Cleveland healthcare systems see operating losses due to rising labor costs

Labor shortages and inflationary pressures continue to weigh on Northeast Ohio’s healthcare system revenues, according to third-quarter financial reports.

For Cleveland Clinic, University Hospitals, and Summa Health, cost growth, including labor, pharmaceuticals, and supplies, outpaced revenue growth, resulting in each reporting operating losses through September 30, 2022.

“Some hospitals are losing money on operations due to increased labor costs or difficulty in attracting other staff, and possibly some reduction in revenue and other increased costs for patient care,” said Allan Baumgarten, a Minnesota-based health care consultant who studies the Ohio market.

MetroHealth, which also posted growth in both revenue and expenses, reported $24.3 million in operating profit on $1.2 billion in revenue in the first nine months of 2022, compared to operating income of $76.8 million. dollars for the same period in 2021 with $1.1 billion in revenue.

“In the wake of the COVID pandemic and the nationwide workforce shortage, MetroHealth is facing the same challenges that hospitals and healthcare systems across the country are facing: rising costs and shrinking margins,” Craig Richmond, MetroHealth Executive Vice President and Chief Financial Officer and system department. officer, wrote in response to questions by e-mail. “Rising inflation has had a marked impact on labor and supply costs.”

The clinic’s operating loss for the first nine months of last year was $316.3 million on revenue of $9.5 billion, compared to operating income of $549.4 million for the same period in 2021 on revenue of $9.1 billion. Operating losses of the clinic for the whole year over $200 million expectedits president and chief executive officer, Dr. Tom Mikhalevich, said during his annual speech on the state of the clinic on Wednesday, January 18th.

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The clinic is working to reduce costs and carefully manage resources, according to a statement from the system, which notes that “our history of financial management puts us in a strong position to address these issues.”

In the first nine months of 2022, UH reported an operating loss of $226.1 million on total revenue of $4 billion, compared to the prior year for the period when the company posted operating income of $68.2 million on revenue of $3.9 billion. billion dollars.

As UH moves into budget planning for 2023, UH has begun implementing some strategies to increase revenue, coupled with “quite significant cost cuts,” said UH CFO Mike Schubsky. These include: reviewing the terms of service purchases, scrutinizing discretionary spending, third-party relationships, reducing the workforce (including laying off administrative staff and eliminating unoccupied positions), and rethinking how to do business at a lower cost.

Shubsky said he expects UH to see a “significant improvement” over 2022.

“I wouldn’t say we’ve already gone all the way; (there are) more things in progress that we are working on,” he said. “But the picture for 23 definitely looks better – at least on paper – than what we saw in 2022.”

He also noted that S&P had recently informed UH that it had affirmed the system’s credit rating at A with a stable outlook.

“S&P recognized the extraordinary efforts of UH management to address the historic challenges facing the healthcare industry,” Shubsky said. “Challenge remains, but we are pleased that the changes we have made allow us to fulfill our mission and provide quality assistance to our community.”

For the first nine months of 2022, Summa reported an operating loss of $20.8 million compared to $32.6 million in revenue for the same period in 2021. Its operating revenue through September 30, 2022 was $1.3 billion, up from $1.2 billion last year. a year earlier.

The system faced higher pharmacy spending and increased material and consumable costs, as well as significant increases in labor costs ($52.5 million more spent in the first nine months of 2022 than in 2021), despite for about the same number of employees. Last year, Summa spent almost $40 million on agency or hired labor in nursing alone, said Dr. Cliff Deveney, Summa’s president and chief executive officer.

UH has also seen staggering spending on these traveling nurses. Shubsky said UH has gone from spending $1 million a month on contract nurses in 2021 to spending $16 million or $17 million on payments to these agencies over several months in 2022.

He said there is “no doubt” that the premium paid to travel agency nurses is “a predominant component of our increase in labor costs”.

Other factors driving up labor costs are overtime pay, additional employee pay allowances, and the addition of Lake Health in April 2021, which means part of the comparable period in 2021 does not include Lake Health’s workforce.

The number of patients is another ongoing challenge for systems, as well as the complexity of the care they need.

“Our sharp side remains: people are much sicker, with higher resource and workforce needs to take care of them,” Deveney said.

Meanwhile, routine and outpatient examination volumes remain low and non-refundable, which Deveney attributes to several factors. One of these could be a financial solution for patients providing their co-payment. There have also been “disruptors” in the marketplace where patients can go for care, which has added competition to the outpatient and elective space.

“And then we also see, I would say, ongoing distrust in healthcare,” he said. “We have a lot of people who, due to vaccinations and many problems with big business, simply have not resumed work like they did. they have other health issues — they tend to get to the emergency room very sick.”

Shubsky also said he would like to see some recovery in patient numbers, which have been “relatively stable” as patient behavior has changed and the economy has forced some people to put medical care needs on hold for a while.

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“We are still trying to get back to pre-COVID levels and we are getting closer,” he said. “I think once we get back to pre-COVID levels we will be in good shape, but I think almost everyone is trying to get back to 2019 levels.”

The accountable health care organization UH was very interested, and the system and clinical management worked to ensure easy and convenient access for patients to the system. “The problem still remains: as long as you have this shortage of nurses and this shortage of labor, how much can you run the engine? I think everyone is still facing this problem,” Shubsky said. “I think there is still demand there. But we have to solve this labor problem.”

Over the past two years, MetroHealth has implemented overtime and bonus incentive programs to preserve its workforce “and ensure we can continue to provide our patients with the care they need,” Richmond wrote. “While we are seeing increases in wages and benefits as a result, the system continues to provide excellent care and even opens new facilities.”

While MetroHealth has seen declines in some clinical services, Richmond writes that improvements in payer structure and case structure have minimized the impact on net income from patient care.

In a statement, the clinic said: “While demand for patient care is high, we face high costs for supplies, pharmaceuticals and employees. Our non-operating loss of $440.9 million in the third quarter of 2022 was mainly due to a reduction in investments. return compared to the same period in 2021.”

Other health systems in the region also faced investment losses in their non-operating income.

Health systems have been lucky enough to live off the returns on investments on their balance sheets, “and that paid off a lot of capital; it paid for a lot of strategic opportunities,” Deveney said. “In the future, we will have a reduced capital.”

Fortunately, he said, Summa has completed its master plans by upgrading the Akron and Barberton campus to its own instance of Epic’s electronic health record system, and this month opening the new Juve Family Behavioral Health Pavilion.

“In the next couple of years, we will be low on capital — probably like everyone else,” he said. “But I think the big issue is how long it will last, and it does indicate that if you can’t depend on investments, as we have done in the past, you have to generate them through operations. .”

This story first appeared in Crane’s Cleveland Business.

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