High labor costs hitting hospitals as physicians generate less revenue

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Hospital and health systems’ finances have remained stable in the last 12 months, but high labor costs continue to challenge the bottom line, according to the latest Kaufman Hall National Hospital Flash Report, with data through September, and Physician Flash Report, with data for the third quarter of 2024.

The Physician Flash Report found that labor expenses from physicians and other providers accounted for the vast majority (84%) of medical groups’ total expenses. The median investment, or subsidy, per employed physician was $304,312, while provider and physician compensation per full-time employee each increased by 3% compared to a year earlier, according to the report.

“Investment/subsidy per physician rose above $300,000 for the first time—a sign that current models of physician employment are not sustainable,” said Matthew Bates, managing director and Physician Enterprise service line leader with Kaufman Hall, in a statement. “Revenue is increasing but physicians and providers are working more while generating less revenue. Health systems need to rethink operations to align the costs of provider employment with the current health care environment.”

Hospital financial performance continued to show signs of stabilization in September, according to Kaufman Hall’s analysts. Though most indicators in this month’s National Hospital Flash Report, including volume and operating margin, show a slight decrease from the previous month’s data, performance remained relatively stable overall.

“Two data points to monitor in the months ahead are inpatient revenue and average lengths of stay,” said Erik Swanson, senior vice president and Data and Analytics group leader with Kaufman Hall, in a statement “Both metrics increased this month, which indicates that hospitals are treating more high-acuity patients. If this continues, organizations will need to contain expenses.”

Outpatient revenue slightly declined and inpatient revenue increased, further highlighting the shifted balance towards more intensive inpatient care.

The data comes from Kaufman Hall’s National Hospital Flash Report, which draws on data from more than 1,300 hospitals from Syntellis Performance Solutions, now part of Strata. The Physician Flash Report draws on data based on more than 200,000 providers, also from Strata.