The Financial Tempest Facing U.S. Health Systems

By: David Hagee, Chief Investment Officer and Scott Arnold, Institutional Business Development Officer
September 29, 2022

Analysts believe the healthcare industry will feel financial aftershocks from the COVID-19 pandemic for years. That is likely to be the case for hospitals and health systems, where recovery from the pandemic’s impact on revenue, margins and days cash on hand is a top priority. Factor in the current scenarios of the highest inflation rate in 40 years and increased market volatility, and hospitals and health systems face significant financial headwinds.

Healthcare Tempest
Consider the following:
● Patient volumes have increased over the past couple of years, but still lag 2019 levels.1
● Through 2021, more than a third of hospitals maintained negative operating margins.2
● Health system administrators face daunting financial and operational pressures from rising labor costs and elevated supply expenses, resulting from the high inflationary environment.

Change in Healthcare Expenses

Surgical services are an important revenue stream for health systems. Effective scheduling and resource management remain essential to optimizing elective procedures. Still, most elective procedures were suspended in March 2020 as hospital beds were prioritized to treat COVID patients. How much did that impact revenues? A study from the American College of Surgeons reported a single university health system lost 42% of its net revenues for five months due to a two-month postponement of surgical services at the beginning for two months during the first wave of the pandemic.3

Fast-forward to today: while the volume of elective surgeries at health systems has increased, the overall caseloads of these types of procedures still fall short of pre-pandemic levels.

To further illustrate the operational challenges many health systems face, let’s look in greater detail at two of the main drivers of tighter budgets: inflation and labor. While rising labor costs have been trending for several years, the recent surge in inflation to near double-digit rates has triggered significant increases in health system spending.

Over a two-year period — March 2020 to 2022 — the costs for supplies increased nearly 10% on a per-patient discharge basis, which is a key measure for health system volume.4 But unlike other industries that can raise prices to offset risings costs associated with higher inflation, health systems are governed by fixed reimbursement rates with payors. So, there are no immediate inflationary adjustments to be made, which further squeezes the margins of these organizations.

Still, health system CFOs identify labor as one of the most challenging areas of operation to meet cost containment or revenue goals.Hospital labor expenses nationally have increased by one-third over the past two years. In addition, contract labor as a percentage of total labor expenses has soared more than five times in comparison to pre-pandemic levels. As of March 2022, the median wage rate for contract nurses was more than three times greater than employed nurses.6

Commerce at a Glance

Staffing shortages were a critical challenge for health systems prior to the pandemic and have become even more dire over the past two years. According to the Missouri Hospital Association, the job vacancy rate in hospitals across the “Show Me” state topped 20% in 2021. This year, that gap is expected to widen to 25% across all hospital medical disciplines, including doctors, respiratory therapists, dieticians and medical assistants.7

These challenges and the current economic landscape carry significant importance for the investment and treasury management capabilities of health systems across the U.S. One thing is certain: the need for effective cost management will remain constant, and healthcare leaders will look to outside advisors for help to achieve it.

At Commerce Trust Company, we seek to be a true finance partner with the hospital and health system clients we serve. Whether it’s acting in a fiduciary capacity or managing an investment portfolio, we strive to deliver immediate value to the healthcare organizations with which we collaborate. We understand and share the commitment these organizations have to the employees, patients and communities they serve.

For more information, contact our Institutional Specialty Healthcare Group at 314.746.3768 or CTChealthcare@CommerceBank.com.

1 Commerce Healthcare®, “Healthcare Financial Trends for 2022,” e-Book, December 2021.
2 Commerce Healthcare®, “Healthcare Financial Trends for 2022,” e-Book, December 2021.
3 American College of Surgeons, “Hospitals sustained huge financial losses from lost revenues during COVID-19 pandemic as patients lost timely access to
surgical services,” news release, Oct. 23, 2021.
4 The Health Management Academy, “Leading Health Systems Financial Outlook,” article, June 2022.
5 The Health Management Academy, “Leading Health Systems Financial Outlook,” article, June 2022.
6 Kaufman Hall, “The financial effects of hospital workforce dislocation,” National Hospital Flash Report special edition, May 2022.
7 Stateline, an initiative of The Pew Charitable Trusts, “Health worker shortage forces states to scramble,” article, March 22, 2022.
Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of September 7, 2022. This summary is intended to provide general information only and is reflective of the opinions of Commerce Trust Company. This material is not a recommendation of any particular security, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Commerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situation.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability
cannot be guaranteed.
Diversification does not guarantee a profit or protect against all risk.
Commerce Trust Company does not act as a “municipal advisor” within the meaning of Section 15B of the Securities Exchange Act and does not offer advice or recommendations concerning bond proceeds or other municipal advice subject to this section.
Commerce Trust Company is a division of Commerce Bank.

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ABOUT THE AUTHOR

David Hagee Senior Vice President, Chief Investment Officer Commerce Trust Company
David is the chief investment officer for Commerce Trust Company and of Commerce Investment Advisors, Inc., the SEC-registered advisor to the Commerce Funds mutual fund complex. Upon gaining a thorough understanding of a client’s needs and goals as well as assessing the client’s entire financial situation, he works with our investment research team to construct a portfolio to help clients achieve their long-term goals.

David has been with Commerce Bank for 23 years. During which he worked as a portfolio manager with private and institutional clients before becoming the director of portfolio management for the eastern region. 

David earned his Bachelor of Arts from Washington University in St. Louis. Additionally, he is a member of the CFA Institute and the St. Louis Society of Financial Analysts as well as a board member and Treasurer of Aim High St Louis. He serves as the President of the Investment Committee of the Center of Creative Arts (COCA) and serves on the investment committee of Forest Park Forever and the International
Institute.