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Rising Costs, Inflation Squeeze Physician Margins

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Rising inflation and operating expenses are strong headwinds against a slow post-pandemic recovery, signaling tough financial times ahead, particularly for physician-owned practices, according to two industry reports.

Only 60% of medical practices hit their revenue goals in 2021, according to one report, and while revenues rose in the first two quarters of 2022, rising inflation and staff costs chipped away at gains, according to the other.

“Costs have risen to a point where the margins of medical groups are imperiled in ways we haven’t seen since the early lockdown months of 2020,” Halee Fischer-Wright, MD, president and chief executive officer of the Medical Group Management Association (MGMA), said in a statement.

“The data in this report underscores the crucial financial strain that many of these businesses faced in 2021 and we’ve seen this trend not only continue but intensify into this year,” Fischer-Wright added.

The 2022 MGMA Cost and Revenue report, from the group’s “DataDive” dataset, includes 2021 benchmarks on expenses, charges, and revenue from more than 4,000 organizations ranging in specialty and practice types. The report also includes smaller surveys conducted in 2022.

The finding that just 60% of medical practices met their 2021 revenue goals comes from a February 2022 MGMA “Stat” poll with 690 responses.

A subsequent survey from June 2022 with 348 responses found that 90% of medical practices reported that costs have risen faster so far in 2022 than revenues, while only 10% said revenues are keeping pace with or are ahead of rising costs.

Those rising costs were heavily driven by labor costs, the MGMA report found. Practice leaders said rising salaries and wages, plus increased expenses for temporary workers and locum tenens providers, were key contributors.

One practice leader responded that the cost of labor “is up 30% from a year ago. That has turned our margin negative.”

Other areas of higher costs or stagnant revenues included reimbursement cuts, especially as Medicare rates fail to keep pace with the cost to deliver care; significant increases in lab supply and drug costs; increases in utility costs; sluggish patient visit rates; and rising malpractice premium rates.

The majority of respondents (62%) to the June poll said malpractice insurance premiums have increased since 2020. Among this group, 48% said they had a 10% to 19% increase in premiums, about 16% saw a 20% to 29% increase, and almost 8% experienced a 30% increase or higher.

From the 2021 dataset, productivity — as measured by total encounters per full-time-equivalent (FTE) physician — was down compared with 2019 across primary care, nonsurgical, and surgical specialties for physician-owned facilities. The biggest decline was seen for surgical (-34.25%) and nonsurgical (-25.52%) specialties.

Hospital-owned practices generally fared better, with productivity up 22.55% for nonsurgical specialties and up 3.34% for surgical specialties.

When productivity was measured in terms of work relative value units (RVUs), similar patterns emerged, with trends being generally worse for physician-owned practices compared with hospital-owned practices.

Total revenue per FTE physician was also down in 2021 compared with 2019 for physician-owned practices for both primary care and surgical specialties, according to the report.

For a glimpse at 2022 numbers for productivity and revenue, the Kaufman Hall Physician Flash Report examined data from more than 200,000 employed physicians and advanced practice providers in more than 100 specialties.

The report found that productivity as measured by work RVUs improved during the second quarter compared with the first, but remained lower than a year ago.

Net patient revenue per FTE provider rose 5.6% from the first quarter to $388,856 in the second quarter, the report found.

However, practices have faced increased expenses in terms of rising inflation and higher staff costs, the report noted.

“To say that 2022 has challenged healthcare providers is an understatement,” Erik Swanson, a senior vice president of data and analytics with Kaufman Hall, said in a statement. “It’s unlikely that hospitals and health systems can undo the damage caused by the COVID waves of earlier this year, especially with material and labor costs at record highs this summer.”

  • Kristina Fiore leads MedPage’s enterprise & investigative reporting team. She’s been a medical journalist for more than a decade and her work has been recognized by Barlett & Steele, AHCJ, SABEW, and others. Send story tips to k.fiore@medpagetoday.com. Follow





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