Kaufman Hall: Hospitals Struggling with High Expenses

Aug. 1, 2023
The latest Kaufman Hall report finds hospitals stuck in a space of high expense costs, even as operating margins have finally stabilized somewhat

Despite overall margin improvement, U.S. hospital organizations are drowning in high costs along multiple dimensions; that’s the conclusion from the analysts at the Chicago-based consulting firm Kaufman Hall.

The Kaufman Hall analysts posted a press release to their firm’s website on Monday, July 31, under the heading, “Hospital Financial Outlook Stable But Challenges Persist”; the results are contained in the firm’s latest “Hospital National Flash Report: July 2023.” As the press release stated, “Despite an overall trend of continued margin improvement, most hospitals underperformed in June as high expenses and economic pressures persist, according to the latest data from Kaufman Hall.”

As the Kaufman Hall experts noted, “The median calendar year-to-date operating margin index for hospitals was 1.4 percent in June, with fiscal year-end accounting adjustments contributing to a slight bump in performance, according to findings in the latest National Hospital Flash Report. As margins continue to stabilize on the surface, the gap between high-performing hospitals and those struggling in this new financial environment is widening.”

Kaufman Hall’s newest Physician Flash Report, with data through the second quarter of 2023, found climbing physician and provider productivity for medical groups as patients increasingly seek care in ambulatory settings. With regard to labor expenses, the report noted that “Provider productivity for medical groups continues to increase, with net patient revenue per provider FTE up 10 percent from a year ago. However, this productivity was not enough to offset rising expenses as the median investment/subsidy per provider still rose 5 percent year-over-year to $224,243. The total direct expense per provider full-time equivalent (FTE) reached $611,519, a 4-percent increase compared to Q2 2022.”

“As labor continues to be the largest share of expenses, health systems need to think strategically about provider employment models,” said Matthew Bates, managing director and Physician Enterprise service line lead with Kaufman Hall, in a statement contained in the press release. “Organizations that want to see performance improvement must figure out how best to effectively integrate advanced practice providers into the care team model.”

That said, the Kaufman Hall experts did note that “The challenges facing hospitals remain but have stabilized, allowing organizations the chance to consider the measures needed to return to profitability.  The proportion of FTEs per adjusted occupied beds decreased 8 percent from May, which may indicate higher levels of workforce reductions and staff turnover as hospitals begin taking the steps needed to survive, according to Kaufman Hall experts.

“This ‘new normal’ is an incredibly challenging environment for hospitals,” said Erik Swanson, senior vice president of Data and Analytics with Kaufman Hall. “It’s time for hospital and health system leaders to begin developing and implementing a strategy for long-term sustainability, including expanding their outpatient footprint and re-evaluating where finite resources are being utilized.”

“Key Takeaways” included the following:

1. Hospital margins underperformed in June, compared to the previous month. Despite an overall trend of continued improvement, most hospitals underperformed slightly compared to in May. Fiscal year-end accounting adjustments may have also contributed to the performance bump in June.

2. Average lengths of stay continue to decrease, and emergency department visits are down. Patient volumes continue to stabilize, and increases in outpatient revenue indicate people are continuing to shift away from inpatient settings.

3. Bad debt and charity care are increasing. Hospitals are being affected as states step up efforts to redetermine Medicaid eligibility and more people are disenrolled.

4. Inflation continues to challenge hospitals’ performance. Supplies and purchased service expenses remain high. Decreases in labor expenses may indicate higher staff turnover and even reductions in workforce.