Healthcare providers across all professions have faced tightening profit margins in recent years. Rising operational costs have coincided with stagnating— or even declining— revenues, squeezing margins for small private practices and large hospital systems alike. Let’s figure out what the heck is going on…
Rising operating costs
It’s normal for the cost of doing business to increase over time. Our expenses have traditionally increased along with inflation, say about 2% annually. But the past several years have seen general inflation much higher than 2%, and healthcare operating costs have at times spiked even higher than whatever general inflation did that year. The two most notable expenses have been labor and supplies.
Labor
This is the biggest factor, by far. Between 2014 and 2023, hospital employee compensation rose 45%, compared with a 28% increase in general inflation in the same period (source). The COVID pandemic exacerbated the problem with some reporting a 17% increase in labor comparing immediate pre- and post-pandemic (source). In 2022, over 46% of dentists reported that their staff wages had increased by more than 10% in the past 12 months (source).
Why? Part of the answer is that the workforce is feeling the effects of general inflation and requesting higher wages. Another reason is that some members of the workforce have seen significant shortages, like nurses and dental hygienists (I wrote about that here). Shortages mean wages become even more competitive to attract a smaller labor pool and also means paying more for temporary workers.
Supplies, Drugs, and Equipment
Prices for clinical supplies and pharmaceuticals have climbed steeply. Hospitals saw drug expenditures per patient rise 19.7% between 2019 and 2022, and medical supply costs per patient rose 18.5% (source). Again, these increases far outpaced general inflation. Dental practices experienced similar inflation – by Q3 2022 nearly 95% of dentists said their supply costs had increased and 82% saw lab fees rise (source).
Flat or falling insurance reimbursement
While costs climbed, provider revenues have not kept pace. What’s troubling is that insurance payments have not only not kept pace with rising costs, in many instances they have remained flat or even decreased.
For hospitals, Medicare and Medicaid reimbursements significantly lag cost growth. Between 2019 and 2022 overall hospital expenses rose 17.5%, more than double the roughly 7.5% increase in Medicare inpatient payment rates (source).
Private insurers have also been slow to raise payment rates. In 2022, 60% of dentists reported reimbursement rates were flat and 25% said they actually decreased (source). It hasn’t gotten better. In 2024, 58% of dentists cited flat/decreasing reimbursement rates, denied claims, and delayed payments as a major concern in their practices (source).
Effects of the squeeze
Aggregate hospital operating margins fell from 8.9% in 2021 to just 2.7% in 2022, rebounding a little bit to 5.2% in 2023 (source). 39% of hospitals had negative margins in 2023, with more rural, Medicaid-dependent hospitals being disproportionately affected. I feel like I’m seeing almost weekly updates from Becker’s about hospital closures. One study estimated that 45% of New York rural hospitals were at immediate risk of closure within the next 2-3 years (source). This should be making headlines.
Naturally, provider compensation is also taking a hit. Hospitals and larger healthcare systems are paying more in labor costs, but the money is going toward efforts like tackling staffing shortages, one-time signing bonuses, and temporary workers. Full-time providers are getting modest raises, but those raises aren’t keeping up with inflation. Primary care doctors saw ~4.4% pay growth in 2022, versus 6.5% general inflation (source). ADA surveys found average net income for general dentists fell ~17% from 2021 to 2023 (source).
Okay, now what?
The ongoing profit margin squeeze in healthcare is likely to drive continued consolidation, as independent practices struggle to stay afloat and hospitals seek scale to manage rising costs. Staffing shortages may persist, leading to increased burnout and further reliance on costly temporary labor. Without policy changes, I think we can predict that reimbursement rates will continue lagging behind inflation, exacerbating financial stress for providers.
If we’re going to see this turn around, healthcare organizations must work together to advocate for sustainable reimbursement models, address workforce shortages with fair compensation, and reduce other line items on our P&Ls (e.g. admin costs).