October 27, 2023
Increased expenses, especially labor, impacting hospital margins
Workforce shortages, supply chain disruptions, expensive new drugs, and high inflation have all greatly increased hospitals’ expenses. These rising costs are the top cause of the tenuous state of hospital margins today. As shown in the graphic below, all major hospital operating expense categories have increased by at least 20 percent in 2023 as compared to 2020 spending levels. While some expense trends are tied to the greater economy and could fall as inflation abates, higher labor costs are more likely to persist due to the wage hikes hospitals implemented to recruit and retain workers during COVID—essentially rebasing the cost of talent. As labor typically comprises over 50 percent of a hospital’s expenses, even a small percent increase can have a disproportionate impact on operating margins, compared to other expenses. Importantly, this increased cost of care delivery has not been met with higher reimbursements from payers, and hospital expenses have grown more than twice as fast as inpatient Medicare reimbursement between 2019 and 2022.