Razor Thin Margins Leave Hospitals Vulnerable to a Recession

Hospital operating margins are stabilizing after a turbulent couple of years. However, margins remain below pre-pandemic levels, which makes hospitals and health systems vulnerable to a possible recession or new public health emergency, according to the latest report from Kaufman Hall.

Hospitals and health systems lost hundreds of billions of dollars during the COVID-19 pandemic, bringing many organizations to the brink of collapsing as revenues plummeted and the cost of treating higher acuity patients rose. Financial troubles seem to have peaked last year, with experts calling 2022 the worst year for hospitals and health systems since the start of the COVID-19 pandemic.

According to Kaufman Hall’s latest “National Hospital Flash Report,” the median year-to-date (YTD) operating margin index for hospitals was relatively flat in March, showing slight improvement compared to February 2023.

Additionally, physician and provider productivity was also up in March as patients continued to return to doctor offices, per the latest “Physician Flash Report.” Consequently, total direct expense per provider full-time equivalent (FTE) rose to $611,317, a 17 percent boost versus the first quarter of 2022.

Meanwhile, net patient revenue per provider FTE was $357,507 during the first quarter of 2023.

Outpatient volumes were also up for hospitals and health systems, increasing outpatient revenue by 14 percent month-over-month and 14 percent YTD compared to YTD 2022.

These improvements are creating some stability for healthcare organizations even though material and labor expenses remain high and workforce shortages are making it difficult to maintain higher volumes. In particular, non-labor expenses, including drug and supply costs, increased by 6 percent from February.

Median investment/subsidy per provider FTE also increased twice as fast as the rate of inflation. The metric rose 12 percent year-over-year, landing at $236,842.

“While it appears that hospital finances are stabilizing, that doesn’t mean that all is well,” Erik Swanson, senior vice president of Data and Analytics with Kaufman Hall, said in a press release. “Under the seemingly calm surface, there are significant challenges—especially labor shortages and diminished margins—that could quickly reach the surface should another crisis arise.”

Healthcare has been considered relatively “recession-proof” because of the role insurance plays in consumers paying for medical services and the low risk of healthcare jobs being reallocated to other workers in the economy. However, hospitals are more sensitive to the macro environment in light of greater patient financial responsibility and a general shift in how consumers access healthcare following the pandemic.

Deploying and retaining advanced practice providers could set healthcare organizations up for success amid workforce shortages and volume challenges, experts at the healthcare consulting firm said.