Hospital finances beginning to stabilize, though margins still down, finds Kaufman Hall

Hospital finances beginning to stabilize, though margins still down, finds Kaufman Hall Jeff Lagasse

Photo: Sam Edwards/Getty Images

Hospital margins are still struggling, but they're beginning to stabilize, according to Kaufman Hall's National Hospital Flash Report for March.

Margins in February were down slightly from the previous month, representing 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, found Kaufman Hall.

Volumes remained relatively steady in February. Due to the shorter month, discharges, patient days, and emergency department 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 hospitals was down, and patients continued to shift to ambulatory settings, with ambulatory surgery centers and outpatient operating rooms minutes seeing volume increases last month.

Meanwhile, the onset of the COVID19 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.

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 change in what is driving hospital expenses, from labor to the costs of goods and services.

WHAT'S THE IMPACT

Stabilizing metrics are somewhat of a relief following 2022, which according to Kaufman Hall was the worst financial year for hospitals and health systems since the start of the COVID-19 pandemic, with operating margins taking a particular hit.

December was the only month in which hospitals realized positive margins. Despite the end-of-year upswing, about half of U.S. hospitals finished 2022 with a negative margin as growth in expenses outpaced revenue increases.

Hospitals faced prolonged increases in labor expenses last year. The increases were driven in part by a competitive labor market, as well as hospitals needing to rely on more expensive contract labor to meet staffing demands. Increased lengths of stay due to a decline in discharges also negatively affected hospital margins.

The December bump, in which hospitals barely broke through to a positive operating margin at 0.2%, was the result of returning volumes and a relaxing of the competitive labor market, data showed. But the expense increases hampered these gains.

THE LARGER TREND

The previous Flash Report, released in February, found patient volumes, emergency department visits, discharges and total revenues were down in January compared to December 2022. Meanwhile, expenses – particularly related to labor – increased over the same period. Total net operating revenue decreased by 3% month-over-month, while total expenses rose by 1%. Total labor expenses rose by 3% month-over-month.

Notably, drug expenses have increased 12% compared to YTD 2020. The increase in drug expenses, along with lower patient volume and longer emergency department stay time, indicates that hospitals are serving sicker patients in inpatient settings since the start of the pandemic, Kaufman Hall said.

Twitter: @JELagasse
Email the writer: Jeff.Lagasse@himssmedia.com