Lower reimbursement rates, denials behind razor-thin margins

Hospitals and health systems are operating on razor-thin margins as reimbursement rates and denials create financial woes, a new survey indicates.

The survey conducted by the Healthcare Financial Management Association (HFMA) and Eliciting Insights polled over 130 health system CFOs to identify major pain points and 2026 budget and labor predictions.

About 84 percent of health system CFOs cited lower reimbursement rates from payers as the top cause of low operational margins.

Additionally, 82 percent of CFOs said payer denials have increased significantly compared to pre-pandemic levels, as financial leaders also cited the administrative burden placed on providers by payers as a major health system margin struggle.

The latest hospital financial performance data from Kaufman Hall shows that the monthly operating margin index in January was 5.1 percent, falling from 5.5 percent the previous month. January’s margin index is higher than in the first month of 2022 and 2021 as hospital financial performance starts to approach pre-pandemic levels. However, hospitals and health systems are still on the road to recovery after historic dips during and in the immediate aftermath of the COVID-19 pandemic.

Health systems, like most other provider organizations, continue to feel the pressure from high labor costs. An overwhelming majority — 96 percent — of health systems CFOs said in the survey that higher labor costs were the biggest driver of margin pressure. Nearly all respondents indicated that nursing was the main driver of labor shortages, although lab technicians, radiology technicians, and other roles are also facing shortages.

Researchers said most health systems are implementing traditional cost reduction methods, such as reducing labor costs, optimizing supply chain, and postponing technology implementations, to overcome margin pressures.

Approximately 40 percent of health system CFOs said their organizations are cutting down on capital lease and real estate investments, while 32 percent are decreasing less profitable services and 26 percent are considering outsourcing revenue cycle roles.

In the last year, many provider organizations have turned to revenue cycle outsourcing to minimize costs and maximize productivity amid labor shortages. Outsourcing has also been a solution for confusing payer requirements and processes that some revenue cycle staff say lead to additional work, denials, and A/R days.

About 61 percent of health systems CFOs also said they are planning to or considering dropping Medicare Advantage payers to reduce the administrative burden payers place on providers. Already, 19 percent of CFOs have discontinued at least one Medicare Advantage plan.

But researchers say it is not enough in the current economic environment. Health systems need to increase revenue to improve margins, they suggested in the survey report.

“Recovering from the pandemic, we have seen a slight overall improvement in average operating margins over the past three years,” Todd Nelson FHFMA, MBA, HFMA chief partnership executive, said in a statement. “However, this study validates that there are many health systems still struggling to find a positive margin. While health plans are modestly increasing reimbursement, they are also ratcheting up prior authorization requirements and denials, which raises the overall cost to collect for health systems.”