Hospital profitability dips as expenses bog down margins

Hospital profitability has hit a snag after a relatively strong first quarter, according to the latest data from healthcare consulting firm Kaufman Hall.

The April 2024 “National Hospital Flash Report” reports a 0.2 percentage point drop in Kaufman Hall’s calendar-year-to-date operating margin index. The index came in at 3.9% in March 2024 versus 4.1% in February 2024.

Kaufman Hall says the index measure represents the national median for hospital profitability (operating revenue less operating expense) including allocations to hospitals from corporate, physician, and other entities.

Hospitals are still more profitable than they were last year, with a calendar-year-to-date operating margin index of 0.8% in April 2024. Hospital profitability has increased significantly over the past year as healthcare leaders gain their footing in a post-pandemic environment. Still, expenses remain high and patient volumes are not guaranteed.

The report shows that major KPIs declined for hospitals in March 2024. They experienced reductions in both volume and associated revenue last month, which Kaufman Hall experts say may suggest more challenges ahead for hospitals.

Hospitals should be on the lookout for their outpatient service lines. Hospital outpatient revenue took a substantial hit, falling by 5% last month, as volumes continue d to decline.

“Declines in outpatient revenue mean hospitals providing outpatient care may face difficulties ahead,” Erik Swanson, a senior vice president with Kaufman Hall, said in a statement emailed to RevCycleIntelligence. “Organizations may need to reevaluate their assets and consider strategic partnerships to offset current and future challenges with volume.”

Hospitals also saw increases in bad debt and charity care last month, as well as increases in days in A/R. These KPIs represent opportunities for hospital revenue cycles and overall collections, according to the report.

Additionally, expenses continue to challenge hospital profitability. Total expense per calendar day is up by 3% year-over-year and 18% versus year-to-date in 2021. Labor expenses have been driving higher expenses recently.

The accompanying “Physician Flash Report” also shows an overall increase in labor expenses, with labor accounting for about 84% of total expenses in the first quarter of 2024. The report also reveals a 4% increase in provider productivity compared to the first quarter of 2023 and a 2% increase in the median investment/subsidy in providers during the period. In total, the median investment/subsidy was $227,972.

“With the high cost of labor unlikely to change, health systems must think critically about how to optimize downstream margins,” Matthew Bates, a managing director with Kaufman Hall, said in the statement. “Organizations could lean into strategies that enable physicians to be more productive as well as prioritizing outcomes related to lengths of stay or readmissions, which impact revenue.”