Hospital Revenue, Margins Improved in 2019 Despite Rising Expenses

March 05, 2020 - Hospitals ended 2019 on a “cautiously optimistic” note, with hospital revenue and margin seeing improved performance despite rising expenses and seesawing volumes, according to a new report from consulting firm Kaufman Hall.

Nationwide, hospitals reported improved margin performance in 2019, with operating earnings before interest, taxes, depreciation, and amortization (EBITDA) rising 2.0 percent or 39 basis points (bps). Meanwhile, hospital operating margins increased by 7.4 percent (78 bps), the report showed.

Modest revenue gains led to hospital margin performance improvement, authors of the report pointed out.

Hospital revenue met expectations last year, with year-over-year improvement overall. Specifically, net patient service (NPSR) per adjusted discharge rose by 3.7 percent, ending the year slightly over budget, while NPSR per adjusted patient day increased by 1.5 percent, on par with budget.

Certain volumes also saw improvements in 2019, leading to favorable margin performance. Volumes on the upswing last year included adjusted patient days (2.5 percent or 815.2 bps increase) and adjusted discharges (0.7 percent or 43.2 bps increase).

“While it was good to see improvements in many financial areas, the long-term trendlines indicate that this is not a time for the C-suite to relax,” said Jim Blake, managing director at Kaufman Hall and lead author of the report.

Blake explained that “modest gains were made during a time when the economy was strong, unemployment was historically low, and government regulations favored business.” Hospitals also did not face “existential health threats, such as the COVID-19 coronavirus outbreak nor the risks that come any time there is a national election.”

“Hospital and health system leaders should take this opportunity to shore up their strategic financial planning capabilities, especially for the long term, to ensure they are prepared for whatever 2020 brings,” he stressed.

Hospitals are likely to face steady growth in expenses overall, the report found. In 2019, hospitals across the country saw expenses increase compared to 2018, with total expense per adjusted discharge rising 3.4 percent year over year, ending 1.4 percent above budget.

Hospitals also reported that labor expense per adjusted discharge increased 2.6 percent in 2019, while non-labor expense per adjusted discharge rose by 4.0 percent. Increases in supply, drug, and purchased services expenses per adjusted discharge drove these increases, authors of the report noted.

The rapidly changing healthcare landscape will also continue to impact hospital volumes, the report showed.

In 2019, hospitals experienced mixed performance with volume. Key volume metrics including adjusted patient days and adjusted discharges were up compared to the previous year. However, the majority of volume indicators performed below budget.

Hospitals also saw significant decreases in discharges and emergency department visits, the report found.

Value-based payment and care delivery models encourage providers to avoid unnecessary trips to the hospital and emergency department, while promoting the use of lower-cost outpatient services. These models are increasingly taking hold of hospital revenues, which may explain the mixed performance in 2019.

Hospitals should consider more precise forecasting in the future since most volume indicators performed below budget, authors of the report advised.

Recent reports have criticized hospital profits, including a recent New York Times article questioning the high profits incurred by non-profit hospitals. But research has shown that hospitals are in a more precarious state.

A recent analysis by Navigant showed that health system operating margins improved in 2018, rising 13 percent from 2018 to 2017. However, the margins were still 30 percent below 2015 levels, indicating future challenges with “achieving sustainable margins over the longer term will require renewed focus on operational efficiency,” explained John Wiest, an analysis co-author and managing director of Guidehouse, which owns Navigant.

Medical groups, however, reported favorable operating margin performance from 2017 to 2018. AMGA (American Medical Group Association) found in 2019 that medical total investment per physician in integrated systems improved 21 percent, while independent practice saw a slightly lower improvement.

Overall, the data indicated that independent practices broke even in 2018, AMGA reported.

Value-based care, consumerism, and other trends are shifting the demand for healthcare, and hospitals seem to be on the losing side of these movements. Meanwhile, lower cost, convenient settings are reaping the benefits of payment models that reward the use of certain ambulatory services and the increased use of high-deductible health plans that shift more costs to patients.