Injection of Innovation Required to Recover Hospital Margins

By Greg Flanagan, COO

Hospitals are being squeezed by the dual forces of soaring costs and limited revenue growth, resulting in extreme pressures on margins. For the first three months of the year, median hospital margins were negative, according to Kaufman Hall. This is being felt at both nonprofit and for-profit operators. With limited opportunities to increase revenue, hospitals need to take an innovative approach to cutting costs and increasing efficiencies in order to restore margins.

Inflation hit the hospital industry early, and hard. This was primarily driven by labor costs, which are up  by more than a third from pre-pandemic levels and much of this comes from the increased use of contract labor to make up for staff shortages and departures. Contract labor grew fivefold as a percentage of total hospital labor costs during the pandemic. During the pandemic, hospitals were forced to use staffing agencies to fill vacant positions. Many of the contract labor staff were “travelers,” earning on average three times the amount of in-house staff. As a result, hospitals also increased hourly rates and pay bonuses to staff nurses in order to fill shifts.

Faced with these increased costs, hospitals are looking for ways to boost revenue from all sources. They will not find much help from the federal government, the biggest payor for healthcare services. The pandemic funds benefitting hospitals have ended and the Centers for Medicare & Medicaid Services (CMS) is unlikely to increase its fee schedules significantly. That leaves commercial insurers. According to the Wall Street Journal, hospitals are asking insurers for price increases of 7.5-15 percent – a big jump from the 4-6 percent increase requested in a “typical” year. Insurers are balking, and negotiations will likely be heated going forward with no windfall for hospitals highly likely.

With cost pressures and limited revenue growth opportunities, hospitals will need to get creative to restore margins.

Surgical Staffing Provides an Opportunity for Innovation

Surgeries are one of a hospitals’ primary sources of profitable revenue, so it may not be one of the first areas examined for cost savings. However, innovative approaches to staffing these surgeries offer an opportunity to not only lower costs, but also increase revenue by making the OR more efficient and productive.

At AP Health, we provide Advanced Practice Providers to assist in surgeries for dozens of hospitals and surgery centers. Our model, which has been proven over the past eight years, reduces hospitals’ administrative and labor costs while improving OR productivity, which increases operating revenue.

When a hospital contracts with AP Health for surgical assist staffing, we assume the responsibility to handle all the recruiting, credentialling, scheduling, management, and billing of surgical assistants. This relieves hospitals of many administrative duties, which in turn lower their costs. Because surgical assistant staffing is the focus of our business, we perform these duties more efficiently than those managing a variety of staff positions. We typically provide this service to hospitals at a cost well below what the hospital would incur with in-house staff. 

Some hospitals have been reluctant to consider outsourcing surgical staff, mistakenly believing that it provides less stability in the operating suite. The truth is that OR volumes fluctuate significantly from week to week, which often means there are either too many or too few surgical staff for the cases of the day. If the OR is overstaffed, overhead negatively impacts margins. If it is understaffed, the providers suffer burnout and leave. AP Health assigns staff based on the surgical volume, ensuring the OR is optimally staffed.

Outsourcing surgical staffing may not be the final solution to the financial pressures hospitals face today; however, I can assure you that we save our hospital clients an average of 25-50 percent of what they had been spending previously on employing/managing Advanced Practice Providers. As a result, I believe that outsourcing surgical staff can be an injection of innovation for hospitals to help them recover profit margins.