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Impact of Inflationary Pressure on Essential Rural and Community Hospitals

There is no question that federal and state COVID-19 relief funds kept hospitals afloat through the pandemic allowing them to flex and accommodate 4.6 million COVID-related hospitalizations. Now hospitals have started to stabilize, and these relief funds are depleted. Unfortunately, income losses persist. 

Rural and independent community hospitals in particular are feeling financial pressure because their margins were already razor-thin prior to the pandemic. The primary cause of recent losses is inflationary pressure that is increasing expenses across all categories and testing the mettle of community hospitals. At the same time, CMS and commercial payers have not adjusted payments accordingly to compensate for today’s cost of providing care. 

The timing is particularly challenging as hospitals emerge from pandemic surges, depleted of resources and staff. 

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According to a Kaufman Hall study U.S. hospitals were on pace to lose $54 billion in net income with 11 percent lower average margins in 2021, even after CARES Act payments. Halfway through 2022, another study showed margins remained cumulatively negative, with higher labor costs, labor shortages and turnover hindering financial performance. Consistent with industry studies, over the past 12 months CHC has seen contract labor expenses as a percentage of total salaries and wages increase more than four times over pre-COVID times. 

The financial squeeze is a national trend being reported by the American Hospital Association and media outlets across the country. Now, the AHA and larger healthcare systems are driving advocacy efforts that are generating results. CMS recently issued the IPPS Final Rule for fiscal year 2023, which provides hospitals with an additional 4.3 percent in reimbursement, largely due to inflationary pressure. 

One big question facing us all: Are these changes a temporary strain that must be weathered in the near-term or are they a long-term reality?  

For community hospital leaders, this question determines whether we must fundamentally change our operations or simply tighten our belts to weather this storm. Unfortunately, if inflationary pressures are a long-term reality, smaller hospitals will struggle to remain sustainable without significant changes to their business model and to payer reimbursement.

Rural and community hospitals remain essential, local healthcare resources. 

There are some positive signs emerging. 

  • First, the pandemic highlighted the critical importance of local community hospitals and healthcare services. There is also a heightened awareness of the financial challenges these essential providers face. This awareness has caused regulators to create a new rural emergency hospital designation. While there are still many unknowns and challenges to this model, it is a positive sign because new designations will give new options to community healthcare providers.
  • Next, community hospitals have been able to reduce reliance on contract labor by making smaller cost-of-living wage increases. Some rural hospitals are finding more interest in their positions as increasing fuel prices raise commute costs and make local employment more attractive.

It’s clear that local healthcare services provide a critical public safety net. As we look into the future, change is the one constant we foresee. Community hospital leaders must take proactive measures to reduce the cost of operations and explore new revenue sources to remain sustainable.

Mr. Morgan is the Vice President, Strategic Analysis at Plano at Texas-based Community Hospital Corporation.

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