Kaufman Hall: Lower Volume, Shorter LOS Improved Hospital Margins in November

Hospital-based organizations finally saw modest financial improvement in November, after expenses declined in that month, even as inpatient revenues remained flat; but hospital-based organizations were rescued by improving outpatient revenues, according to the latest report from the Chicago-based Kaufman Hall consulting firm.

The results, announced on Kaufman Hall’s website, show modest improvement after a largely difficult year through most of 2022. According to the “National Hospital Flash Report: December 2022,” “Hospitals experienced a slight increase in operating margins in November—though margins remained negative for 2022 to date—according to the latest National Hospital Flash Report from Kaufman Hall.  Lower expenses and increased outpatient revenue drove improved month-over-month performance.”

Most notably, the Kaufman Hall experts noted, “Hospitals experienced improved margins in November, up 12 percent from the previous month. The median Kaufman Hall Year-To-Date Operating Margin Index reflecting actual margins was -0.2 percent in November.” The key difference from earlier in the year? “A decrease in volume and shorter lengths of stay contributed to a 1-percent decrease in total expenses in November. While the slowdown led to less revenue, hospital expenses declined in November, resulting in improved margins. Labor expenses, a significant driver of healthcare costs, also decreased by 2 percent in November.”

“As we’ve seen in other industries, the significant increases in labor costs have made it harder for hospitals to realize positive margins,” said Erik Swanson, a senior vice president of Data and Analytics at Kaufman Hall, and the report’s named author. “Hospitals were fortunately relieved of some financial pressure in November amid a continued competition in the healthcare labor market, potentially due to a shift away from expensive contract labor.”

The report found that “Hospital outpatient revenue increased 10 percent year-over-year, while inpatient revenue was flat over the same time period. While inpatient services continue to hamper margins, hospitals can lean on outpatient services to address challenges.”

“The November data, while mildly improved compared to October, solidifies what has been a difficult year for hospitals amidst labor shortages, supply chain issues, and rising interest rates,” Swanson said. “Hospital leaders should continue to develop their outpatient care capabilities amid ongoing industry uncertainty and transformation.”

The report cited four Key Takeaways, as follows:

1. Hospital margins remained negative for 2022.

Hospitals saw margins improve in November. However, median hospital margins remained negative for 2022 to date.

2. Hospital expenses declined in November, driving improved margins.

The average patient length of stay declined slightly—along with several other key volume metrics— leading to relatively flat revenue. However, hospital expenses declined, resulting in improved margins.

3. Labor expenses decreased in November.

Like in other industries, significant increases in the cost of labor made it harder for hospitals to see positive margins in 2022. In November, however, hospitals saw labor expenses decrease, potentially due to hospitals relying less on contract labor, which is often more expensive.

4. Hospital outpatient revenue is up this year.

“Hospital outpatient clinics and services have been a bright spot in hospitals’ revenue column in 2022. While inpatient service continue to hamper margins, hospitals could lean on their outpatient services to buoy margins,” the report noted. Indeed, according to the report, inpatient margins remain highly fragilized. Nationwide, by bed size, they were as follows when comparing November 2022 results to October 2021 results: 0-22 beds, +2 percent; 26-99 beds, -1-percent; 100-299 beds, -1 percent; 200-299 beds, -1 percent; 300-499 beds, -2 percent; 500 or more beds, -2 percent.

The National Hospital Flash Report draws on data from more than 900 hospitals. Data from the report come from Syntellis Performance Solutions.