Low margins make for a challenging environment, but is likely the new normal
The latest data from Kaufman Hall shows that hospital finances are beginning to stabilize in an environment where razor thin margins are becoming the new normal.
The National Hospital Flash Report shows that the highly variable margins that hit hospitals over the past three years is beginning to subside as external economic factors like labor shortages, higher material expenses, and a patient population that is increasingly seeking care outside of the hospital affect hospital finances.
The median year-to-date operating margin is still in the red, with the operating margin index for hospitals at -1.1% in February, down slightly compared to -0.8% in January. Despite the slight dip in financial performance, February marked the eighth month in which the variation in month-to-month margins decreased relative to the last three years.
“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,” said Erik Swanson, senior vice president of Data and Analytics with Kaufman Hall, 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.”
Hospitals continued to incur high expenses that negatively affect margins. Kaufman Hall experts point out that February represented a shift from labor to goods and services as the primary driver of hospital expenses. Inflationary pressures led to significant cost increases in goods and services, increasing non-labor expenses by 6% year-over-year. While hospitals still face labor shortages, labor expenses appeared to hold steady, indicating less dependence on contract labor.
“Hospital leaders face an existential crisis as the new reality of financial performance begins to set in,” said Swanson. “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.”
The onset of the COVID-19 pandemic kickstarted a shift in patient behavior that continues today, according to the report. Patients continued to seek more of their care away from inpatient settings, with February 2023 outpatient revenue up 14% compared to February 2022. Due to the shorter month, discharges, patient days, and ED visits were all down slightly in February compared to January. On a per-day basis, however, the average length of stay in hospitals was down, while ambulatory surgery centers and outpatient operating room minutes saw volume increases last month.