Hospitals are having a harder time controlling costs through labor and efficiencies and improvement efforts plateaued last year, according to Kaufman Hall's 2018 National Flash Report. Profitability indicators show that operating margin improved by about 5% compared to 2017.
Kaufman Hall, which analyzed more than 600 hospitals, found that volume trends underperformed compared to the previous year. Higher-acuity patients resulted in higher reimbursement per adjusted discharge and adjusted patient day.
Drug expenses are one reason for the cost issues. Drug costs increased by about 4% from 2017. Also, bad debt and charity care grew, though at a slower pace at the end of the year. One piece of good news for hospitals is that revenue increased in 2018.
Kaufman Hall found that 2018 was generally a year of improvement in regards to profitability. However, volume indicators showed underperformance as discharges continue to drop.
Revenue indicators showed promise, but an ongoing problem is expenses. Hospitals are trying to contain costs by reducing full-time equivalents and bed numbers. However, those savings only go so far and hospitals expect they'll need to add staff in the coming years. A recent Healthcare Financial Management Association/Navigant survey reported that 78% of hospital CFOs said their organizations' labor budgets will grow in the coming years, with 18% expecting an increase of more than 5%.
Another factor working against hospitals is drug costs. A recent InCrowd survey found that physicians are pessimistic that those prices will change, with 82% saying it’s unlikely the situation will improve next year.
The Trump administration backs cutting prescription prices as a way to reduce costs. HHS released a proposal in January to end safe harbor protections for drug rebates through pharmacy benefit managers in Medicare Part D and Medicaid managed care plans. Those savings would instead go directly to consumers.
Hospitals have implemented cost-containment strategies, but the report shows there comes a point when hospitals can't cut anymore. It appears the industry may have reached that point. "Hospitals will need to think more innovatively on how to manage expense," according to the report.
Kaufman Hall pointed specifically to the West, which experienced "worsening labor efficiency." Hospitals in this region "need to consider how to employ more advanced approaches to labor management," the authors wrote.
There are other ways to squeeze dollars out of hospital costs, according to a recent McKinsey & Company report. It estimated that between $1.2 trillion and $2.3 trillion could be saved over the next decade on productivity gains and not expanding the workforce. The report highlighted potential opportunities to improve productivity through efficiency and care coordination.