A year ago, the COVID-19 pandemic was much less severe than it had been, but healthcare wasn’t out of the woods yet. The industry was still contending with rising inflation, nurse shortages, supply chain issues and deteriorating operating margins.
Today, some of those challenges still exist—but providers are finding ways to mitigate these higher costs, said Robert Dudley, managing director of the hospital and health systems group for BOK Financial®.
“They’re having to renegotiate payor contracts, reassess their operations, look for more efficiencies and move more things to outpatient, if possible, because it’s a lower cost of care,” Dudley explained. “They’re trying to reimagine how they run their hospitals.”
How providers adapt, in turn, is changing some aspects of the industry, particularly involving labor costs and medical supplies. After decades of outpacing general inflation in the economy, for example, medical care services inflation is actually down year-over-year by most metrics, Dudley said.
“This may be because much of the inflation within healthcare was being somewhat artificially driven up by supply chain issues and the cost of labor,” he explained. “The higher cost of labor is still there, with much of it now becoming embedded in operating costs, so providers are having to work through that. If now it takes $120 an hour to hire somebody, providers have been trying to learn how to adapt to those costs.”
Operating margins are “lumpy”
At the same time, higher labor costs are eating into providers’ operating margins. Although they are finally trending positive after more than a year of being in the red, these margins are still “lumpy,” as providers work to get labor costs at the right level for their size of operations, Dudley said. “It’s a struggle right now for many providers, but it’s also kind of a new normal.”
Wages have remained high because the number of healthcare professionals looking for work has remained lower than the demand for their work. Following the laws of supply and demand, if this trend continues, wages—and, with them, inflation—will rise, he noted.
For example, there aren’t enough day-to-day care staff, such as nurses and health aides, so providers are paying higher wages to get the staff they need. The total supply of registered nurses (RNs) nationwide decreased by more than 100,000 from 2020 to 2021, the largest drop ever observed over the past four decades, according to a nursing workforce analysis published in Health Affairs.
Looking forward, worker shortages are only expected to get worse, according to recent estimates. For instance, by 2025, there likely will be a shortage of more than 400,000 home health aides and 29,400 nurse practitioners, according to projections by the consulting firm Mercer, cited by the Duquesne University School of Nursing.
Deglobalization may be occurring within healthcare
Meanwhile, the healthcare industry is also reimagining how providers get their supplies, as part of another lesson learned from the pandemic, Dudley said.
From January 2020, just prior to the onset of the pandemic, to June 2020, imports of essential medical goods to the U.S. increased by 215%, while U.S. exports of these goods increased by only 9.4%, according to data from the St. Louis Federal Reserve Bank.
But even with such a dramatic rise in imports, which also increased the trade deficit, the healthcare providers who needed these medical supplies couldn’t get them because of disruptions in the supply chain.
“Even when the supplies got here, they sometimes sat in the ports for months and months until the delivery trucks could get to them because people weren’t driving during the shutdowns,” Dudley recalled. “It was a real eye-opener for many.”
Now, the industry is looking for onshore medical supply companies to provide the goods they need, which will take some of the disruptions out of the supply chain, he explained. One BOK Financial client recently made a strategic investment in a manufacturing company producing essential latex products, like medical gloves and IV bags, in the U.S.
Manufacturing medical care supplies in the U.S. might be slightly costlier than manufacturing them overseas in places like China, but it’s also more dependable, Dudley noted.
“I think the certainty of delivery versus a little more in price may be something providers are willing to take on the chin.”
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