hospital labor expense growth of 20.8% over the same period. Even after accounting for increased patient acuity, labor expenses per patient jumped 24.7%.
Not surprisingly, over half of U.S. hospitals ended 2022 operating at a financial loss. Also not surprisingly, in December 2022 credit rating firm Moody’s concluded that more healthcare organizations were at risk of credit downgrades or default—which turned out to be prophetic, as the first quarter of 2023 saw eight hospitals default, according to research firm Municipal Market Analytics. That figure represented the most hospital bond defaults since 2011, and only one hospital defaulted in the first quarter of 2022. Perhaps most concerning, some of the defaults came from large, highly rated systems.
Moreover, Kaufman Hall predicts expense pressures will continue through the remainder of this year. The firm’s May 2023 National Hospital Flash Report concluded that: 1) the median operating margin for U.S. hospitals was 0%--meaning just breakeven--in April, leaving most hospitals with little or no financial wiggle room; 2) inpatient volumes declined while lengths of stay rose, and outpatient volumes also dropped; 3) the effects of Medicaid disenrollment could be materializing, as reflected in increases in bad debt and charity care in April, and this trend could continue as substantial disenrollment from Medicaid is projected as a result of the end of the COVID-19 public health emergency on May 11; and 4) inflation continued to impair hospital finances, as labor costs jumped in April and the costs of goods and services continued to be significantly above pre-pandemic levels.
With no quick fix to the labor shortages, hospitals and health systems are scrambling to find other areas to reduce costs and/or increase revenue profitably. Therein lie opportunities for pharmacy leaders to help bolster hospital finances.
Since prescription drugs are the fourth-largest category of non-capital expenses for hospitals, pharmacy departments can support cost reduction through the deployment of automation to generate labor savings and by leveraging insights gleaned from medication use evaluation, preferably in an automated manner, given the continued widespread shortage of pharmacy technicians, which has required many pharmacists to perform pharmacy technician tasks.
Furthermore, financial information and analytics firm S&P Global has advised hospitals to diversify beyond acute care and generate new, often more profitable, revenue streams, and the list of promising areas includes an outpatient pharmacy and other pharmacy services. Similarly, McKinsey & Company has identified specialty pharmacy and home infusion as attractive areas for growth and profitability during the next two years.
