For hospitals, ‘razor thin margins’ may represent new normal

Hospitals are seeing a bit more consistency in their financial performance, but that’s not necessarily good news.

Health systems saw a slight drop in operating margins in February, according to the latest National Hospital Flash Report from Kaufman Hall, a healthcare consulting firm.

The median year-to-date operating margin index for hospitals was -1.1% in February, down from -0.8% in January. Hospitals can expect to see flat margins in the foreseeable future, Kaufman Hall projects.

On the upside, hospitals should be getting a better sense of their economic realities, and can at least plan appropriately, says Erik Swanson, Kaufman Hall’s senior vice president of data and analytics.

“After years of erratic fluctuations, over the last several months we are beginning to see trends emerge in the factors that affect hospital finances like labor costs, goods and services expenses, and patient care preferences,” Swanson said in a statement.

“In this new normal of razor thin margins, hospitals now have more reliable information to help make the necessary strategic decisions to chart a path toward financial security.”

While health systems may now see more consistent trends, they also face dire challenges as it’s clear that they will grapple with financial headwinds for some time to come. Hospitals found 2022 to be the worst year financially of the COVID-19 pandemic, with many finishing the year in negative margins.

Healthcare executives are going to need to think differently and engage in serious long-term planning, Swanson said.

“Hospital leaders face an existential crisis as the new reality of financial performance begins to set in,” Swanson said in a statement. “2023 may turn out to be the year hospitals redefine their goals, mission, and idea of success in response to expense and revenue challenges that appear to be here for the long haul.”

Hospitals continue to struggle with higher expenses, but increased labor costs are no longer the prime culprit, Kaufman Hall says. Health systems are spending more on goods and services. Non-labor expenses were 6% higher in February 2023 year-over-year.

Conversely, labor expenses dropped 1% in February 2023, compared to February 2022. Hospitals are still battling labor shortages - a sentiment expressed repeatedly at the ViVE conference in Nashville this week. But hospitals appear to be relying less on more expensive contract labor, Kaufman Hall says.

Outpatient revenue continues to grow more quickly than inpatient revenue. The report shows outpatient revenue in February 2023 was 14% higher than in February 2022. Conversely, inpatient revenue rose only in February was only 2% higher than the same month last year, according to the report.

Kaufman Hall’s report utilizes data from more than 900 hospitals from Syntellis Performance Solutions.