Hospitals bounce back a bit financially, but face a long recovery

The latest Kaufman Hall report indicates health systems are rebounding somewhat after a very difficult start to the year, but they have a long way to go.

America’s hospitals bounced back a bit in March, but the financial recovery is poised to be a long one, according to Kaufman Hall.

While hospitals and health systems saw improved financial performance in March, operating margins remained in the red for the third straight month, according to Kaufman Hall’s latest monthly report, released May 2. Hospitals took a beating financially with the wave of Omicron patients in January reaching pandemic peaks, prompting many to delay non-urgent procedures.

The median Kaufman Hall Operating Margin Index was -2.43% in March. January was a particularly brutal month for health systems from a financial perspective, and February only saw modest improvement. Hospitals had seen 11 consecutive months with positive operating margins before January 2022.

“The March performance results suggest a long road ahead as healthcare providers struggle with inflation, national labor shortages, and the ongoing impacts of COVID-19 two years after the March 2020 start of the pandemic,” the report stated.

Hospital leaders say they have had difficulties with shortages of some workers, particularly nurses, and higher costs in drugs and other supplies.

There were undoubtedly some bright spots for hospitals in March.

Gross operating revenues rose 14% month-over-month and were 6.6% higher than in March 2021.

With COVID-19 cases dropping, hospitals witnessed a sharp uptick in outpatient revenue, which rose 16% in March compared to February; outpatient revenue was also 2.7% higher than in March 2021. Inpatient revenue rose 5.4% in March compared to the previous month, but it was almost the same as in March 2021 (a 0.3% increase year-over-year).

Hospitals saw more surgical procedures in March, with operating room minutes rising 17.3% over the previous month, although they were still slightly below March 2021 (a 0.7% decrease compared to last year).

Emergency department minutes rose 16.8% in March compared to February, and were 6% higher than in March 2021. Hospital leaders around the country have said recently they are seeing more people coming in for treatment they delayed due to the COVID-19 pandemic and now cannot wait any longer.

Expenses per adjusted discharge dropped 9% in March compared to February, but are still 10.8% higher year-over-year. Labor expenses fell 8% month-to-month but were 12.6% higher than in March 2021.

Hospitals endured a 13% increase in supply expenses compared to the previous month, and supply costs were 5.4% higher than in March 2021. Drug expenses rose 2.2% in March compared to February, but were actually slightly less year over year (-0.8%).

Some analysts project difficult times ahead for health systems, particularly for smaller hospitals. Merger activity has been slow in the healthcare industry so far this year, but some analysts expect more deals to take place as the year continues.

KPMG says it expects to see more mergers, especially as some hospitals that are struggling financially come to terms with the fact that they are going to need to find partners to stay alive.

Ash Shehata, KPMG’s national sector leader for healthcare and life sciences, told Chief Healthcare Executive, “The strong will remain stronger. Those that struggle will likely be targets for acquisition."

Diane Swonk, chief economist at Grant Thornton, said at the HIMSS 2022 Global Health Conference that the industry is on the cusp of seeing some hospitals shut down.

“We’re about to see a lot of hospitals close,” Swonk said.