Most of Washington's Hospitals are In the Negative. What Does This Mean for CFOs?

"This level of losses is unprecedented," says WSHA's CFO.

Hospitals in Washington state are facing unprecedented financial challenges, with significant operating losses and negative margins, says the Washington State Hospital Association (WSHA).

A study conducted by the association reveals that in the first six months of 2023, the state's hospitals collectively reported operating losses of nearly $750 million, representing a -4.6% operating margin.

This trend carries important implications for hospital CFOs not only in Washington state but across the country as it underscores the ongoing financial struggles that hospitals face across the country.

So, what is behind the struggling finances for the state’s hospitals, and what lessons can CFOs across the country learn? Luckily there are a few key trends from this report that all CFOs can focus on.

Expenses, expenses, expenses.

The study highlights that a substantial increase in expenses is one of the key drivers of these losses in Washington state, with expenses rising by 10% year over year. Hospital CFOs nationally should be aware of the impact of rising costs related to supplies, equipment, medications, and labor expenses.

"We are working closely with our suppliers to make sure they understand that we need to push back on cost increases, and they need to find ways to take cost out," Sam Banks, chief procurement officer and vice president of supply chain at Indiana University Health, told HealthLeaders. "In some areas and contracts, we have protection against inflation or at least a cap on prices. That has saved us in quite a few situations."

He added: "I am a firm believer that the better we understand how their products are made and their input costs, the better our ability is to push back on cost increases."

When it comes to labor, CFOs need to be particularly mindful of the wage pressures on the labor front. In Washington state, employee compensation has increased by an average of 8% per employee when comparing the first six months of 2023 to the same period in 2022.

In fact, Matt Minor, CFO of Columbia County Health System located in Washington state, recently shared with HealthLeaders that labor is his largest expense.

“Even before the pandemic, it was the number one issue. That has always been the highest cost. Before the pandemic, it was a problem that was somewhat unique to rural providers because there is just a smaller percentage of the population that wants to live there,” Minor said.

“Our closest major city is 45 minutes away by car. The next one from that is an hour away. So, it takes a lot to get people to want to come and live in Dayton. Then after the pandemic, when you have a much smaller pool to work with, it becomes even more difficult. So that has absolutely been our single greatest financial hurdle over the last few years,” he said.

This increase in labor expenses, coupled with challenges in recruiting and retaining staff, is significantly straining hospital budgets.

Non-operating revenue is not a sustainable solution.

The study notes that non-operating revenue, which includes investment income and COVID-related funds, helped reduce the overall losses. However, CFOs know that non-operating revenue is not a reliable or a sustainable solution for achieving positive operating margins in the long term.

“Investment income is not reliable and it is critical that operating margins are positive for long-term sustainability of hospitals in our state,” Eric Lewis, WSHA’s CFO reiterated in a statement.

“85% of the organizations responding to our survey had a negative margin. This level of losses is unprecedented,” Lewis said.

There’s a spotlight on the importance of cost control.

The study also emphasized the importance of cost control measures, including cuts in services and reductions in the use of contract labor. Luckily, HealthLeaders has seen that CFOs across the country are already considering similar strategies to manage contract labor expenses effectively.

The losses and negative margins in these Washington state hospitals emphasizes the financial challenges faced by healthcare organizations across the country—and highlights the fact that CFOs have a mountain to climb in 2024.