The latest report from the Chicago-based Kaufman Hall consulting firm offers mixed results on hospital and health system finances, with margins remaining negative on average, but at least, they’re no longer sinking, for the moment, in any case. As noted in an announcement of the firm’s latest report, on its website, “Hospital finances are beginning to stabilize as razor thin margins become the new normal. The high level of variance that plagued hospital margins over the past three years is beginning to subside among pricing and inflationary pressures affecting expenses. The median Kaufman Hall Year-To-Date Operating Margin Index reflecting actual margins was -1.1 percent in February.”
Indeed, “The latest National Hospital Flash Report shows that the high level of variance that plagued hospital margins over the past three years is beginning to subside as external economic factors like labor shortages, higher material expenses, and a patient population that is increasingly seeking care outside of the hospital affect hospital finances.”
The statistics remain dire: “The median year-to-date operating margin index for hospitals was -1.1% in February, down slightly compared to -0.8% in January. Despite the slight dip in financial performance, February marked the eighth month in which the variation in month-to-month margins decreased relative to the last three years.”
“After years of erratic fluctuations, over the last several months we are beginning to see trends emerge in the factors that affect hospital finances like labor costs, goods and services expenses, and patient care preferences,” Erik Swanson, senior vice president of Data and Analytics with Kaufman Hall, said in a statement included in the announcement. “In this new normal of razor thin margins, hospitals now have more reliable information to help make the necessary strategic decisions to chart a path toward financial security.”
Among the issues, the firm noted, “Hospitals continued to incur high expenses that negatively affect margins. Kaufman Hall experts point out that February represented a shift from labor to goods and services as the primary driver of hospital expenses. Inflationary pressures led to significant cost increases in goods and services, increasing non-labor expenses by 6% year-over-year. While hospitals still face labor shortages, labor expenses appeared to hold steady, indicating less dependence on contract labor.
“Hospital leaders face an existential crisis as the new reality of financial performance begins to set in,” said Swanson. “2023 may turn out to be the year hospitals redefine their goals, mission, and idea of success in response to expense and revenue challenges that appear to be here for the long haul.”
Indeed, “The onset of the COVID-19 pandemic kickstarted a shift in patient behavior that continues today. Patients continued to seek more of their care away from inpatient settings, with February 2023 outpatient revenue up 14% compared to February 2022. Due to the shorter month, discharges, patient days, and ED visits were all down slightly in February compared to January. On a per-day basis, however, the average length of stay in hospitals was down, while ambulatory surgery centers and outpatient operating room minutes saw volume increases last month. The National Hospital Flash Report draws on data from more than 900 hospitals from Syntellis Performance Solutions.
Key takeaways from the report:
1. A new normal continues to emerge. Hospital margins in February were down slightly from the previous month. This represents the eighth straight month in which the variation in month-to-month margins has decreased relative to the last three years. Due to external economic factors, relatively flat margins are likely to continue in the near term.
2. Volumes stay relatively steady. Due to the shorter month, discharges, patient days, and ED visits were all down slightly in February compared to January. On a per-day basis, however, hospitals experienced moderate growth in volumes in February. Average length of stay in the hospital was down, and patients continued to shift to ambulatory settings, with ambulatory surgery centers and outpatient operating rooms minutes seeing volume increases last month.
3. Outpatient settings drive revenue. The onset of the COVID-19 pandemic kickstarted a shift in patient behavior that continues today. Patients continue to seek more of their care away from inpatient settings. This is illustrated in outpatient revenues continuing to grow in early 2023.
4. Costs of goods and services are increasing faster than labor. Hospitals continue to face labor shortages. Labor expenses, however, appear to be holding steady indicating less dependence on contract labor. Meanwhile, inflation and pricing pressures are leading to significant cost increases in goods and services. This represents a charge in what is driving hospital expenses from labor to the costs of goods and services.
