Hailey Tran
Hospitals incur a wide range of expenses, from salaries and benefits to medical supplies and equipment. In 2023, spending on hospital care in the US totalled $1.5 trillion, with private health insurance accounting for more than a third of these costs. Labour costs are the single largest category of hospital spending, with salaries, fringe benefits and contract labour making up about 30% of a hospital's operating expenses. Hospitals in urban areas, such as New York, tend to have higher costs due to the higher cost of living. The pandemic has also impacted hospital finances, with supply chain issues and the cancellation of elective procedures affecting revenues and driving up costs.
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What You'll Learn
Employee salaries and wages
The COVID-19 pandemic has also impacted hospital salary expenses, as increased rates of physician burnout have led to staffing shortages across the country. To address these shortages, hospitals have relied more on contract labor, which has further contributed to salary and labor costs. Salary and labor expenses make up about half of a hospital's total operating expenses.
In addition to salary expenses, hospitals also incur costs for fringe benefits, which are another significant expense category. These expenses include benefits such as health insurance, retirement plans, and paid time off. When combined with salary expenses, these employee-related costs can account for about 30% of a hospital's operating expense.
The rising costs of healthcare, including hospital salary expenses, have impacted Medicare and Medicaid spending. Hospital care accounts for a large share of Medicare and Medicaid expenditures, with Medicare covering about 83 cents for every dollar spent by hospitals in 2023. This has resulted in underpayments and financial challenges for hospitals, further strained by the erosion of payment value due to inflation.
To maintain staffing levels and attract qualified employees, hospitals offer competitive wages. This has led to increases in advertised salaries for registered nurses and other healthcare professionals. While these higher wages can help retain staff, they also contribute to the overall financial challenges faced by hospitals.
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Medical and surgical supply costs
The pandemic has had a significant impact on the supply costs for hospitals. For example, hospitals in the US have spent over $3 billion on PPE kits since the beginning of the pandemic. The pandemic has also caused disruptions in the global supply chains that hospitals rely on for medical supplies, leading to price escalations. Between fall 2020 and early 2022, hospitals experienced surges in the prices of energy, resins, cotton, and metals, which are critical for manufacturing medical supplies and devices.
Supply chain costs are not the only factor driving up medical and surgical supply expenses for hospitals. The cost of medical equipment, operating rooms, and facility upgrades is also increasing. Hospitals need to invest in new technologies, such as digital health technology and robotic automation, to keep up with evolving healthcare standards and improve cost efficiency.
Additionally, hospitals in urban areas, such as New York, tend to have higher medical supply costs due to the higher cost of living. Non-profit hospitals may also contribute to higher overall operating expenses due to their focus on community service, research, and education.
The rising costs of medical and surgical supplies can strain hospitals' finances and their ability to provide comprehensive services. As a result, hospitals may struggle to reinvest in critical physical assets, compromising care quality and their ability to stay current with healthcare advancements.
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Professional fees
The inclusion of professional fees in hospital bills is crucial for accurately estimating the total cost of hospital care. Hospital discharge data, which is commonly used for cost-of-illness analyses, often excludes professional fees, leading to an underestimation of the full financial burden of medical care. By applying cost-to-charge ratios (CCRs) and professional fee ratios (PFRs), researchers can better estimate the total payment for hospital care, including both facility and professional fees.
The distinction between professional and facility fees has implications for healthcare policy and reimbursement rates. For instance, Medicare reimbursement rates for outpatient services may not adequately cover the costs of professional fees, leading hospitals to subsidize physician practices using facility fees. Additionally, proposed legislation to limit facility fees could impact hospitals' ability to fund essential healthcare services, particularly in the context of Medicare outpatient payments.
In conclusion, professional fees are a significant contributor to hospital spending, and their inclusion is vital for understanding the true cost of hospital care. Accurate estimation of professional fees enables policymakers and healthcare providers to make informed decisions regarding reimbursement rates, resource allocation, and the overall financial stability of hospitals.
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Technology
IT expenses can vary depending on the size and location of the hospital. On average, hospitals with 25 beds or fewer spend approximately $1 million on IT solutions, while larger hospitals with over 250 beds can spend more than $33 million. Northeastern hospitals in the United States have the highest IT expenses, with an average of $17 million reported for 2023. These higher averages are attributed to large hospitals in cities like New York City and metropolitan regions.
The global healthcare IT market is substantial, with costs reaching almost half a trillion dollars in 2021. While the global average for hospital IT spending is around 3%, North America's average is slightly lower at 2.5%. This equates to approximately $7,000 per employee per year in the American market. However, IT spending as a percentage of revenue can range from 3.0% to 5.9%, according to a study by Computer Economics.
Hospitals invest in IT solutions to improve patient care outcomes, enhance efficiency, and meet regulatory requirements. Examples of technologies adopted by hospitals include electronic health records (EHRs), telehealth platforms, AI-driven tools, cybersecurity measures, and mobile device management (MDM) software. The COVID-19 pandemic may have also influenced IT spending, as hospitals needed to maintain device functionality while adhering to social distancing protocols.
In addition to IT expenses, hospitals spend considerable amounts on high-tech medical equipment and devices. This type of technology is a significant driver of healthcare costs, with new technology purchases accounting for more than half of hospitals' capital spending. The use of advanced technology contributes to higher hospital costs per patient, as observed in Massachusetts, where costs were 55% higher than the national average.
To manage their technology expenses, hospitals must carefully plan their IT investments and create comprehensive IT budgets. By assessing their hardware, users, and vendors, hospitals can identify areas requiring additional resources. Additionally, hospitals can benefit from working with experienced IT specialists who can help optimize their technology infrastructure and ensure it aligns with their organizational goals.
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Reimbursement and underpayments
Underpayment and reimbursement issues are a significant concern for hospitals, impacting their financial stability and ability to provide comprehensive services. Underpayment occurs when the payment received by hospitals is less than the costs incurred in delivering care to patients. This gap between payment and costs can be attributed to the difference between hospital charges and government program payments, particularly for Medicare and Medicaid patients.
Medicare and Medicaid are government-funded programs that provide healthcare coverage for eligible individuals. Medicare is financed by the federal government, while Medicaid is jointly funded by states and the federal government. Payment rates for these programs are set by law and are often below the actual cost of providing care, resulting in underpayments to hospitals. In 2020, combined underpayments by Medicare and Medicaid amounted to $100.4 billion, with Medicare accounting for $75.6 billion and Medicaid for $24.8 billion. This trend continued in 2022, with Medicare paying just 82 cents for every dollar spent by hospitals, resulting in $99.2 billion in underpayments.
Hospitals face significant financial pressure due to underpayments, which can hinder their ability to reinvest in critical areas such as medical equipment, operating rooms, and facility upgrades. This, in turn, can compromise care quality and make it challenging for hospitals to keep up with evolving healthcare standards and technologies. The issue of underpayment is further exacerbated by contractual allowances, where payors do not fully adhere to the terms outlined in their contracts, resulting in partial payments.
To address underpayments, hospitals must proactively identify and resolve issues related to revenue cycle management and payor-related matters. This includes optimizing revenue codes to ensure accurate and specific billing, as well as leveraging experts in reimbursement to create necessary rules and workflows for accurate billing and payment processing. By effectively managing underpaid claims and analyzing revenue cycle processes, hospitals can recover significant revenue and mitigate the financial strain caused by underpayments.
While reducing federal spending on hospital care may seem like a viable option for controlling costs, it is important to consider the potential trade-offs. Lowering Medicare reimbursement rates may lead to reduced services, poorer quality of care, or higher out-of-pocket expenses for patients. Therefore, hospitals must carefully navigate the complexities of reimbursement and underpayments to ensure they can continue providing comprehensive and accessible care to their communities.
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Frequently asked questions
Hospitals spend the most on labour, including employee salaries, fringe benefits, and contract labour. These costs account for about 30% of a hospital's operating expenses on average, but this figure can be higher in urban areas with a higher cost of living, such as New York City.
In 2021, state and local governments in the US spent $377 billion on health and hospitals, which was about 10% of their direct general spending. This spending is split roughly evenly between state and local governments, with states providing 47% and local governments providing 53%.
The pandemic has added new items to hospitals' supply lists, such as PPE kits, which have cost hospitals over $3 billion. It has also disrupted global supply chains, leading to price escalations. The cancellation or postponement of elective procedures and the restriction of hospital visits to only the necessary ones have also caused hospitals to lose revenue.
Other major hospital expenses include medical and surgical supply costs, professional fees for specialists, and investments in new technology. Hospitals also face higher costs for staffing, real estate, and facilities maintenance.
