Chicago-based CommonSpirit Health’s third quarter financial results highlight the persistent strain inflation poses on not-for-profit hospital balance sheets, with cascading effects on borrowing plans and operational strategies.

The sector’s struggles have led to calls in Illinois to increase the Medicaid hospital reimbursement rate and at the federal level advocacy groups say more support is needed.

Inflation joined supply chain struggles, wage pressures, and the labor shortage — most acutely felt with nursing staff — last year as the most burdensome strains dragging down margins and the recovery from COVID-19-inflicted financial stress in 2020.

Inflation is moderating and signs point to further easing. Hospitals are also finding better methods for keeping costs in check, but the toll is still being felt as the latest quarterly results from one of the largest not-for-profit systems underscore.

“Our financial results for Q3 year-to-date are not as good as last year due to the same financial challenges we experienced in the prior quarters. These headwinds are the same challenges being experienced by other health systems, such as the impact of rising inflation” and labor shortages, Benjie Loanzon, senior vice president of finance and corporate controller, said in an investor call Monday.

The system reported operating revenues of $8.57 billion and operating expenses of $9.08 billion compared to $8.52 billion of revenues and $8.98 billion of expenses for the third quarter last year. A $508 million loss brings to $1.2 billion losses reported in the first three quarters of fiscal 2023 compared to $509 million last year.

Health systems are feeling the strain of inflation most acutely in labor and materials, advisory firm Kaufman Hall said in its National Hospital Flash Report that pulls data from more than 900 not-for-profit and for-profit hospitals and systems from Syntellis Performance Solutions.

Non-labor expenses including drug and supply costs rose by 6% in March from the previous month. “Despite increased provider productivity and revenues, inflation continues to burden hospitals and health systems but some improvement in margins provides evidence that hospital leaders are managing to navigate high expenses and economic pressures,” the report said.

The median year-to-date operating margin index for hospitals was relatively flat in March but did show some slight improvement from February. That stability is fragile with margins below pre-pandemic levels and at risk if a recession takes hold or a public health emergency emerges, Kaufman Hall said.

Physician and provider volumes are on the rise as patients seek out care that had been put on hold during the pandemic. Outpatient volumes remained strong in March but workforce shortages still pose a drag on hospitals’ ability to treat patients admitted to their institutions.

“While it appears that hospital finances are stabilizing, that doesn’t mean that all is well,” said Erik Swanson, senior vice president of data and analytics with Kaufman Hall. “Under the seemingly calm surface, there are significant challenges — especially labor shortages and diminished margins — that could quickly reach the surface should another crisis arise.”

Expenses last year recorded double-digit hikes compared to pre-pandemic levels with the impact cutting a wide swath from the workforce to drugs, medical supplies, equipment and services, the American Hospital Association said in an April 20 special report laying out the sector’s woes.

Overall hospital expenses increased by 17.5% between 2019 and 2022 which outpaced Medicare reimbursement rate increases of 7.5% during the same period.

Labor costs, which on average account for about half of hospitals’ total budget, increased 20.8% between 2019 and 2022. For the first time in history, the median price of a new drug exceeded $200,000 and the price increases for existing drugs exceeded inflation at 19.7% from 2019 to 2022, the AHA report said.

Hospital supply expenses per patient increased 18.5% between 2019 and 2022 with emergency services supplies like ventilators, respirators, and other critical equipment shooting up 33%. Service expenses rose 18% between 2019 and 2022.

“Rising costs for drugs, supplies, and labor coupled with sicker patients, longer hospital stays and government reimbursement rates that do not come close to covering the costs of caring for patients have created a dire situation for hospitals and health systems,” Rick Pollack, the association’s president, said in a statement.

The group’s federal agenda includes seeking additional Medicare and Medicaid funding and reining in drug costs. The group is also pursuing a policy to create a “trigger” that would provide additional Medicare funding to hospitals when they experience an extraordinary inflationary environment or other extraordinary circumstance, like the COVID-19 pandemic.

Given the current economic landscape, hospitals and health systems face a reckoning that requires restructuring, Kaufman Hall said in a May 13 special commentary.

The report notes that while it appears the worst of the recent banking crisis has passed and the COVID-19 public health emergency is officially over, inflation persists and there’s fear of a U.S. government default as Republicans balk at raising the debt ceiling.

“Healthcare needs a ‘makeover’ to align with post-COVID realities as margins remain well below historical norms. Where we are is not sustainable and waiting for things to return to how they used to be is a rapidly decaying option,” wrote author Eric Jordahl, a managing director who directs Kaufman Hall’s treasury & capital markets practice. “The journey of transforming operations is going to require very careful planning about how to size, position, and deploy liquidity, leverage, and investments.”

Borrowing remains down as systems weigh their capital needs against balance sheet and rating impacts and higher borrowing costs amid higher interest rates.

“Healthcare financings that came in the past couple of weeks generally did well,” the report said. “Maturities seemed to do better than put bonds, and it remains important to pay attention to couponing and how best to navigate a challenging yield curve. But these are episodic indicators rather than trends, given that the scale of issuance remains muted.”

The sector’s struggles have led to calls for higher Medicaid hospital reimbursement rate increases for the first time in 28 years in Illinois, but the clock is ticking.

“Illinois hospitals are in dire financial distress with soaring expenses and below-cost Medicaid reimbursement,” the Illinois Health and Hospital Association says.

The state legislature’s regular spring session was slated to end last Friday but has been extended through at least this week with the primary task of passing a fiscal 2024 budget still unfinished.

“Hospitals are struggling to absorb labor and supply chain costs, which have increased upwards of 20%. Those higher costs are now permanently embedded into the cost of providing care,” Illinois Health and Hospital Association President A.J. Wilhelmi and Chicagoland Chamber of Commerce President Jack Lavin wrote in a commentary published in the Chicago Sun-Times Friday.

“Without additional state support to help offset those new costs, hospital leaders say the consequences will be impactful and affect delivery of care,” the group wrote.

Government program reimbursement rates for Medicare and Medicaid, which provide health care coverage for well over half of all patients being cared for at Illinois hospitals, fall short of fully paying for care with Medicaid program reimbursement rates estimated at 80%.

Illinois ranks 48th in Medicaid spending per enrollee, while it’s the single largest insurer in Illinois covering three in 10 individuals compared to one in 10 in 1995. Senate Bill 1763 would provide a 20% across-the-board increase to Medicaid base rates.

The Illinois Primary Health Care Association is advocating for increased funding Medicaid payment rates for patients’ medical, dental, and behavioral health needs in Senate Bill 1888 and House Bill 2298. Half of the estimated $100 million cost would be borne by the federal government, the group said.

At CommonSpirit, the system’s widely publicized cybersecurity breach last October also dragged down results for the fiscal year with a $160 million price tag so far. Loanzon said the system expects to recoup much of the loss from insurance.

The system benefitted from overall strong volume growth with admissions up 9% over last year, but a decline in revenue per adjusted admission and continued rising costs and labor shortages made their dent. Supply side expenses did improve from the same time which the system attributed to various initiatives.