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May 09, 2024 (Cleveland, OH)

AHA’s Latest Cost of Caring Report Indicates an Environment of Financial Uncertainty for Hospitals

The American Hospital Association’s (AHA) recently released Costs of Caring report finds many hospitals and health systems are currently operating in an environment of financial uncertainty with little to no margin.

The report suggests that while some hospitals have financially stabilized from the COVID-19 pandemic and historic lows of 2022, the overall hospital field is far from where it needs to be to meet the demand for care, invest in new and promising technologies and interventions, and be prepared the next major healthcare crisis. The continued workforce shortage, supply chain issues for drugs and supplies, and the high level of inflation have all impacted hospitals’ costs, while payments have failed to keep pace.

The report provides a list of significant costs impacting a hospital’s ability to care for patients and communities.

1. Costs of Providing Essential Services

Hospitals play an essential role in serving communities by providing access to essential healthcare services. Many of these services — such as emergency care and behavioral health — can be expensive and require a substantial number of resources.

These essential services are not offered by other healthcare providers. According to the AHA’s report, in 2022, hospitals delivered more than 3.5 million babies and admitted nearly 137 million patients in emergency departments. Demographic trends and clinical factors have led to a rise in inpatient utilization among more clinically complex patients covered by Medicaid and Medicare. Inpatient services such as these are more costly and public payer payments for these services fall below costs. In 2022, underpayments from Medicare and Medicaid totaled nearly $130 billion. Medicare paid just 82 cents for every dollar hospitals spent caring for patients, resulting in a shortfall of almost $100 billion.

This is a growing concern as there also has been an increase in the utilization of behavioral health services in recent years. The graph below demonstrates payments for inpatient behavioral health services were slightly more than 34% below costs across all payers on average in 2023. 

In the outpatient setting, average payments for burns and wound services were 42.9% below cost, behavioral health 31.7% below and infectious disease 12.1% below.

Looking at the costs of inpatient and outpatient services, the data indicates the challenges that hospitals and health systems face — particularly in rural areas — in providing essential services.

2. Hospital Administrative Expenses

There has been a rise in administrative costs due to inappropriate practices by some commercial health insurers, including Medicare Advantage and Medicaid managed care plans. Commercial health insurers have overburdened hospitals with time-consuming and labor-intensive practices such as automatic claims denials and onerous prior authorization requirements and, additionally, have increased premiums.

AHA notes that the time taken by commercial payers to process and pay hospital claims from the date of submission increased by 19.7% in 2023 and claim denials increased by 20.2% for commercial payers in the same year.

In addition to increasingly becoming targets of cyberattacks, hospitals are spending more on things not directly related to patient care services yet are still essential to delivering care and maintaining operations. This can include costs associated with implementing, maintaining and upgrading information management systems and overall technology infrastructure.

3. Hospital Drug Expenses

The consistent increase in drug prices continued in 2023, with hospital spending reaching $115 billion. This was fueled in part by the 35% increase in the median annual list price for a new drug, which reached $300,000. According to AHA, the HHS Assistant Secretary for Planning and Evaluation (ASPE) found that between 2022 and 2023, prices for nearly 2,000 drugs increased faster than the rate of general inflation, with an average price hike of 15.2%

The price of drugs is impacted by the fact that many drugs are in short supply. In 2023, there were an average of 301 drugs in shortage per quarter, an increase of 13% from 2022. These shortages added as much as 20% to hospital drug budgets, according to data from the American Society of Health System Pharmacists.

A report by the Office of the Assistant Secretary for Planning and Evaluation found up to a 16.6% increase in the prices of drugs in short supply, and an increase in the price of substitute drugs of at least three times the cost of the drug in short supply. The shortage of drugs also leads to an increase in associated costs, including the cost of what is required by staff to find, procure and administer alternative drugs, and overtime for staff complete these tasks.

4. Hospital Supply Costs

On average, hospital supply costs account for approximately 10.5% of a hospital’s budget. Medical supply expenses collectively accounted for $146.9 billion in 2023, an increase of $6.6 billion over 2022.

Upfront expenses for critical equipment and device upgrades are costly. As an example, the AHA states that the advanced technology of cardiac magnetic resonance imaging machines costs the average hospital $3.2 million. Some hospitals that have a higher demand for this machine may need to purchase multiple machines. This cost is compounded when you consider the costs for ongoing maintenance, upgrades and staff training.

5.Hospital Labor Costs

AHA notes that hospital labor costs also have significantly impacted them financially — with labor costs increasing by more than $42.5 billion between 2021 and 2023 for a total of $839 billion. This growth in total hospital employee compensation of wages and benefits far outpaces inflation.

Critical labor shortages continue to exist in many parts of the country — due in part to burnout from the pandemic, violence against hospital employees and commercial insurer administrative burden. AHA expects labor costs will likely continue to be an issue for hospitals as the gap between supply and demand for healthcare workers continues to grow.

Overall, the report findings conclude that hospitals continue to face significant challenges that make it difficult to meet their mission to their communities. The AHA continues to urge Congress and the Administration to support policies to make sure hospitals and health systems have the resources needed to continue providing care to all patients and communities.

View the full Costs of Caring report by visiting aha.org.

To learn more about how hospitals continue to invest locally despite shortfalls in reimbursement and uncompensated care, view The Center for Health Affairs’ Community Benefit Report.