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March 8, 2023

Report shows pandemic, inflation left CT hospital finances reeling

CT Mirror St. Francis Hospital and Medical Center in Hartford.

Connecticut hospitals faced their worst year financially in 2022 since before the coronavirus struck, facing shrinking revenues, sicker patients and surging labor and other costs, according to a new study released Tuesday by the Connecticut Hospital Association.

Hospitals lost money in 2022, with expenses outpacing revenues by about 1%. Across the industry, that’s down $164 million from 2019, when hospitals enjoyed a positive operating margin of 4.6%.

“Hospitals and health systems are navigating unprecedented financial challenges, and the pandemic continues to have a lasting impact on health care across the state,” said Jennifer Jackson, hospital association CEO, who unveiled an analysis from Kaufman, Hall & Associates, a Chicago-based health care management consulting firm, during an online news conference.

“With any business, there’s only so long you can go with not having a profit or having a negative margin,” said Susan Martin, chief financial officer for the Middlesex Health.

Both Jackson and Martin said these pressures are forcing hospitals to curtail programs and defer capital investments, even as many communities are asking them to offer more.

“The pressures are continuing. They feel unrelenting,” Jackson said. “We do need to be concerned about what’s down the road.”

Several factors have combined to squeeze hospitals since the coronavirus arrived in 2020, and while case rates have declined, fiscal challenges aren’t retreating, according to the report.

The Kaufman Hall report found annual expenses by 2022 were up $3.5 billion across all Connecticut hospitals compared with pre-pandemic levels.

Labor costs in general are one of the worst culprits. Salary and benefits costs are up 20%, as workers in all fields — not just in health care — are less apt to accept the health care risks of working in a hospital. A 40-year high in inflation, reached in the summer of 2022, also put significant pressure on compensation, pushing salary and benefit costs more than $1.3 billion above pre-pandemic levels.

Contract labor costs for hospitals are up $519 million or 61% from those in 2019.

Inflation also has taken a toll on drug and medical supplies — which are up $1.1 billion annually from pre-pandemic levels — while two major revenue sources from the public sector continue to lag well behind the cost of doing business.

Jackson said the federal Medicare program for the elderly currently covers about $1.1 billion less than the service costs Connecticut hospitals incur. Medicaid, a federal program administered and funded partly by states to serve poor patients, yielded a similar $993 million gap in 2022.

Further complicating matters, hospitals in general are dealing with sicker patients, with the average length of stay up 9% since 2019.

Labor shortages sometimes prevent the timely discharge of patients from hospitals, leading to increased expenses for facilities without a matching boost in revenue.

Many people avoided physicals, screenings and other wellness visits during the pandemic, allowing health care problems to advanced unnoticed, said Dr. Syed Hussain, chief clinical officer for Trinity Health of New England.

And while Hussain said there’s no definitive evidence yet that the coronavirus pandemic has dramatically worsened chronic lung and heart ailments, he added that chronic diseases are on the rise.

This mix of wellness, operational and fiscal challenges doesn’t come with an easy solution. But Jackson said a fix almost certainly will take years, and the industry and state officials must begin developing a holistic solution now.

Some of the initial steps are easy, she said. These include revisiting Medicaid rates and avoiding some proposals that would place more fiscal pressure on hospitals.

Jackson cited several concepts advanced this year by Gov. Ned Lamont or by legislators, including new restrictions on the facility fees that hospitals can charge, imposing new staffing ratio mandates and capping costs hospitals can recoup for services delivered by providers outside of a patient’s insurance network.

Lamont’s budget spokesman, Chris Collibee, said Tuesday that “The governor is committed to driving down the cost of healthcare for our residents while improving the quality of care they receive. Hospitals and insurance companies must be a part of the solution. We look forward to ongoing conversations that achieve those goals.”

The co-chairs of the General Assembly’s Public Health Committee, Sen. Saud Anwar, D-South Windsor, and Rep. Cristin McCarthy-Vahey, D-Fairfield, both said greater investments in the health care workforce development are essential.

Calling it the “first big ripple effect of the pandemic,” Anwar, who is a physician, said the entire spectrum of the health care workforce is facing rising labor costs and staff shortages — a problem so severe the industry alone cannot correct it.

And McCarthy-Vahey added the state needs to look not only at ways to help hospitals with staffing issues directly but also to invest in higher education.

“We know that this is going to have to be an all-systems approach to the issue,” she said.

It wasn’t clear Tuesday whether that approach would include revisiting a controversial state tax on hospitals first enacted in 2011 that led to a multi-year lawsuit waged by the industry.

Connecticut levied hundreds of millions of dollars in taxes against hospitals starting in the 2011-12 fiscal year, but it was supposed to be a tax in name only.

The state originally pledged to redistribute and return all of those funds to the industry as part of a complicated system — that most states employ — to leverage more federal Medicaid dollars.

But over time hospitals began to pay far more than they received back, while the state came out far ahead.

The lawsuit was settled in 2019. Yet, as Jackson noted Tuesday, the industry still gets back most of the $850 million it pays annually — but doesn’t come out ahead. The state gains roughly $600 million in extra Medicaid funds from Washington.

And while Jackson didn’t say Tuesday whether the industry is looking for the report to spark tax reform, she added that “Hospitals remain one of the largest taxpayers in the state of Connecticut” and yet Medicaid payments to hospitals fall nearly $1 billion short of covering the cost of treating poor patients.

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