Physician practices and hospitals see six consecutive months of negative margins

Increase in patient volume and revenue not enough to outweigh the growing cost of care

Physician practices as well as hospitals and health systems continue to face historically high operating expenses, leading to six consecutive months of negative margins, according to Kaufman Hall’s Physician Flash Report and National Hospital Flash Report. This was despite increased patient volume and revenue.

According to Kaufman Hall, physician practices saw the median investment/subsidy per full-time provider be materially higher than a year ago but showed a slight decrease in the second quarter from the first quarter of the year.

The median Kaufman Hall year-to-date operating margin index for hospitals was -0.09% through June, for a sixth straight month of cumulative negative actual operating margins. However, the median change in operating margin in June was up 30.8% compared to May, but down 49.3% from June 2021.

“To say that 2022 has challenged health care providers is an understatement,” said Erik Swanson, a senior vice president of Data and Analytics with Kaufman Hall, in a statement. “It’s unlikely that hospitals and health systems can undo the damage caused by the COVID waves of earlier this year, especially with material and labor costs at record highs this summer.”

For physician practices, net patient revenue per provider FTE rose 5.6% from Q1 2022 to $388,856 in Q2, up significantly from Q2 2020 (38%), but just slightly from Q2 2021 (1%). Increased provider productivity, particularly in primary care and surgical specialties, led to a 3.1% increase in net patient revenue per provider Work Relative Value Unit (wRVU) from Q1 to Q2 2022.

For hospitals, patient length of stay dropped 2.1%, patient days dropped 2.6%, and emergency department visits dropped 2.6% in June compared to May 2022, though all three figures are up when compared to June 2021. Operating room minutes were up 2.4% compared to May 2022. Despite the mixed volume numbers, hospital revenues were up in June. Gross operating revenue was up 1.2% from May 2022.

Total expenses for hospitals dropped slightly in June, down 1.3% from May due to a slight decrease in patient acuity, but are up 7.5% from June 2021 and are up 9.5% year-to-date.

Similarly, while provider compensation dropped in physician practices, expenses continued to escalate with increased patient demand, inflation, and a competitive labor market for support staff leading to a new high for total direct expense per provider FTE in Q2 2022 of $619,682—up 7% from Q2 2021 and 12% from Q2 2020, according to Kaufman Hall.

“Given the trends in the data, physician practices need to focus on efficiency in the second half of 2022,” said Matthew Bates, managing director and Physician Enterprise service line lead with Kaufman Hall, in a statement. “Amid historically high expenses, shifting some services away from physicians to advanced practice providers like nurse practitioners or physician assistants could help rein in the costs of treating an increased patient load while taking some of the weight off of the shoulders of physicians.”