In 2022, Kentucky hospitals faced their most challenging year financially since the start of the pandemic. Inflation, record-high operating costs, and lower volumes led to unprecedented financial losses according to a new study by Kaufman Hall, which estimates 38% of the state’s hospitals are now at risk of closure.
The study, prepared by Kaufman Hall at the request of the Kentucky Hospital Association, shows Kentucky hospitals ended 2022 with nearly a negative two percent operating margin — representing a loss of more than a quarter of a billion dollars from pre-pandemic levels. The losses occurred despite additional reimbursement from the Hospital Rate Improvement Program (HRIP), a state program that increases payments to Kentucky hospitals for the treatment they provide to Medicaid patients admitted to the hospital. Had the HRIP program not been in place in 2022, Kentucky hospital losses would have exceeded $1.3 billion and operating margins would have fallen even more.
“The new study from Kaufman Hall shines a spotlight on the struggles hospitals across the Commonwealth are facing,” stated Kentucky Hospital Association president and chief executive officer Nancy Galvagni. “Hospitals are the heart of the communities they serve, providing high-quality, life-saving care to anyone who needs it regardless of their ability to pay. They are also some of the largest employers in towns across the state, so the financial health of hospitals is critical to both the physical and economic health of Kentucky.”
Contributing to this massive loss was the sky-rocketing costs of hospital expenses. Operating expenses increased by $4.2 billion since 2019, and rising labor costs during the ongoing workforce crisis were a major contributing factor.
“Kentucky hospitals continue to face existential financial and operational threats,” said Erik Swanson, Senior Vice President of Data and Analytics at Kaufman Hall. “In 2022, Kentucky hospitals experienced their worst financial performance since the outset of the pandemic, and conditions in 2023 remain extremely challenging.”
In order to compete for the best health care professionals nationwide, growth in both salaries and benefits for Kentucky outpaced the national median for each year. In the three years combined following the start of the pandemic, salary expense in Kentucky increased approximately $2.6 billion, while benefit expense increased $409 million.
To bridge the gap between permanent staff and openings, hospitals relied on contract labor. In the three years combined following the start of the pandemic, Kentucky hospitals collectively spent approximately $1.2 billion more in contract labor compared to 2019 levels.
“Rising costs are making it difficult for our members to stay open,” noted Galvagni. “Labor costs, in addition to the extreme growth in costs for supplies and drugs our patients need, which are struggles all Kentuckians understand, are outpacing growth in revenue.”
While Kentucky hospital net operating revenues have grown since the start of the pandemic, according to Kaufman Hall the rate of growth has significantly lagged behind the rate of growth in expenses. Expense per discharge and expense per patient day both outpaced revenue growth due to sicker patients, and longer lengths of stay. Because hospitals are paid on a per-case basis, the increase in length of stay results in higher costs per patient without realizing a comparable increase in revenue.
“Despite the financial strain, Kentucky hospitals remain committed to providing high-quality care to every patient,” commented Galvagni. “The Kentucky Hospital Association continues to work with lawmakers to ensure hospitals and the thousands of caregivers they employ have the resources they need to continue providing the services Kentuckians need and deserve.”