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Technology, new discoveries, demographics, regulatory factors, and new models of care keep the healthcare industry in a constant state of fluidity. The United States spends $4.3 trillion a year on healthcare expenses and the U.S. hospital facilities market size is expected to reach $2,540.4 billion by 2030 and to expand at a compound annual growth rate (CAGR) of 7.62% over the forecast period.
Importance of Cost Management in Hospitals
Hospitals need to manage expenses and revenues to remain operationally efficient. The pandemic has put high pressure on costs whilst driving revenues down. With elective procedures cancelled or postponed and hospital visits restricted to only necessary ones, hospitals hemorrhaged revenue making cost control vital.
Breaking Down the Different Hospital Expenses & Costs
Hospital costs breakdown can be broadly categorized into labor, capital, administrative, operating costs, nursing services, and professional services.
Wages, Benefits, and Labor Costs
While percentages vary from hospital to hospital, across the board the biggest expense for hospitals are wages and benefits which on average account for 56% of the total expense of a hospital. It is nearly 5 times more than any other category, with the second largest expenditure being professional fees at 11.9%.
Wages and benefits costs are further expected to rise largely stemming from the effects of the COVID-19 pandemic. Doctors and nurses have left the healthcare system due burnout or illness and as a result, labor costs have risen and forced hospitals to sustain services through expensive contract labor. Compared to pre-pandemic levels, hospitals saw their expenses for travel nurses increase tenfold. An article by Healthcare Dive stated that one third of nurses are expected to quit their jobs by the end of 2022 due to burnout caused by the pandemic and the stress being put on them with increased demand for their services. In the next decade, the United States will be short of nearly 122,000 physicians by 2032 according to 2019 data published by the AAMC (Association of American Medical Colleges).
The next decade will bring additional challenges as demographics indicate that by 2029, more than 71 million Americans will be 65 or older while roughly one million registered nurses are already more than 50 years old. Thus, in the next 10 to 15 years, one-third of today’s nursing workforce will reach retirement age. Nearly 700,000 nurses are projected to retire or leave the labor force by 2024 at a time when the need will be higher.
By 2025, estimates indicate that more than three million nurses may be needed to care for the population, however, the national supply of nurses is projected to only reach 2.8 million by 2025 leaving a gap of 250,000 nurses. This shortfall between supply and demand is expected to drive additional wage increases in future years.
Overall, these factors will therefore continue to keep the wage and benefits category the highest cost and largest challenge for hospitals.
Areas such as information technology (IT), non-clinical and clinical purchased services and supplies, laboratory, and pharmacy costs represent up to 60% of hospital operation expenses.
Supply Costs
One major cost head is supply including medical devices. Supply costs include products such as medical equipment, laboratory supplies, machinery, operating tables, linens, food, wound dressings, and intravenous solutions. On average, these expenses make up 15% of total expenses but can go as high as 30-40% in surgery-intensive hospitals. While these products are necessary to hospitals, research has shown that hospitals spend on average an excess of $12.1M on supply-chain costs. The pandemic added additional items to the supply list. According to an article by Fierce Healthcare, hospitals have spent more than $3 billion on PPE kits from the beginning of the pandemic.
Hospitals in the US rely on global supply chains especially in the medical supplies category. Everything from masks to devices come from across the globe. Previously established relationships and contracts with distributors are disrupted with supply chain issues with factories and vendors shutting down operations. Consequently, hospitals have had to readjust systems leading to price escalations. Between fall 2020 and early 2022 costs for energy, resins, cotton, and most metals surged more than 30%; these all are critical elements in the manufacturing of medical supplies and devices used every day in hospitals. Global events such as the war in Ukraine, lockdowns in China and rising transportation costs continue to have fuel these cost increases and delays in deliveries. According to the Health Industry Distributors Association, transportation times for medical supplies are 440% longer than pre-pandemic times.
Specialist Fees
The next large cost center impacted is professional fees which are linked with specialists that usually run private practices but are attached to hospitals to provide expert opinions on specific medical cases, teach residents, and work at clinics. These fees are also often associated with doctors within the hospital that are specialized in fields such as anesthesiology, radiology, or pathology.
Technology Costs
An emerging cost area is technology with hospitals needing to constantly invest in newer digital health technology to ensure their patients get the most adequate care, especially with the new norm being virtual checkups and an increased demand for telehealth. Beyond that, while technology investments could be expensive, long-term efficiencies could help control costs. Emergent technologies such as robotic automation could help innovate and manage costs.
The Future of Hospital Costs
In conclusion, expenses will continue to exert pressure on hospital margins. Hospital administrations have a challenging decade ahead of them and they will need to consider strategies to optimize labor costs, reduce fixed costs and invest in new technologies to gain efficiencies.
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