Hospital Operating Margins Remain Tight as COVID-19 Expenses Rise

Key performance metrics and revenue continue to improve as health systems slowly recover from pandemic losses, but hospital operating margins remain tight, Kaufman Hall’s most recent National Hospital Flash Report Summary found.

Low COVID-19 vaccination rates and the spread of the highly contagious Delta variant are putting an additional strain on hospitals across the country, leading to spending increases that continue to counteract any improvements.

The median Kaufman Hall hospital operating margin index was 2.8 percent in June. With the addition of federal funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it was 4.3 percent. Not including CARES, operating margin climbed 89.5 percent year-to-date (YTD) compared to the first six months of 2020. With CARES, operating margin was up 48.7 percent YTD.

Despite the hefty increase, the operating margin in June was still down 10.3 percent YTD compared to the first six months of 2019, but rose 3.7 percent YTD with CARES funding.

“Rising expenses are contributing to relatively tight hospital margins, even as revenues and volumes continue to show signs of improvement,” Erik Swanson, senior vice president of data and analytics at Kaufman Hall, explained in a press release.

“And the increasing spread of the Delta COVID-19 variant may stifle further recovery in the coming months.”

Volumes rose compared to 2020 levels but remained low compared to pre-pandemic levels. Emergency department visits rose 3.2 percent YTD compared to 2020 but were still down 14.8 percent YTD from 2019. Operating room minutes rose across all key metrics, at 20.4 percent YTD compared to 2020 and 2.6 percent YTD compared to 2019.

Large purchases of personal protective equipment drove up hospital expenses at the onset of the pandemic in 2020, causing inflated total expenses per adjusted discharge, the report explained. Total expense per adjusted discharge fell 2.6 percent from January to June of 2021 compared to 2020, but rose 14.5 percent compared to 2019.

As patients returned to outpatient care, hospitals saw a promising increase in revenue compared to both 2019 and 2020. Gross operating revenue rose 18.2 percent YTD compared to 2020 and 7.9 versus 2019. Outpatient revenue rose 24.3 percent YTD from 2020 and 9.6 percent YTD compared to 2019, while inpatient revenue was up 11.9 percent YTD versus 2020 and 3.3 percent YTD versus 2019.

“While overall metrics indicate continued recovery for hospitals and health systems nationwide, the uptick in COVID-19 cases could hinder progress in the coming months,” the report predicted.

As the Delta variant spreads across the country, health systems, public health officials, and federal and local governments are scrambling to increase vaccination rates. But considering the contagiousness of the Delta variant along with current vaccination rates, hospitals will likely see expenses rise and beds fill.

Vaccine mandates for hospital employees provide hope for boosting vaccination rates. Many leading healthcare organizations like AMA and AHA have expressed their support for mandatory vaccinations for healthcare workers.

Others are concerned that uproar over vaccine mandates may just exacerbate the existing hospital staffing shortages at a time when hospitals are once again filling up with COVID-19 patients.