🔒Hospital execs say finances stumble amid sluggish patient volumes, rising expenses, end of COVID aid

Hospitals in Connecticut saw substantial gains in revenue during 2021, but many will operate at a deficit during fiscal 2022, which closed Sept. 30, as pandemic relief diminishes and patient volumes remain sluggish.

Many Connecticut hospitals, including Middlesex Hospital, saw operating losses driven by the evaporation of COVID-19 grants, coupled with an inflationary economy and rising expenses.

“We’ve got costs going up for a whole variety of reasons, much of which have to do with the impact of the pandemic,” said Middlesex Health President and CEO Vincent Capece Jr. “It’s kind of thrown all the supply chain into a frenzy. And then I don’t know that anybody really has an explanation as to what’s going on with labor, but there just doesn’t seem to be enough people out there.”

Patient volumes, a main revenue driver, were higher in fiscal 2022 than in the prior year, but still below pre-pandemic levels in many departments, he said.

Routine treatment and care has not returned to pre-pandemic levels, though in many areas it has at least partially recovered from pandemic lows.

In general, hospitals are seeing patients less often, and when they do, patients tend to be sicker — and therefore more expensive to treat.

Emergency room volumes may never reach pre-pandemic levels, said Middlesex Health Chief Financial Officer Susan Martin.

“When they do come in, they’re really sick, much sicker than they were before the pandemic, and some of that probably has to do with the fact that patients put off their care during the pandemic phase,” Martin explained.

Higher insurance costs are also causing people to delay care, she added. In early September, the Connecticut Insurance Department approved an average 12.9% rate hike for several state health insurance providers, slightly less than the companies requested.

Fixed costs

Hospitals are seeing insurance companies push patients toward freestanding urgent care clinics and surgical centers, which have lower fixed costs because they don’t have to operate an emergency room 24/7, and have fewer regulatory hurdles.

“They can do things less expensively, and that’s why a lot of insurance companies are trying to push the care in that direction,” Capece said. “But then it takes away from the hospital procedures that are profitable, and are helping to pay for things that no one else will pay for, which means whatever is left in the hospital, we need to charge even more for it, to make ends meet. So it’s a vicious cycle that is continuing to drive costs up.”

Hospitals, which have substantially higher fixed costs than standalone enterprises, don’t see their costs drop when patient volume declines the way that other organizations do.

“You still have to cover those costs,” Capece said. “And that’s why we’re so dependent on volume. And, as we said earlier, the costs that we have are going up, so all of our fixed costs and many of our variable costs have continued to go up at a much faster rate than our prices have been able to go up.”

Middlesex received about $30 million in COVID grants in fiscal 2020, and about $10 million in fiscal 2021 and 2022. So far, it doesn’t appear hospitals will receive any support from the program in 2023, resulting in a direct revenue loss.

“It has helped us to weather the storm,” Capece said. “But as we look ahead, we really don’t see any end in sight right now to the escalation in costs.”

Revenues rebounded during fiscal 2021, with the state’s 27 acute-care hospitals generating $337.4 million in additional patient revenue compared to a year earlier, according to a report from the Office of Health Strategy. Overall, the state’s hospitals in fiscal 2021 reported a collective operating margin of $333.4 million, up from $40.9 million a year earlier, and an overall margin of $1.5 billion, compared to $365.5 million in fiscal 2020.

However, the current financial reality is different, hospital executives said.

“The picture today is 180 degrees the opposite, just 12 months later and the red ink is jeopardizing access to care throughout this country and in places in Connecticut,” said Bristol Hospital CEO Kurt A. Barwis. “Even hospitals and systems that have never lost money, but especially small hospitals like Bristol that don’t have the system resources, are struggling significantly just one year later.”

The past few years haven’t been easy for Bristol Hospital, which has been hit hard by the pandemic. The Hartford Business Journal recently reported that Bristol Hospital recorded a nearly $14 million loss in fiscal 2021, largely from declines in admissions, emergency room visits and surgeries.

That led the hospital to make layoffs in June. Bristol Health’s executive team, including Barwis, also took 8% salary reductions. Barwis said the moves led to $4 million in immediate savings.

The financial pressures have forced the hospital to think more seriously about potential partnerships or mergers, Barwis said.

Middlesex Hospital is also one of the few remaining independent hospitals in Connecticut.

An analysis by Kaufman, Hall & Associates released Sept. 15 by the American Hospital Association shows more than half of U.S. hospitals are projected to operate in the red through 2022.

Nationally, hospital and health system expenses are expected to increase by nearly $135 billion this year, largely due to expenses related to retaining and supporting workers. Labor costs are projected to increase by $57 billion over 2021, and contract labor by $29 billion.

A spokeswoman for Trinity Health of New England, parent to St. Francis Hospital and Medical Center in Hartford, said healthcare systems are experiencing staffing shortages, requiring them to use staffing agency labor, which is more expensive.

While Trinity’s net patient service revenue was relatively flat between fiscal 2021 and fiscal 2022, increased labor costs, along with other inflationary challenges, drove expenses up $102 million in fiscal 2022. The hospital system’s overall operating margin for fiscal 2022 was -2.4%, compared with a positive 1.6% margin in fiscal 2021, excluding pandemic funding.

Medicare costs

Costs are being driven up partly by an increase in patients who are on Medicare and Medicaid, as more people reach the age of 65, Capece said.

On average, 40% to 50% of the patients hospitals treat are on Medicare or Medicaid, so when government-set reimbursement rates don’t keep pace with inflation, hospitals have to cover the shortfall by passing costs onto private insurers.

“People who have commercial insurance are generally paying a premium to subsidize people who are on Medicare and Medicaid or people who have no insurance at all,” Capece said.

Mark Schaefer, vice president of finance for the Connecticut Hospital Association, said hospitals are looking for higher reimbursement rates that come closer to covering the actual cost of treating patients.

“Without some federal action and recognition, at both the state and federal level — that reimbursement is needed that covers costs — it’s going to be hard to get out of the hole,” Schaefer said.

Middlesex, which has an endowment of about $100 million, is faring better than some.

“We’ve tried not to use the principal; we’ve tried to live off the earnings to the extent that it could help supplement our losses,” Capece said. “It’s not something that you can rely on every year. And it’s not something that you can sustain for a long period of time.”

Hospitals are making changes to adapt. On Sept. 22, Yale New Haven Health system announced that it expected a $250 million budget deficit in 2023, and would cut 155 management-level jobs.

Some hospitals might merge to lower their costs, while others could be forced to scale back services, executives said.

“We’re already seeing that hospitals are laying employees off, closing down services, more mergers, which leads to less competition and usually higher prices,” said Martin, Middlesex Health's CFO.