Jordan Ellis
Hospitals are facing a challenging financial situation due to rising costs, inadequate reimbursement, an ageing population, workforce shortages, and supply chain issues. They require substantial cash reserves to maintain operations and invest in new equipment and infrastructure. While most hospitals had adequate cash reserves in 2022, about one in ten were deemed financially vulnerable. The COVID-19 pandemic significantly impacted hospital finances, with government relief funds and postponed elective procedures affecting cash flow. Hospitals also face challenges with labour costs, supply expenses, and Medicare reimbursement rates, all contributing to their financial health.
| Characteristics | Values |
|---|---|
| Financial reserves of non-profit hospitals and health systems in 2022 | $548 billion |
| Change in financial reserves from 2019 to 2022 | $102 billion |
| Average days cash on hand in 2022 | 218 days |
| Percentage of total hospital expense growth in 2024 | 5.1% |
| Total compensation and related expenses as a percentage of total hospital costs | 56% |
| Advertised salary growth for registered nurses over four years compared to inflation | 26.6% faster |
| Medicare reimbursement as a percentage of dollar spent by hospitals in 2023 | 83% |
| Percentage of inpatient admissions reimbursed by MA plans in 2024 | 49% |
| Percentage of non-profit hospitals with "strong" days of cash on hand in 2022 | 73% |
| Percentage of non-profit hospitals with "adequate" levels of cash on hand in 2022 | 18% |
| Percentage of non-profit hospitals with "vulnerable" or "highly vulnerable" levels of cash on hand in 2022 | 9% |
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What You'll Learn
Hospitals' financial health
Hospitals, like any other institution, need to maintain their financial health to continue operating. The COVID-19 pandemic has highlighted the financial challenges faced by hospitals and health systems, with revenue streams being significantly impacted by the suspension of elective surgeries and a decline in patient volumes.
Financial health is a critical aspect of hospital management, and hospitals need to ensure they have adequate cash reserves to maintain operations and invest in new equipment and infrastructure. Hospitals have various expenses, including staffing costs, outsourced support services, supplies, software licenses, and equipment. These expenses can quickly add up, and hospitals need to carefully manage their finances to avoid financial distress, bankruptcy, or even closure.
To maintain financial health, hospitals can create short-term financial forecasts, including projected income statements, balance sheets, and cash flow statements. Regular reviews of financial indicators and key metrics are essential, and hospital leadership should be actively involved in these processes. Federal and state governments also play a role in supporting hospitals, especially during crises like the pandemic, through funding and relief packages. However, this support often comes with stringent reporting requirements to ensure funds are used appropriately.
Additionally, the financial health of hospitals is closely linked to the quality and safety of patient care. Hospitals with more capital can invest in better technology, hire more qualified staff, and initiate quality improvement projects. Conversely, financial distress may lead to limited quality improvements and compromised patient care.
Overall, hospitals must carefully manage their finances, make strategic investments, and maintain strong financial health to ensure they can continue providing high-quality patient care and serving their communities effectively.
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Government relief
Hospitals and health systems received significant government relief during the COVID-19 pandemic, which contributed to an overall increase in financial reserves from $446 billion in 2019 to $548 billion in 2022 among the nonprofit hospitals and health systems analysed. The federal government allocated $186.5 billion in payments to be distributed through the Provider Relief Fund (PRF) to support healthcare providers in the fight against the COVID-19 pandemic. This funding supported healthcare-related expenses, ensured uninsured Americans could receive COVID-19 treatment, and covered lost revenue attributable to the pandemic.
The large majority of nonrecurring operating revenues for nonprofit hospitals and health systems likely came from pandemic relief dollars, which jumped from $13 million in 2019 to $29 billion in 2020. However, as pandemic relief funds eroded, operating margins dropped in 2022, also due to labour shortages, increased supply expenses, and high inflation rates.
While financial reserves increased during the pandemic, they decreased in 2022, with about one in ten hospitals and health systems considered "vulnerable" in terms of their days of cash on hand. This highlights the importance of government relief funding in supporting the financial stability of hospitals during crises.
To improve understanding of the financial status of hospitals and health systems, some states have started requiring more complete and standardised reporting of financial data, including days of cash on hand. This additional information could help policymakers make informed decisions regarding government reimbursement and funding for these entities.
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$76.5 $139.95
Operational costs
Staff salaries and benefits constitute one of the largest expense categories for hospitals, often accounting for approximately 50-60% of total operational expenses. This includes wages, benefits, and additional compensation for healthcare professionals, such as nurses, doctors, and specialists.
Medical supplies and equipment are another significant expense for hospitals, typically ranging from 25% to 30% of their total budget. This includes the cost of surgical instruments, diagnostic tools, pharmaceuticals, personal protective equipment (PPE), and other consumables.
Facility maintenance and utilities also contribute substantially to hospital expenses, making up about 10-15% of the operational budget. This includes utility bills, building maintenance, and upkeep of medical equipment.
Other notable operational costs for hospitals include insurance premiums (5-8%), administrative expenses (10%), information technology and software (3-5%), marketing and patient acquisition (3-5%), and regulatory compliance (2-4%).
It is worth noting that hospitals may also incur substantial capital expenses for significant projects or purchases, such as installing new software systems or acquiring advanced medical equipment. To fund these capital projects, health systems often sell bonds to banks and institutional investors.
The COVID-19 pandemic significantly impacted hospital finances. While many hospitals received pandemic relief funds, which contributed to increased financial reserves, they also faced challenges due to labor shortages, supply expense increases, and other factors.
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Staffing costs
To reduce staffing costs, hospitals can focus on improving staff retention. Providing educational opportunities through upskilling or reskilling can enhance job satisfaction and improve patient outcomes. Implementing employee referral programs can also be a cost-effective way to recruit, as referred prospects tend to be more successful, allowing hospitals to skip some steps in the recruitment process.
Additionally, hospitals can reduce overtime, streamline workflows, and adopt cost-saving technologies like telehealth and automated scheduling. Embracing collaborations with academic institutions can also provide access to qualified talent through apprenticeship programs, allowing hospitals to nurture and employ top recruits.
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Hospital expenses
Hospitals have various expenses, and labour costs are the largest expense category, accounting for almost half (46%) of all hospital expenses in 2023. Total compensation and related expenses account for 56% of total hospital costs. Hospitals offer competitive wages to retain and recruit staff, and salaries for registered nurses have grown 26.6% faster than the rate of inflation over the past four years. Other significant expenses include medical and surgical supply costs, employee benefits, outsourced support services, and software licenses, equipment, and subscriptions.
Hospitals also face financial pressures due to decreasing revenues and increasing expenses, supply chain disruptions, labour shortages, and policy changes. These factors contribute to persistent cost growth, and hospitals struggle to maintain access to essential services. Additionally, hospitals receive reimbursements from Medicare and insurance companies, but these reimbursements may not keep up with inflation, resulting in underpayments.
To fund large projects, hospitals may sell bonds to banks and institutional investors. They also received government relief during the COVID-19 pandemic, which contributed to an increase in financial reserves. However, the erosion of pandemic relief funds, labour shortages, and increased supply expenses due to inflation have negatively impacted operating margins.
While most hospitals had adequate or strong cash reserves in 2022, about one in ten were considered vulnerable. Better financial data and transparency could help policymakers understand the financial status of hospitals and make informed decisions regarding reimbursement and funding.
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Frequently asked questions
Most nonprofit hospitals and health systems had "adequate" or "strong" days of cash on hand in 2022, though about one in ten did not.
Hospitals have many expenses, including payroll, supplies, software licenses, equipment, and subscriptions. Hospitals also spend money on continuing medical education for their staff, as well as on capital projects such as new MRI machines or operating rooms.
Hospitals typically sell millions of dollars in bonds to banks and major institutional investors.
During the pandemic, hospitals postponed non-emergency care, cancelled elective procedures, and diverted resources to patients in the greatest need, threatening their financial stability. However, hospitals also received large amounts of government relief during this time, which contributed to an increase in financial reserves.
Hospitals face persistent cost growth, inadequate reimbursement, workforce shortages, supply chain disruptions, and policy decisions that do not reflect on-the-ground realities. These factors threaten hospitals' solvency and ability to sustain comprehensive services.
