Kaufman Hall: Hospital Margins Continued to Edge Up Through 2023

Jan. 31, 2024
The Kaufman Hall consulting firm finds that last year, 2023, found a modest level of financial recovery, with the media hospital operating margin rising to 2.3 percent in December

The news around hospital finances continues to improve gradually, according to leaders at the Chicago-based Kaufman Hall consulting and advisory firm.

A press release posted to Kaufman Hall’s website on Jan. 30 began thus: “Following the worst year since the beginning of the COVID-19 pandemic, 2023 presented a more promising trend for hospitals and health systems with general improvement across operational and financial measures, according to the latest data from Kaufman Hall. The median calendar year-to-date operating margin index for hospitals was 2.3 percent in December, with year-end accounting adjustments contributing to a slight bump in performance, according to findings in the latest National Hospital Flash Report. The latest Physician Flash Report found that provider productivity has increased, but expenses continue to outpace revenue growth.”

The press release noted that “Hospitals and health systems saw significant financial improvement in 2023, but whether this will hold moving forward remains to be seen. The average length of stay has declined on a year-over-year basis as hospitals have worked to establish and maintain clear pathways for patient discharge. However, average length of stay may ultimately rise as lower-acuity patients are increasingly treated outside of the hospital setting. Outpatient revenue has grown significantly—increasing by more than 40 percent compared to 2020.” And it quoted Erik Swanson, senior vice president of data and analytics at Kaufman Hall, as stating that “These improved margins indicate that hospitals and health systems are taking the necessary steps to adapt to this new environment. While finances are approaching historic levels, today’s care and business models look very different. Organizations have had to adjust how and where they’re delivering services to better meet patient preferences.”

The press release went on to note that “Revenue is up, reflecting increased productivity by providers, but expenses are increasing at a faster rate. The median investment/subsidy per provider rose to $225,685—an increase of 7 percent since 2021. This is due in part to provider compensation, which has risen 9 percent compared to 2021. Meanwhile, advanced practice providers (APPs) now make up 38.1 percent of the total provider workforce, as data show that hospitals and health systems that effectively recruit and deploy APPs continue to outperform those that do not.”

“All signs are pointing to the need for hospitals to reconsider whether subsidizing physicians is a sustainable financial future,” said Matthew Bates, managing director and Physician Enterprise service line lead with Kaufman Hall. “Sticking to the status quo is not a feasible option for organizations that want to be successful in the long term—they need to examine and rethink how the physician employment model is linked to their overall financial strategy and goals.”

Key Takeaways:

1. Margins improved in December and are up by more than 15% compared to 2022, which marked the worst year since the beginning of the pandemic.  Hospitals are experiencing general improvement across operational and financial measures. 

2. Average length of stay has declined on a year-over-year basis. This continued stabilization reflects the ongoing effort by hospitals and health systems to have clear pathways for discharge. Despite current signs of improvement, acuity and average length of stay will likely rise in the long term as more lower-acuity care is shifted outside the hospital.

3. Outpatient revenue has grown significantly—increasing by more than 40% compared to 2020. This growth is being driven by the shift towards outpatient care settings due to reimbursement changes, patient preference, increased ability for care to be delivered in these settings, and further digitization.

The National Hospital Flash Report draws on data from more than 1,300 hospitals from Syntellis Performance Solutions. The Physician Flash Report draws on data based on more than 200,000 providers, also from Syntellis.

The full report can be found here.




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