Hospital shakeout ahead

Structural changes in health care delivery will wipe out many jobs during the coming economic slowdown

On the day when the Fed raised interest rates by another three quarters of a percentage point, it’s timely for a health care blogger like myself to consider how the looming economic slowdown (and possible recession) will affect the hospital sector.

My prediction: Unlike previous slowdowns and recessions, the next downturn will lead to major employment reductions at the nation’s more than 6,000 hospitals.

The latest harbinger of hard times in the hospital sector took place in Cleveland, the nation’s poorest city. Last week St. Vincent Charity Medical Center announced it will shut down all in-patient hospital operations and lay off nearly 1,000 employees.

“The (COVID-19) pandemic, the changing healthcare landscape, and declining inpatient volumes have led to significant financial challenges that became impossible to overcome,” the inner-city hospital said in its Worker Adjustment and Retraining Notification (WARN) act filing with Ohio’s unemployment bureau. On its website, the hospital announced it will continue to provide outpatient services at its facilities, including primary care, mental health and addiction medicine services. It will also maintain an urgent care center and specialty clinics, noting the locus of health care is increasingly moving toward outpatient services with fewer hospital admissions.

This trend in the shifting locale for many medical services has been underway for years. Total hospital admissions stagnated during the decade leading up to the pandemic, even as total out-patient visits to hospital-owned facilities soared.

During the first year of the pandemic, both hospital and out-patient visits plunged significantly. Outpatient visits have since rebounded, but, given that hospital stays are the most expensive part of health care, overall hospital revenue continues to lag behind pre-pandemic levels.

Despite this shift in demand, total hospital employment continues to grow. During August, total hospital employment in the U.S. reached 5.2 million workers in August, just a shade below its pre-pandemic peak.

Yet the finances to sustain that level of employment are deteriorating rapidly. According to the latest flash report on hospital finances from the consulting firm KaufmanHall, more than half of hospitals (53 percent) are projected to lose money this year, slightly more than last year and 2020, the first year of the pandemic. Just a third of hospitals lost money on an operating basis in 2019.

Even big systems are losing money

One need look no farther than some of the largest hospital chains in the country for evidence of deteriorating operating conditions. St. Louis-based Ascension, whose 143 Catholic hospitals make it the third largest U.S. hospital system, recently announced it lost $879 million in day-to-day operations on $29.0 billion in patient revenue for the fiscal year that ended on June 30, 2022. That marked a sharp reversal from the $676 million gain from operations on $27.2 billion in revenue the previous fiscal year. Both hospital admissions and inpatient and outpatient surgical visits fell compared to 2020-21 fiscal year, a period when hospital operations were curtailed due to the pandemic.

In a commentary published on the consulting firm KaufmanHall’s website today, CEO Ken Kaufman blamed the usual suspects. “Workforce shortages, supply chain disruptions, and drug expenses combine to drive up both labor and nonlabor expenses,” he wrote. “Even in the few categories where expense growth is slowing, such as contract labor, costs remain far above pre-pandemic levels. To make matters worse, there is no additional federal financial support for hospitals in the foreseeable future.” Hospitals received nearly $200 billion in special aid during the pandemic to maintain operations while their normal activities were curtailed.

He made only a brief mention of the long-term structural changes taking place in health care, which are nearing a tipping point and will be accelerated by an economic slowdown. Reductions in employment are inevitable at the large and medium-sized hospitals that in recent decades have become one of the largest, if not the largest, employer in many cities and towns.

The locus of care is inexorably moving to outpatient settings and physician offices, where care is both less expensive and more in line with patient preferences. There will always be a need for large hospitals to provide highly specialized and complex care. But the routine and high-priced procedures that have traditionally been hospitals’ main source of revenue (and the bane of insurers and anyone concerned about health care cost control) will continue to decline.  

Kaufman concludes: “Executives of leading healthcare systems realize that large-scale cost structure changes must be made. In recent conversations, several executives told me that they don’t expect to be in a pre-pandemic revenue position anytime soon. As a result, they are grappling with major cost structure issues. And they are gearing up to make some tough decisions.”

The seemingly endless run in hospital job growth is nearing its end.