Hospital margins are more stable, but all is not well

After a long stretch of financial difficulties, hospitals are seeing more stable margins, but they are hardly out of the woods, according to the latest report from Kaufman Hall.

Hospitals are seeing an uptick in patient volume, but they're still operating on slender margins, according to Kaufman Hall's latest monthly report. (Image credit: ©ekapolsira - stock.adobe.com)

Hospital finances did improve a bit in March compared to February, according to Kaufman Hall’s National Hospital Flash Report. Yet hospitals continue to operate under razor-thin, “near zero” margins, the healthcare consulting firm says. Hospitals may need to accept that slender margins represent the new normal for the foreseeable future, the company has said.

With such thin margins, hospitals and health systems find themselves in an extremely vulnerable position, especially if the country moves into recession or if there’s another public health emergency.

The median year-to-date (YTD) operating margin index for hospitals was essentially flat in March (0.0%), an improvement from -1.5% in February.

While the news is somewhat better for hospitals, they are still facing stiff headwinds, said Erik Swanson, senior vice president of data and analytics at Kaufman Hall.

“While it appears that hospital finances are stabilizing, that doesn’t mean that all is well,” Swanson said in a statement. “Under the seemingly calm surface, there are significant challenges—especially labor shortages and diminished margins—that could quickly reach the surface should another crisis arise.”

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While hospitals have been dealing with difficulties with staff shortages throughout the COVID-19 pandemic, health systems have been facing greater costs on supplies due to inflation.

“Increased material costs associated with drugs and supplies as a result of inflationary pressures continue to negatively affect hospital margins. Additionally, workforce shortages persist, driving up the cost of labor, albeit at a slower pace than material costs,” the report states.

Non-labor expenses, including drugs and other supplies, rose 6% in March over the previous month, the report states.

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On the upside, health systems are seeing an uptick in patient volume. Outpatient revenue in particular continues to be a bright spot for hospitals, seeing a 14% increase in March compared to February, and a 7% gain compared to March 2022. Inpatient revenue rose 11% in March compared to February and was 5% higher than March 2022.

Health systems performed more surgical procedures, as operating room minutes rose 13% in March compared to the previous month and are 7% higher than March 2022.

At the same time, patients weren’t staying as long in the hospital, as the average length of stay fell 4% in March compared to February. The report notes that hospitals may be seeing patients who aren’t as seriously ill. In recent months, hospital leaders said they were seeing more patients with greater acuity requiring longer hospital stays, at least in part due to some patients delaying treatment during the pandemic.

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