California hospital profit margins still below pre-pandemic levels, according to new financial analysis

A new financial analysis published by KaufmanHall, prepared at the request of the California Hospital Association, reveals thatthough not as extreme as in 20202021 marked a year of significant financial strain for California hospitals. The analysis includes data representing 79 California hospitals.

 

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In the second year of the pandemic, California hospitals experienced financial losses of nearly $6 billion on a volume-adjusted basis, which is more than triple previous projections. 

The figure below shows hospital losses experienced in 2020 and 2021 compared to 2019.

 

Image: KaufmanHall

 

According to the analysis, California experienced cumulative losses of $12.1 billion in 2020 and 2021 including federal funding, and over $20.2 billion excluding federal funding. The analysis attributes much of this loss to expenses rising faster than revenues. In 2021, total California hospital expenses rose 15%, compared to the 11% national average rise in total hospital expenses.

The profit margins of California hospitals in 2021 were 26% lower on average than pre-pandemic levels. The figure below shows a 2019-2021 comparison of the analyzed California hospitals’ profit margins.

 

Image: KaufmanHall

 

Before the pandemic, 50% of these hospitals had unsustainable profit margins (margins of 3% or lower). In 2020, the percent of hospitals with unsustainable profit margins rose to 69%, and in 2021, this number dropped to 55%.

According to the analysis, these accelerating expenses can also be attributed to California hospitals treating fewer people in 2021 than in 2019. However, patients treated in 2021 often had more severe illnesses and stayed in the hospital longer.

“Fewer admissions and longer lengths of stay create additional financial pressures,” the analysis says. “Hospitals are commonly paid a fixed amount per admission, so organizations typically lose money if their stay requires longer than anticipated care.”

Adjusted discharges decreased by 7% and adjusted patient days increased by 4% in 2021, compared to pre-pandemic levels, with an overall 11% increase in average length of stay. 

Labor expenses are also accelerating, largely driven by workforce shortages that have led to more contract labor and increases in base wage rates for staff, as well as the costs of recruiting and hiring new staff to mitigate the shortages. The analysis notes that contract labor costs have nearly doubled since the beginning of the pandemic.

 

Image: KaufmanHall

 

The analysis highlights that these financial struggles are likely to continue through 2022, projecting that median profit margins will likely remain below pre-pandemic levels for the entire year.