Hospital Profitability Up Despite Volume, Expense Challenges

March 26, 2019 - Hospital profitability and revenue experienced significant improvement from 2017 to 2018, with operating margins growing by about five percent, a new report from consulting firm Kaufman Hall showed.

The 2018 National Flash Report also found other indicators of hospital profitability improvement among the 600 hospitals analyzed, including growth in operating margin outperforming budget by 4.4 percent and earnings before interest, tax, depreciation, and amortization (EBITDA) margin seeing little change.

“Overall, 2018 was better than 2017 with medians demonstrating profitability improvements, though pockets of strong and weak performance continue to exist,” Jim Blake, Publisher and Managing Director at Kaufman Hall, wrote in the report. “Labor expenses and efficiency appeared to have been a primary focus in 2018, and while largely successful, the rate of improvement has declined demonstrating a potential plateau of improvement is being reached.”

Volume challenged hospitals despite favorable profitability performance, the report revealed. Discharges, emergency department (ED) visits, average length of stay, and all other volume indicators demonstrated declining performance compared to the previous year.

Specifically, the report found:

• Discharges declined by 4.6 percent
• Adjusted discharges fell by 0.8 percent
• Adjusted patient days decreased by 1 percent
• Average length of stay increased by 1.3 percent
• ED visits dropped by 3.8 percent
• Operating room minutes declined by 3.8 percent

In addition, all metrics underperformed compared to budget, which indicates “a greater downward shift than was expected,” the report stated.

Despite consistent underperformance in 2018, the consulting firm explained that few indicators experienced worsening performance compared to 2017.

“Discharges maintained a steady rate of decline, and adjusted discharges and adjusted patient days demonstrated a slowing increase,” they wrote. “Again, the reason for the increase in these adjusted discharges is driven primarily by the adjustment factor as more volume shifts towards the outpatient setting. ED visits continued a decline relative to last year with an acceleration in unfavorable performance. Hospitals should continue to expect decreases in ED visits throughout 2019.”

Additionally, hospitals also experienced generally unfavorable expense performance in 2018, the report uncovered. For example, total expense per adjusted discharge saw no year-over-year change compared to 2017 and labor expense per adjusted discharge increased by 0.2 percent.

Changes in expense performance were modest, and even though indictors such as supply and drug expenses significantly increased compared to 2017 (2.4 and 1.1 percent, respectively), the growth remained relatively below budget for most hospitals.

The expense performance data shows hospitals focused on cost containment in 2018, and the facilities were largely successful with reducing expenses. However, the rate of improvement may be stalling.

“Expense trends for 2018 demonstrated mostly consistent unfavorable performance, however as mentioned above, in many cases the rate of unfavorable performance is declining,” the report stated. “Total expense per adjusted discharge demonstrated a slight increase in the rate of change throughout the year, while the rate of increase of labor expense per adjusted discharge remained flat. FTEs per AOB [adjusted occupied bed] declined throughout the year, however the trend demonstrated a slowing rate of improvement likely indicating that the traditional methods of labor management are reaching their peak.”

“Hospitals will need to think more innovatively on how to manage expense,” researchers emphasized. “Non-labor expense indicators continued to be unfavorable, though consistently so, and drug expense continued its relative rate of increase of around 4 percent as compared with last year.”

Reduced expense and volume performance did little to help hospitals in 2018. But increases in revenue performance cushioned hospitals from the challenges, the consulting firm noted.

In addition to hospital profitability improvements, hospitals also received greater bundled payments for higher acuity patients resulting in additional reimbursement. Reimbursement per adjusted discharge and per adjusted patient day increased by 1.1 and 2.6 percent respectively from 2017 to 2018.

The inpatient-outpatient (IP/OP) adjustment factor also increased by 2.4 percent year-over-year.

However, bad debt and charity as a percentage of gross revenue grew by 2.4 percent compared to 2017. Uncompensated care costs may be rising for hospitals, but the rate of growth is slowing, the report showed.