Hospital financials worsen despite strong first quarter

The latest data from Kaufman Hall has painted a concerning picture for hospital financials across the United States, indicating a downturn despite a relatively robust start to the year. According to the National Hospital Flash Report, hospital operating margins, volume, and revenue have all experienced declines.

In March, the Kaufman Hall Calendar Year to Date Operating Margin Index, a key measure of hospital profitability, dropped to 3.9%, marking a 0.2 percentage point decrease from February's figure of 4.1%. This index represents the national median for hospital profitability, factoring in operating revenue less operating expense, including allocations from corporate, physician, and other entities.

Experts from Kaufman Hall have highlighted challenges ahead for hospitals regarding revenue cycles and overall collections, attributing these difficulties to increases in bad debt and charity.

One significant contributing factor to the financial strain is the relentless rise in labor expenses. The latest Physician Flash Report reveals that labor accounted for 84% of total expenses in the first quarter of 2024. Despite this, provider productivity increased by 4% compared to the same period in 2023, indicating efforts to maximize efficiency. The median investment/subsidy in providers also rose by 2% to $227,972 during this time frame.

Matthew Bates, a managing director with Kaufman Hall, emphasized the necessity for health systems to devise strategies to optimize downstream margins amidst the unlikelihood of labor costs decreasing. "Organizations could lean into strategies that enable physicians to be more productive as well as prioritizing outcomes related to lengths of stay or readmissions, which impact revenue," Bates said in a statement.

Moreover, hospitals are grappling with declines in outpatient volume, with outpatient revenue plummeting by 5% according to Kaufman Hall's analysis. This decline underscores the competitive challenges hospitals face in providing outpatient care and hints at potential difficulties ahead.

Erik Swanson, a senior vice president with Kaufman Hall, suggested that hospitals providing outpatient care may need to reassess their assets and explore strategic partnerships to mitigate current and future volume challenges.

The National Hospital Flash Report and the Physician Flash Report, draw on data from more than 1,300 hospitals and 200,000 providers respectively.