Non-Profit Health Systems Need Positive Margins

March 04, 2024 - Non-profit health systems receive a lot of scrutiny because of their tax status, with some critics accusing systems of valuing revenue over patient care. However, a new report from Deloitte makes the point that even non-profit health systems need to generate positive margins to keep up with high-quality, equitable care.

Razor-thin margins have become the new normal for hospitals and health systems, according to the Healthcare Financial Management Association (HFMA). Specifically for non-profits, operating margins reached an eight-year low of -0.8 percent in September 2023, Deloitte reported citing data from S&P Global Ratings.

Non-profit health systems are not designed to turn a generous profit. However, Deloitte researchers said, “margins must improve if the industry is to continue providing high-quality, equitable care.”

Hospital financial performance is positively associated with quality and safety, Deloitte revealed through a large literature review. In particular, financial stability was linked to better patient experience, lower readmission rates, and lower risk of adverse patient outcomes.

Researchers stated in the report that margins are important for healthcare providers because they offer routine capital replacement to maintain, update, reconfigure, and rebuild complex facilities, equipment, supplies, and devices, especially as organizations keep pace with evolving models of care.

Additionally, health systems need healthy margins to care for complex patients and provide complicated services. Oftentimes, these complex patients are covered by relatively low-paying insurance programs, such as Medicaid, or are underinsured or uninsured.

For non-profit health systems, in particular, healthy margins also enable providers to offer community benefits. Stable margins can offset direct charity care, unreimbursed care, and the operation of facilities that generate minimal financial return. These health systems are also typically one of the largest employers in their communities, so stable margins can keep them in business and hiring.

But health systems may need slightly more than margin stability now. The healthcare industry is undergoing a reinvention with the introduction of generative AI and other innovative technologies, as well as the success of population health management programs. This reinvention requires more strategic investments to address changing consumer demands for more accessible, equitable, and digital care.

Health systems may also need to invest in alternative sites of care to improve patient convenience, costs, and access. Deloitte noted that investments could range from $1.4 million for an ambulatory surgery center operating room to $7 million to $30 million for a micro-hospital.

Health systems will need to cut costs to generate positive margins in the current economic environment. However, leaders may see more success with a holistic approach to margin improvement that includes integrating margin drivers (e.g., strategic growth, revenue enhancement, and capital deployments). This approach will create a more balanced transformation portfolio, the report stated.

Health system leaders will also need to consider workforce transformation to support innovations, especially as organizations across the care continuum face historic labor shortages and clinical burnout.

“Health system margins are the lifeblood of a healthy, patient-centered, innovative health care system and community,” the report concluded. “Claims that profits are not important in fact undermine the ability to fund the mission, serve the community, and deliver better, equitable care. Health system board members, executives, community leaders, and policymakers should focus first and foremost on their fiduciary responsibility to supporting a viable and innovative health care system over the long term.”