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Rising Labor Costs Push Down Oregon Hospital Profits

The hospital association reports its members earned 1.1% in profits overall despite surging costs and reductions in elective procedures, with rural areas performing best.
January 6, 2022

Rising labor and other costs continued to squeeze the finances of Oregon hospitals in the quarter that ended Sept. 30, leaving nearly half with operating losses for the period, the state’s hospital association said Thursday.

Median operating profits for the quarter were 1.1% at the 62 hospitals represented by the Oregon Association of Hospitals and Health Systems. That’s down from just under 4% in the second quarter and under 2% in the first quarter.

The state’s large urban hospitals were much less profitable than rural hospitals, reporting a median operating loss of 2.3% for the quarter, compared to a median 4.4% profit for rural hospitals, the association reported. Forty-five percent of the hospitals represented by the association had operating losses for the quarter, the association said.

The quarterly operating results are closely watched as the state’s hospitals — almost all of them nonprofits — juggle rising employee pay and benefit costs along with high caseloads of COVID-19 patients and lower volumes of elective surgeries.

The third-quarter numbers are worse than the first two of 2021, but not as bad as they could have been. Hospitals have been complaining of a surge in third-quarter labor costs for months as the delta variant spread.

And the state has contracted with several companies to provide temporary emergency workers to understaffed hospitals, authorizing more than $280 million so far, to be reimbursed by the federal government.

 The quarterly financial results for the hospitals don’t reveal the totality of hospital system finances, because they don’t include the growth and profits of the massive investment portfolios held by many hospitals’ parent health systems. For example, the seven-state 52-hospital Providence St. Joseph Health system — with eight hospitals in Oregon — reported that while operating revenues were up for the third quarter, so were operating costs, leading to a system-wide operating loss of $405 million. But the system reaped $953 million in non-operating revenues, mostly growth in its $12 billion long-term investment portfolio, leading to a net profit of $548 million for the quarter, according to the quarterly financial report Providence releases to the public. Providence’s results underscore the importance of investment portfolios in backstopping hospital operations that might be temporarily losing money.

Similarly, in November, the Fitch bond rating agency in November didn’t express much concern about the Oregon Health & Science University’s financial health. Fitch renewed OHSU’s AA bond rating, noting that OHSU has $2.1 billion in unrestricted financial reserves. Fitch predicted a “continued rebound in operating” profits for OHSU.

Still, the data released by the hospital association suggests many hospitals continue to seek firm financial footing after being buffeted by the delta surge and now, the omicron variant.

“Hospitals have been under pressure from COVID for nearly two years,” said Andy Van Pelt, CEO of Appraisal Health Insights, the data analysis arm of the Oregon hospital association. “We are still facing major challenges just as the omicron variant has led to sobering projections for the new year.”

Omicron hospitalizations in Oregon will accelerate this month, OHSU projected in late December.

Oregon COVID hospitalizations will likely peak at about 1,650 people by the end of January, concluded  Peter Graven, director of OHSU’s office of advanced analytics, in a Dec. 31 report. After that, hospitalizations will fall rapidly as the virus finds fewer people who have not been recently infected or vaccinated, he said.

Hospitals are being hammered by higher labor costs, including the cost of hiring traveling temporary nurses to handle COVID caseloads, Van Pelt said.

“Traveling nurse expenses, which has some hospitals paying up to 700% of the hourly rate for staff nurses, are just one of the factors,” he said.

Oregon hospitals’ total payroll and employee benefits has risen 19% over the past three years, Van Pelt said. The rise is driven in part by agreements with labor unions that include annual cost of living and step increases.

“Other labor costs such as purchased services for housekeeping and facility management,” are also rising rapidly, Van Pelt said. The expense for Oregon hospitals of hiring contractors for housekeeping, information technology and other similar services has risen 18% in the past three years, he said.

Statewide, net hospital revenues from caring for patients are also rising, from $3.2 billion in the first quarter of 2019 to an estimated $3.7 billion in the third quarter of 2021, according to data from the hospital association. But operating expenses have outstripped net patient revenues in almost every quarter since the start of the pandemic, the data show.

The financial results of Oregon hospitals historically have fluctuated greatly from quarter to quarter and year to year, driven by factors ranging from the economy to expansion of Oregon Health Plan coverage.

In 2016, for example, Oregon hospitals’ cumulative profit margin was 5.3% in the second quarter, but plunged to a 0.4% loss in the fourth quarter. In the fourth quarter of 2018, the hospitals had a median operating loss 1% loss, but that rebounded to a nearly 6% profit two quarters later.

The quarterly financial results for each Oregon hospital are gathered by the Oregon Association of Hospitals and Health Systems and its for-profit data subsidiary, Apprise Health Insights. They release their analysis and also forward the individual hospital financial data to the Oregon Health Authority. The state agency then produces its own analysis and also posts individual hospital data to its website. The state has not yet produced its third-quarter analysis or posted the data to its website.

Oregon hospitals had previously reported a profitable first half of 2021 — although profit levels remained below their five-year average — and their revenues exceeded pre-pandemic figures in that period.

In the second quarter of 2021, Oregon hospitals posted an average operating margin, or profit, of 3.4% — $137 million statewide — according to an Oregon Health Authority report. That’s below the five-year average of about 4%. 

In the first quarter of 2021, Oregon hospitals reported an aggregate profit of $73 million, or a 2% profit rate.

(Ben Botkin contributed additional reporting for this story)

You can reach Christian Wihtol at [email protected]