The two years from the third quarter of 2005 to the third quarter of 2007 (Q3 2005-Q3 2007) saw a rapid increase in median hospital expense per discharge (wage index and case mix adjusted), with increases in nonlabor expense (5.8 percent) outpacing increases in nonprovider labor expense (3.7 percent). From Q4 2007, the start of the recent recession, to Q2 2012, hospitals reined in their major costs: Median nonlabor costs per adjusted discharge increased by 1.8 percent, on average, during this time, and nonprovider labor cost increased by only 0.1 percent. 

The astonishing slowdown in nonprovider labor expense per discharge (case mix and wage index adjusted) resulted from a combination of increasing patient acuity, fewer hours worked per patient day, shorter average length of stay (LOS), and smaller percentage overtime hours. Most supply and other nonlabor expenses are relatively unaffected by shortened LOS or hours worked. Median supply expenses per discharge, including drugs, increased at a 1.7 percent annual rate and other operating costs increased at a 2.0 percent rate. As a result of these trends, median hospital labor expense as a percentage of operating costs decreased from 48.7 percent in Q4 2007 to 46.3 percent in Q2 2012.

Exhibits 1-3

Data Trends Exhibits

Data for this analysis were developed by Truven Health Analytics from the ACTION OI hospital database. The analyses use quarterly financial data (Q3 2005 through Q2 2012) only for general acute care community hospitals. The quarterly samples have, on average, 499 reporting hospitals. Expenses per adjusted discharge include both inpatient and outpatient operating expenses and exclude nonoperating expenses. Each expense is divided by adjusted discharges, where adjusted discharges equal the number of patient discharges multiplied by the ratio of total revenue to inpatient revenue. Each average is divided by an all-payer hospital case mix index to adjust for changes in patient acuity. Labor expense is divided by the hospital area wage index to adjust for differences in labor expenses between hospital market areas. Hospital responses are weighted to reflect the national distribution of hospital characteristics such as region and hospital class (major teaching, teaching, large, medium, small community). For more information, email David Koepke, PhD.

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