Hospitals face financial hurdles as costs rise, reimbursements lag

Hospitals and health systems continue to struggle with rising costs and insufficient reimbursements, according to a new report issued by the American Hospital Association.

Hospitals continue to see higher expenses for labor, medications and other supplies, according to a new American Hospital Association report.

The American Hospital Association report, which was issued Thursday, cites challenges that will sound familiar to healthcare leaders. Hospitals continue to see higher expenses for labor, medications and other supplies.

Hospitals have also seen added strain due to the Change Healthcare cyberattack, the report notes. Some hospitals and other healthcare providers have suffered substantial losses due to the disruption of the cyberattack, since Change Healthcare handles so many business and administrative functions for providers.

• Read more: Senators grill UnitedHealth Group CEO over Change Healthcare cyberattack

Pointing to the report, Rick Pollack, president and CEO of the American Hospital Association, called on Congress and President Biden’s administration to offer more support for hospitals and health systems.

“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,” Pollack said in a statement.

Here are some key takeaways from the report.

Reimbursements trail inflation

Medicare reimbursements for hospital inpatient care rose 5.2% between 2021 and 2023.

The problem: economy-wide inflation rose by 12.4% in that same span. Hospitals have long lamented the fact that federal support for hospitals doesn’t keep pace with their higher costs, as well as the actual cost of providing care.

The AHA report noted that Medicare paid 82 cents for each dollar hospitals spend caring for patients.

“Our government needs to change how it updates these rates,” Pollack said at the AHA Leadership Summit last July. “Right now, the math is flat out wrong.”

Rising labor expenses

Hospitals are spending 60% of their money on labor, the report notes.

Hospital labor expenses rose to $839 billion in 2023, an increase of $42.5 billion since 2021. Hospitals are still spending a significant amount on staffing agencies to fill vacancies ($51 billion in 2023).

The AHA report also notes that staffing continues to be a thorny issue for hospitals.

“Critical labor shortages persist, especially in the face of growing burnout among clinicians,” the report stated.

Kevin Holloran, who evaluates nonprofit hospitals for Fitch Ratings, has said hospitals need to find ways to manage labor costs by keeping staff and reducing use of contracted labor.

“The thing that's going to make or break you is, how well do you do recruiting and retaining key staff? And we always say nurses, but it's everybody, up and down the spectrum from executives to nurses,” Holloran told Chief Healthcare Executive® in December.

• Read more: Nonprofit hospitals still have negative outlook, but Fitch projects better times

Drug costs rise

Hospitals spent $115 billion on drugs in 2023, and health systems say drug costs are being driven by a couple of trends.

Drug companies are raising prices on medications hospitals have used for years, but new drugs are also coming with hefty price tags.

“One of the factors fueling this growth is drug company decisions to impose large price increases on existing drugs. However, 2023 also saw a continuation of a long-standing trend of drug companies introducing new drugs at record prices,” the report stated.

The median listed price for a new drug rose to $300,000 in 2023, an increase of 35% from the previous year, according to the report.

Drug shortages mount

While hospitals are paying more for drugs, they are also encountering more supply issues.

In 2023, hospitals endured the highest number of drug shortages in more than 10 years, the report states. On a quarterly basis, there was an average of 301 drugs in short supply, a 13% increase over the previous year.

Hospitals may be dealing with more shortages this year. The American Society of Hospital Pharmacists reported a record of 323 active drug shortages in the first quarter of 2024. Shortages include emergency medications stored in hospital crash carts, chemotherapy drugs, and pain and sedation medications, the ASHP said.

Supply costs

Beyond medication, hospitals are also paying more for other essential supplies, the report stated.

Hospital spending on medical supplies rose to $146.9 billion in 2023, an increase of $6.6 billion over the previous year.

The cost of one cardiac magnetic resonance imaging (cMRI) machine: $3.2 million.

Protecting staff

Hospitals have had to invest more on security and other measures to protect staff in the wake of rising violence. “There has been a significant uptick in violence against health care workers in recent years,” the report stated.

More than half of emergency nurses have been threatened or assaulted in the past 30 days, according to the Emergency Nurses Association.