Kaufman Hall’s Swanson: Hospitals Are Wading Into Deeper Financial Waters Now

Last month, the leaders at the Chicago-based Kaufman Hall consulting and advisory firm, a Vizient company, released their most recent “National Hospital Flash Report,” based on August data. As they noted in the report, the August nationwide-average revenue margin dipped to 5.5 percent after having stayed above 6 percent for the previous seven months. (The previous seven month averages were 6.9 percent in January, 6.1 percent in February through May, 6.2 percent in June, and 6.0 percent in July.)

The Kaufman Hall leaders noted, per August, that “Both patient volumes and operating margins have decreased this month. While margins remain positive, they’ve been steadily declining since January 2025.” They further noted that “Bad debt and charity care continue to rise. With change to federal policy on the horizon, uncompensated care will likely continue to increase.” And, they added, “Expenses have increased year-over-year, notably non-labor expenses. External forces including rising raw material costs and the uncertainty in global trade highlight the need for hospitals to maintain a resilient supply chain and explore spend management strategies.”

Following up on the release of the report, Erik Swanson, managing director and leader of Kaufman Hall’s Data Science and Analytics Team, spoke with Healthcare Innovation Editor-in-Chief Mark Hagland regarding the implications of the firm’s latest findings. Below are excerpts from that interview.

Let me begin by asking you your top takeaways from the findings in the report.

There are a few things, all of which we’ve spoken about in the past. We continue to see some amount of stability in bottom-line performance; however, it’s been declining throughout the course of the year so far. Many organizations are using this year to try to build some resiliency. So it’s a bit as though we’re now in a spot where the data is starting to become a little bit worrisome. And that’s the hospital view; and at the system level, the margins are about 150 base points lower, so at the system level, they’re not even at 1 percent.

So a necessary amount of resiliency is not being created this year. And rising debt and charity care are impacting hospitals. Other elements involved are that macroeconomic conditions are causing people to lose their insurance. And non-labor expense, particularly drugs, is one of the main pain points. And as the population ages and more chronic conditions emerge, all that requires more, and more expensive drugs.  So I’m glad that hospitals are doing better than in 2022, but there are flags being raised in my mind, about things taking place now.

What level of impact will the tax and immigration bill passed in July have on hospitals in the coming months?

Anything that increases the uncompensated care proportions will absolutely negatively impact hospital finances. And our report shows that, even as volume are up in the ED and other areas—within the ED, the patient segments that have grown the most are the uncompensated care elements. So anything that drives that up will impact hospitals. I’m not sure what the order of magnitude it will have. But collectively, we know that on a broad-scale basis, it will impact hospitals and health system.

It seems to me that the smaller, rural, and standalone hospitals are in real danger right now?

That’s absolutely correct. And in almost all instances, the smaller hospitals are underperforming the larger organizations. And one of the pressures that the smaller organizations have is, they have mandated levels of minimum staffing requirements as all hospitals have; and if you want to keep a labor and delivery unit open; and for some of these areas, they’re not doing enough births to cover their costs. So they tend to have a more fixed cost structure, and that’s challenging when volumes are low. A challenging demographic and population their serving. And unlike large organizations that have a lot of demand—they can move people around, and move supplies around, and have flexibilities that smaller organizations don’t have. And recruiting caregivers and staff is also very challenging for some of these smaller institutions. Finally and almost always, almost none of these organizations have built up their balance sheets, per liquidity. And even current policy aside, they already had fundamental challenges that will only be exacerbated here. Short of hospital closings, services being rationalized, and there will be some healthcare deserts created.

What advice would you want to give to senior hospital and health system leaders, in this environment?

Let’s start on the revenue side: it is critically important for hospitals to get paid for the type of care they’re delivering. They really need to focus on things like clinical documentation, etc. So ensuring that you’re coding accurately, is very important. Many organizations have struggled to capture the true conditions of their patients. Secondarily, the information asymmetry with payers can be a big factor, so being informed and strategic going into payer negotiations is really important.

Do you think that AI and advanced analytics on the revenue cycle management side could be helpful in that regard?

I have a few things to say about that. First of all, even going back to the 1980s and 1990s, there’s always been a technology arms race in revenue cycle between payers and providers. The payers have the scale and size. And that’s not a new phenomenon. And now we’ll be moving into AI. What I would say, though, is that organizations will need to find the vendors with whom to partner around RCM. And AI won’t necessarily be the panacea; there will be human elements as well. By human elements, I mean, the processes in place around chart reviews, observing patients to make sure things are being coded appropriately, all those items, beyond the transmission of rates from payers. Have we modeled denials processes? Technology will augment human decision-making processes, but won’t entirely replace it.

And I would add that this is certainly an area where the ROI on some of the tools tends to be clearer than elsewhere. You can model reductions in denials based on the expenditures on technology, for example.

And drugs, supplies, non-labor costs, are really challenging right now, particularly for smaller hospitals. Smaller hospitals need to focus on joining GPOs (group purchasing organizations), and other collaborative strategies. What’s more, site of care is becoming increasingly important. Do I have a footprint at the appropriate sites of care, on the outpatient side? That will be critically important.

Having that revenue diversity, making sure you’re caring for patients in lower-cost sites of care, and thinking carefully about your portfolio of services, are all becoming increasingly important in the current and future environment.