Hospital Margins Still Negative, But Finances See Some Stability

Hospital finances are seeing signs of stability after years of unpredictable ups and downs during the COVID-19 pandemic, according to Kaufman Hall’s latest “National Hospital Flash Report.”

The median year-to-date operating margin index for hospitals was -1.1 percent last month, down slightly compared to the -0.8 percent index in January 2023. The healthcare consulting firm said hospital operating margins took a small dip; however, February was the eighth month in which changes to month-to-month margins decreased relative to the last three years.

“After years of erratic fluctuations, over the last several months we are beginning to see trends emerge in the factors that affect hospital finances like labor costs, goods and services expenses, and patient care preferences,” said Erik Swanson, senior vice president of Data and Analytics with Kaufman Hall.

Hospitals have been operating on razor-thin margins for months as the organizations deal with shifts in care volume and high costs of labor and supplies. However, some critics have recently said hospital financial performance is not as dire as the organizations are making it out to be. This comes after the Medicare Payment Advisory Commission (MedPAC) did not recommend a payment hike for hospitals. MedPAC agreed the current rate plus the statutory 1 percent would be adequate to keep Inpatient and Outpatient Prospective Payment System rates close to actual costs of care.

But external economic factors, such as labor shortages, higher material expenses, and a shift to outpatient care, continue to affect hospital finances, according to the Kaufman Hall report.

In February, hospital labor costs held steady despite ongoing clinician shortages. Steady labor expenses also signified less dependence on contract labor, Kaufman Hall reported. Hospital contract labor expenses rose by a whopping 258 percent in 2022 as hospitals addressed worsening labor shortages, a recent American Hospital Association (AHA) analysis showed.

Meanwhile, non-labor expenses increased by 6 percent year-over-year last month. The report pointed to a shift from labor to goods and services as the driver of hospital expenses because of inflationary pressures.

The report also showed a continued shift to outpatient care, which started when the COVID-19 pandemic began in 2020. Outpatient revenues continued to grow in early 2023, rising by 14 percent between February 2022 and February 2023, the report said.

There were also declines in discharges, patient days, and emergency department visits because February is a shorter month. However, the average length of a hospital stay was down on a per day basis last month. Meanwhile, ambulatory surgery centers and outpatient operating room minutes saw volume grow.

Kaufman Hall’s Swanson said this is “the new reality of financial performance” for hospitals.

“2023 may turn out to be the year hospitals redefine their goals, mission, and idea of success in response to expense and revenue challenges that appear to be here for the long haul,” he stated.