As reported here on Dec. 10, “Hospitals’ financial and operational performance remained stable in October, with key indicators including revenue, operating margins, and the average length of patient stay generally holding steady, according to the most recent ‘National Hospital Flash Report’ from the Chicago-based consulting and advisory firm Kaufman Hall, a Vizient company.”
According to the report, published on Dec. 9 and posted to the firm’s website, the mean operating margin for hospitals in October was 4.4 percent, up slightly from the 4.3 percent mean operating margin in April through September. Indeed, hospital operating margins have been stable all year; in January, the mean operating margin was 4.9; in February, 4.4 percent, and in March, 4.2 percent. All of the 2024 mean operating margins have been considerably higher than in November and December 2023, when they were 2.5 percent and 2.7 percent.
Erik Swanson, senior vice president and Data Analytics Group leader at Kaufman Hall, said in a statement upon the release of the report, that “Hospitals continue to experience overall financial and operational stability. However, supplies and drug expenses continue to put pressure on hospitals, and cost containment should be a priority. “Continued growth in outpatient revenue and reductions in the average length of stay indicate that patient care is shifting to more ambulatory and outpatient care sites,” he said.
After the report was released, Healthcare Innovation Editor-in-Chief Mark Hagland spoke with Swanson about the implications of the report’s findings. Below are excerpts from that interview.
We’ve now seen a year of financial stability for hospitals and health systems, with the mean operating margin nationwide well above 4 percent throughout the year. That consistency seems to speak to some level of financial stability right now, correct?
You’re absolutely correct, and I’ve been describing this situation as hitting some level of stability. And a lot of this stability is owing to the fact that volumes have stabilized. So we’ve seen a generally gradual increase in volumes; in many cases, volumes are at or exceeding what they were pre-pandemic. We’ve observed a little bit of a decrease in average lengths of stay, but normal care patterns and volumes. And we’ve been seeing a gradual shift from inpatient to outpatient, but at a gradual pace.
So from a macroeconomic or capital markets perspectives, that’s what all is leading to this stability. And while we have stability, margins are still lagging what they were pre-pandemic. And it’s particularly true of losses being generated on the medical group side. And we’ve seen the divide continuing between higher and lower performers.
Per that, this is still a perilous time for low-performing hospitals, correct?
Unequivocally correct. And when we look at the last few years of financial performance among patient care organizations as a whole, that 3.5-percent margin over time puts them in line with public utilities. And even historically, we might have argued that that 3.5-percent historic margin was not sufficient for a capital-intensive industry such as healthcare is. So any reduction, even if the margins are higher, is still challenging.
And even 4.1-percent margins are low per what has to be invested, right?
Yes, and inside [multi-hospital] systems, some margins are sub-2-percent. And days cash on hand for many organizations is also in a diminished state.
Some believe that most standalone hospitals are inevitably going to end up being acquired, because of their inability to survive long-term. Your thoughts?
I don’t want to make a blanket statement, but it’s true that some of these smaller standalone hospitals are having to ask themselves the question, can we remain independent? And even the size of that smaller party has grown pretty significantly; it’s no longer just the smallest organizations, but now moving into organizations with several hundred million dollars in annual revenues.
What will the financial landscape look like for hospitals in 2025?
I do try to be careful about being overly predictive. But if the trends we’ve observed thus far continue as they have been, you’ll continue to see some general improvement over the course of 2025, but not markedly so. Organizations are still seeing drug and supply cost issues, and reimbursement concerns. But some of this stability is allowing organizations to better manage their resources. And those that can are thinking about their outpatient/ambulatory footprints—areas that tend to be able to generate some margin. So we’re likely to see some continued improvement, though gradual. I think it will be slow, gradual movement.
Do you see additional acquisitions of medical groups by hospital systems in the next few years?
When organizations purchase these medical groups, we talk about subsidies for medical groups; when that occurs, there are components of revenue from the medical group that move over to the hospital. So it’s not universally true that each provider is making hospitals lose money, but rather, revenue has shifted. But I think we’ll continue to see activity in that space, for no other reason than that growing that outpatient footprint will be incredibly important. Pre-pandemic, the metric most closely associated with solid operating performance for hospitals was ED visit volume. Now, it’s referrals from primary care and medical groups. That shows that medical groups play an essential role in hospitals’ financial health. Now, the shape and form of those agreements—that, I think is changing a bit, but we’ll continue to see further employment or equity type models.
We all know that hospitals’ dependence on traveling/agency nurses during the worst period of the COVID-19 pandemic was a financial killer. Has that situation improved considerably since then?
Yes, it was an absolute killer. The data are very clear, and our discussions with clients are clear, that that reliance on contract labor has diminished substantially. It’s still higher than in the past, but it’s been reduced substantially since its peak in 2022. And because the demand has gone down, the rates that agencies could charge, have decreased as well. So we’re seeing reductions both in the volume of agency nursing and in the rates charged. Now, for a number of months, we’ve seen a reduction of FTEs per AOB, actively occupied bed. So some of those nurses from agencies are becoming reemployed by the hospitals. And on an overall basis, that has lowered or at least attenuated the growth in labor expense. Still, overall FTEs per AOB is still extremely lean. So we’re still operating in a mode of staffing shortage. So there is certainly some relief on that contract employment side, but still a very lean operation from at least a nursing perspective.
How big would you say a challenge the ongoing inflation in supply costs is right now?
Let me put it this way: it appears that many of the headwinds upcoming will be around the non-labor side. All of these expenses have a significant impact. If non-labor is about 50 percent of your total cost and supplies and drugs make up a significant portion of that, that’s meaningful.
And as the population ages, that’s leading to and requiring specialty pharmaceuticals: chemotherapy drugs, etc. That will continue to provide some pressure; and as the population ages, on a long-term basis, we expect the acuity in hospitals to rise, as patients move into outpatient settings. So not only will the prices of drugs and supplies increase, but the utilization will increase. And unlike labor, the ability to effect change in terms of price and utilization, is quite slow. So this is not something that organizations can be incredibly nimble with; so supply and drug and purchased services, will continue to be a strong challenge.
How might the emergence of hospital-at-home impact hospital finances in any direction?
There’s a lot to unpack there. Number one, in many ways, hospital-at-home is beneficial to patients not only per cost, but there can be potential reduced mortality. And to your point about you’ve seen one you’ve seen one, that’s true, and not a lot of hospitals have cracked the code on how to deliver hospital-at-home economically. But this expansion of remote monitoring tools as well as in some instances, virtual nursing, will play a role. So hospitals with those capabilities and can invest in the concept—it can be a profitable service that is delivering solid care at lower cost and better patient outcomes and satisfaction. But certainly, many organizations I’ve spoken to have been struggling to evolve those programs forward. I think we’ll continue
How do you see the ongoing evolution of value-based contracting in the context of the financial health of hospitals and health systems going forward?
Generally, I would say that in most areas, this notion of challenged payer mix or the payer mix shifting more towards governmental, and higher rates of uninsured and underinsured, will be challenging, especially in the context of an aging population. But necessity is the other of invention. And many more organizations are moving into value-based arrangements, and even capitation. And some organizations have done well. But it takes a fundamental shift of thinking as you move into that space. Fee-for-service-type reimbursement programs will continue to be challenged, and we’ll continue to see that shift into value-based arrangements.
