Hospitals and health systems are at a crossroads of increasing demand for higher acuity care and deepening financial instability, caused by rising costs due to ongoing workforce shortages, severe fractures in the drugs and supplies supply chain and high levels of inflation, according to a May 2 report published by the American Hospital Association.
While cost pressures have not let up in 2024, hospitals also have to contend with "inadequate increases" in reimbursement by CMS and increasing administrative burden due to "inappropriate" commercial payer practices, according to the report.
"As this report clearly highlights, increased expenses, workforce challenges, and growing administrative burden are unsustainable and creating headwinds and obstacles that threaten access to care for millions of Americans,"AHA President and CEO Rick Pollack said. "The AHA urges Congress and the Administration to take action to strengthen hospitals and health systems and bolster access to care for all patients and communities."
Five things to know:
1. Costs of providing essential services. Hospitals often provide essential services — such as emergency care, behavioral healthcare, or labor and maternity services — that are not offered by other types of providers in the area — particularly in rural parts of America. Many of these services are resource intensive and costly to provide, and CMS payments for these services fall well below costs.
The AHA found that Medicare paid 82 cents for every dollar hospitals spent on care for Medicare patients in 2022 — the most recent year for which data is available. Medicare underpayments to hospitals hit $99.2 billion in 2022, almost two and a half times the amount in 2012.
2. Administrative costs. Hospitals are dealing with significant growth in administrative costs due to "inappropriate practices" by commercial payers, including Medicare Advantage and Medicaid managed care plans, according to the AHA. Premiums have grown twice as fast as hospital prices, according to The Wall Street Journal, and commercial payers have overburdened hospitals with time-consuming and labor-intensive practices such as automatic claims denials and excessive prior authorization requirements.
"Rarely, if ever, seen the kind of payer behavior that we've seen recently." Chicago-based CommonSpirit CFO Dan Morisette said during a Feb. 29 investor call. "Denials that are absolutely not in accordance with the contracts that we have, delayed payments where we need to go to arbitration and/or litigation to try to get paid for work that we're clearly entitled to. "The behavior overall has been egregious.
3. Drug costs. In 2023, hospitals spent $115 billion on drug expenses. One of the factors fueling this growth is drug companies imposing large price increases on existing drugs and introducing new drugs at record prices, according to the AHA. Last year, the median annual list price for a new drug was $300,000, a 35% increase over the previous year. While high drug prices pose significant challenges for hospitals and health systems, it is compounded by the fact that many of these same drugs are in shortage. The number of ongoing drug shortages in the U.S. is at its highest since 2001 — when the American Society of Health-System Pharmacists began tracking data.
4. Supply costs. On average, supply costs comprise about 10.5% of a hospital's budget and accounted for a collective $146.9 billion in 2023, increasing by $6.6 billion from the prior year, according to data from Strata Decision Technology. As technology evolves, hospitals need to buy new supplies, devices and equipment that meet clinical care standards and ensure high quality care. The upfront costs for critical equipment and device upgrades — such as cardiac magnetic resonance imaging — are expensive as well as the costs required for maintenance, upgrades and staff training.
5. Labor costs. Between 2021 and 2023, hospital labor costs increased by more than $42.5 billion to $839 billion, accounting for nearly 60% of the average hospital’s expenses. Some hospitals continue to rely on expensive contract labor to fill gaps and maintain access to care, spending about $51.1 billion on contracted staff in 2023. Hospitals and health systems have invested more to attract and retain talent, with wage rates across all hospital jobs jumping by 10.1% during 2023, according to data from Lightcast. With a growing gap between supply and demand for healthcare workers over the next decade, the AHA expects labor costs to likely continue to be a challenge for hospitals.