Hospital Margins Aren’t Budging, Raising Concerns About Care

August 03, 2023 - The economic outlook for hospitals remains bleak, according to the latest data on hospital financial performance from Kaufman Hall.

The median calendar year-to-date operating margin index for hospitals was 1.4 percent in June, the latest “National Hospital Flash Report” shows. Hospital financial performance improved compared to the previous month when the index was just 0.3 percent. But the gap between high-performing hospitals and those that are struggling is widening, researchers say.

“This ‘new normal’ is an incredibly challenging environment for hospitals,” Erik Swanson, senior vice president of Data and Analytics with Kaufman Hall, said in a statement. “It’s time for hospital and health system leaders to begin developing and implementing a strategy for long-term sustainability, including expanding their outpatient footprint and re-evaluating where finite resources are being utilized.”

The economic challenges, including higher costs of supplies and labor, have stabilized, contributing to better hospital financial performance over the summer. However, these challenges are still impacting operating margins, reveals the data from over 1,300 hospitals from Syntellis Performance Solutions.

Meanwhile, data based on more than 200,000 providers, also from Syntellis, shows improved physician and provider productivity for medical groups through the second quarter of this year. Net patient revenue per provider full-time equivalent (FTE) is also up by 10 percent versus a year ago.

Still, medical groups and hospitals continue to see rising expenses, which bogged down overall performance. Total direct expense per provider FTE was $611,519, a 4 percent increase compared to this time last year.

Hospitals experienced a decrease in labor expenses as supply costs remained high. However, researchers attribute lower labor costs to staff turnover and possible reductions in workforce.

Overall, hospitals underperformed in June, with operating margin index improvements stemming from fiscal year-end accounting adjustments.

Downturned financial performance has the American Hospital Association (AHA) worried, given the historic financial losses hospitals faced during the pandemic. The hospital group previously reported hospitals lost tens of billions of dollars a month at the height of the pandemic, with losses continuing into subsequent years.

Hospitals are just now breaking even, AHA’s director of Health Analytics and Policy Bharath Krishnamurthy wrote in a blog post earlier this week. But this isn’t the improvement hospitals and health systems need to maintain patient access to care.

“While this finding represents a meager stabilization from the unprecedented financial losses that many hospitals and health systems incurred over the last few years, it should not be interpreted that the financial struggles of hospitals and health systems are over,” Krishnamurthy explains.

The median margin data indicates that roughly half of hospitals and health systems are operating at a financial loss, the blog post continues.

AHA says the data counters analyses that have suggested positive operating margins are “inherently bad, as though the operating goal of hospitals and health systems should be to incur financial losses.”

“This would be financially reckless and ignores the reality that hospitals and health systems need some margin to keep pace with new life-sustaining advances in medicine, help support their workforce and continue to keep their doors open to care for their patients and communities,” writes Krishnamurthy.

A study published last month in JAMA Health Forum found hospitals fared better financially during the pandemic than previously thought, with about three-quarters of hospitals operating with positive margins in 2020 and 2021. AHA criticized the study’s methodology, saying it only captured a small snapshot of hospital financial performance.

AHA suggests hospitals and health systems invest in new technologies, like bedside ultrasounds and remote patient monitoring, to ensure patient safety during this trying time.

“When hospitals and health systems experience break-even operating margins, they are often forced to delay or forgo investments that directly benefit patients,” Krishnamurthy says.