Kaufman Hall’s Swanson: Leaders Need to Consider Longer-Term Strategies

As Healthcare Innovation reported on March 18, the Chicago-based consulting and advisory firm Kaufman Hall, a Vizient company, released findings on March 17 in its latest “National Hospital Flash Report” finding that average monthly operating margins for U.S. hospitals were 4.4 percent in January, up from 3.7 percent in December, and considerably above the 0.5 percent in November of last year. Indeed, throughout 2024, the average monthly operating margin hovered between 1.3 percent and 1.8 percent consistently, except in April, when it reached 2.0 percent, and in December, when it hit 2.1 percent.

Per the stabilized numbers, Erik Swanson, managing director and group leader of data and analytics at Kaufman Hall, said in a statement contained in Monday’s press release, that “January was a relatively stable month for hospitals, as more people received care due in part to seasonal challenges like flu and other respiratory diseases. Hospitals are also experiencing more rapid revenue growth from inpatient than outpatient services. Expenses are also rising, driven primarily by drug costs, though the rate of cost growth has slowed.”

Healthcare Innovation Editor-in-Chief spoke this week with Erik Swanson to get amplification from him on where things stand right now for hospitals, medical groups, and health systems. Below are excerpts from their interview.

That 4.4-percent nationwide median figure for revenue margins for January seems pretty good, at least at first glance, correct?

That’s generally true, though there are nuances involved that one should consider. One of the things we included in our most recent report, and this is critical—how multi-hospital systems consider the margins of their component entities, matters. The overall systems are running 150-200 basis points lower than their components; it’s the negative margins being produced by the medical groups. So, hospital performance has improved over the past few years, and continues to improve. Performance relative to pre-pandemic levels was a bit anemic in 2024. But all indications are that we’re closer to getting back on track relative to pre-pandemic levels. So while the trend is generally improving, it’s very uneven, so that median number doesn’t paint the whole picture.

Could you give me your perspective, then, on the financial performance of the component medical groups, which is in some cases lagging behind that of the overall integrated systems? The medical groups tend to be less fully capitalized, for one thing.

There are a few important, level-setting elements to mention here. Number one, as medical groups are purchased by systems or become parts of systems, there is a funds flow, such that the revenues coming from imaging and ancillary services, flow to the health system. So just because the medical group is losing money doesn’t mean that all the flow is negative. Second, you’re correct that some of the medical groups are less fully capitalized than they could be. And so they’re starting to rethink the pure employment models that some of them have been using, and are considering shifting to ownership models, such as around ambulatory surgery centers, etc. And that then dovetails into the broader conversation around value-based care delivery and contracting. As we start to see risk-sharing, where will medical groups fit in? We’re starting to see a movement away from pure employment models.

The other big piece here is understanding how that care is being delivered: what does the provider model look like? What is the proportion of APPs being used relative to physicians? If you make really good use of APPs, you might be able to drive margins across the service line, or mitigate losses.

Lastly, the reality of the situation is that, even among those frameworks, some services are more prosperous than others. And depending on the condition of the hospital, the system, or the medical group, there may well be services that need to be ended or scaled back. The prime example is women’s services, especially labor and delivery, in rural healthcare.

Is now the time when health system leaders will be making hard decisions around which services to eliminate or scale back? That’s a discussion that has been percolating literally for decades now.

I think we’re seeing those conversations happening; certainly, an increased focus on service line strategy. What services are we delivering versus not, what businesses are we providing? I think all those discussions are being had. I’d also that some of this increased M&A activity is being driven by those discussions. So systems are being focused strategically, which may not mean being all things to all people/ Decisions will be made on a case-by-case basis. But certainly, some of the type of advisory work we’re doing is being focused around service line strategy more than anything else. So leaders are certainly thinking about it. And what might potential Medicaid cuts, and Medicare cuts, Medicare Advantage changes, will be considered?

Based on what you’re seeing now, what might the landscape look like a year from now?

Here’s what I’ll say: the data seems to indicate a few things. First, we’ve been seeing a recovery in volumes; we’re starting to see the rate at which outpatient revenue growth exceeds inpatient revenue growth, slowing for now. That would indicate the shift towards higher-acuity patients on a long-term basis. So we may see an ongoing shift into higher-acuity care. That’s partly driven by an aging population. And relative to that, a corollary is that, particularly with drugs and supplies, the delivery of care to those higher-acuity patients will remain high—both the drug costs, and the utilization costs; both of those will put increasing pressure on organizations. So we’ll see continued recovery and ongoing increases in drugs and supplies in particular. Labor expenses have fluctuated a bit. I don’t expect any of these expenses to decline overall. We’re in a period of higher structural expenses, most of which will be exacerbated by higher acuity and longer lengths of stay. But those trends will be gradual. So barring any major pandemics or shocks, that’s the picture.

Are there things that c-suite leaders should be doing about all this, right now?

I suspect they’re already pursuing certain modes. Ken Kaufman and I have been blogging about this, but the complexity in the landscape does require new approaches. Certainly, embracing more advanced quantitative techniques to understand scenario modeling and how we balance objectives, will be important. How do we quantify service line contribution? That will be important. And the leaders of the best systems are adopting and embracing technologies, which could include AI, but certainly will encompass more advanced analytics. That’s one of the more notable changes here relative to how organizations will be managing themselves. The basic blocking and tackling will always be critical, but may not be sufficient to achieve the highest level of performance.