State healthcare cost caps could further pressure hospital operating margins: report

Policies in several states have limited provider rates and levels of reimbursement, as well as constrained operating flexibility, according to Fitch Ratings.

Article By: Susanna Vogel

Blog Source From : https://www.healthcaredive.com/

Dive Brief:

• State-specific caps on how much health systems can increase patient and payers fees could compress nonprofit hospitals’ revenue and reduce operating margins at a time when the sector is already struggling with expense pressures, Fitch Ratings said in a report issued last week.
• Connecticut, Maryland, Massachusetts, Nevada, New Jersey, Oregon, Rhode Island and Washington have already established caps for price increases, which Fitch says has limited provider rates and levels of reimbursement and constrained operating flexibility.
• The state efforts come amid a nationwide push to lower healthcare costs, including government initiatives reducing surprise billing and negotiating prices of certain prescription drugs.

Dive Insight:

While patient volumes have largely recovered since the COVID-19 pandemic, inflationary pressures and a hot labor market have driven up operating costs for nonprofit health systems, causing median expense growth to outpace median revenue growth in fiscal year 2023, according to Fitch.

The rise in healthcare provider costs contrasts with other services industries, where the services producer price index — an indicator that tracks price trends in the services sector — has steadily declined since 2022 highs.

In healthcare, PPI is still trending higher than pre-pandemic levels for both inpatient and outpatient care, mainly due to increased labor costs, according to Fitch.

Labor can now account for as much as 60% of hospital expenses, according to the report. Despite providers’ efforts to cut labor costs, pressure is unlikely to abate in the short-term as the job openings rate sits at more than double the pre-pandemic average and year-over-year wage growth remains elevated. 

State policies that tie healthcare cost increases to economic indicators — rather than the cost of care — could further pressure health systems’ operating margins, possibly resulting in service cuts, Fitch said.

Delaware, for example, is considering a policy that would limit healthcare price increases to 2% in 2025 and 2026, while California recently approved a 3% cap that will be phased in over five years, according to the report.

Health systems have few options to manage rising costs besides passing on some of the expense to consumers, the report said.

States are also considering policies that monitor healthcare consolidation and affiliations, which Fitch says could restrict the ability of health systems to navigate evolving markets.