As reported here on December 10, “hospitals’ financial and operational performance remained stable in October, with key indicators including revenue, operating margins and average patient length of stay overall remaining stable, according to the most recent ‘National Hospital Flash Report’ of Chicago-based consulting and advisory firm Kaufman Halla Vizient company.”
According to the report, released Dec. 9 and posted on the company’s website, hospitals’ average operating margin in October was 4.4 percent, slightly higher than the average operating margin of 4.3 percent in April. and September. In fact, hospitals’ operating margins have remained stable throughout the year; In January, the average operating margin was 4.9; in February, 4.4 percent, and in March, 4.2 percent. All 2024 average 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 following the report’s release that “hospitals continue to experience overall financial and operational stability. However, expenditures on supplies and medications continue to put pressure on hospitals and cost containment should be a priority. “Continued growth in outpatient revenue and reductions in average length of stay indicate that patient care is shifting to more outpatient and walk-in care sites,” he said.
After the report was published, 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 have seen a year of financial stability for hospitals and health systems, with a national average operating margin well above 4 percent for the entire year. That consistency seems to speak to some level of financial stability right now, correct?
You are absolutely right and I have been describing this situation as if it reached some level of stability. And much of this stability is due to the fact that volumes have stabilized. So we have seen a generally gradual increase in volumes; In many cases, volumes are equal to or higher than they were before the pandemic. We have seen a small decrease in average length of stay, but normal care patterns and volumes. And we have been seeing a gradual shift from inpatient to outpatient, but at a gradual pace.
So from a macroeconomic or capital markets perspective, that’s what leads to this stability. And while we have stability, margins are still below what they were before the pandemic. And this is particularly true for losses that occur on the medical group side. And we have seen that the division between the highest and lowest performers continues.
Therefore, this remains a dangerous time for underperforming hospitals, correct?
Unequivocally correct. And when we look at financial performance in recent years among patient care organizations as a whole, that 3.5 percent margin over time puts them in line with public services. And even historically, we could have argued that that historical margin of 3.5 percent was not enough for a capital-intensive industry like healthcare. Therefore, any reduction, even if the margins are higher, remains a challenge.
And even 4.1 percent margins are low relative to what one should invest, right?
Yes and inside [multi-hospital] systems, some margins are less than 2 percent. And the cash available to many organizations is also diminished.
Some believe that most independent hospitals will inevitably end up being acquired due to their inability to survive in the long term. Your thoughts?
I don’t want to make a blanket statement, but it’s true that some of these smaller independent hospitals have to ask themselves: can we still be independent? And even the size of that smaller party has grown quite significantly; It’s no longer just the smallest organizations, but organizations with several hundred million dollars in annual revenue are now coming on board.
What will the financial landscape look like for hospitals in 2025?
I try to be careful not to be too predictive. But if the trends we have seen so far continue as they have, some overall improvements will continue to be seen over the course of 2025, although not markedly. Organizations still face issues with medication and supply costs, as well as reimbursement concerns. But part of this stability is allowing organizations to better manage their resources. And those who can do so are thinking about their outpatient/outpatient footprints, areas that tend to generate some margin. Therefore, we are likely to see some continued, albeit gradual, improvement. I think it will be a slow and gradual movement.
Do you see additional acquisitions of medical groups by hospital systems in the coming years?
When organizations purchase these medical groups, we talk about medical group subsidies; When that happens, there are components of the medical group’s revenue that are shifted to the hospital. Therefore, it is not universally true that each provider is causing hospitals to lose money, but rather that revenues have changed. But I think we’ll continue to see activity in that space, simply due to the fact that increasing that ambulatory footprint is going to be incredibly important. Before the pandemic, the metric most closely associated with strong hospital operating performance was emergency department visit volume. Now, they are referrals from medical and primary care groups. This shows that medical groups play an essential role in the financial health of hospitals. Now, I think the shape of those agreements is changing a little bit, but we will continue to see more employment or equity-type models.
We all know that hospitals’ reliance on traveling or agency nurses during the worst period of the COVID-19 pandemic was financially devastating. Has that situation improved considerably since then?
Yes, he was an absolute killer. The data is very clear, and our conversations with customers are clear, that the reliance on outsourced labor has decreased substantially. It’s still higher than in the past, but it’s down substantially from its peak in 2022. And because demand is down, the fees agencies could charge have also dropped. So we are seeing reductions in both agency nursing volume and fees charged. Now, for several months, we have seen a reduction in FTE per AOB, actively occupied bed. So some of those agency nurses are being rehired by hospitals. And generally speaking, that has reduced or at least tempered the growth of labor spending. Still, the total FTE per AOB remains extremely small. So we are still operating in a staff shortage mode. So, there is certainly some relief on the employment contract side, but it is still a very efficient operation at least from a nursing perspective.
How big a challenge would you say is the current inflation in supply costs right now?
Let me put it this way: It looks like a lot of the headwinds ahead will be on the non-labor side. All of these expenses have a significant impact. If non-labor expenses make up about 50 percent of your total cost and supplies and medications make up a significant portion of that, that’s significant.
And as the population ages, that leads to the need for specialized pharmaceuticals: chemotherapy drugs, etc. That will continue to put some pressure; and as the population ages, in the long term, we expect acuity in hospitals to increase as patients transition to outpatient facilities. So not only will the prices of drugs and supplies increase, but their utilization will also increase. And unlike labor, the ability to make changes in terms of price and utilization is quite slow. So this is not something that organizations can be incredibly agile about; Therefore, the supply and acquisition of medicines and services will continue to be a strong challenge.
How might the emergence of the hospital at home affect hospital finances in any direction?
There’s a lot to unpack there. First, in many ways, hospital at home is beneficial to patients not only because of cost, but it can also reduce mortality. And to your point that you’ve seen one, you’ve seen one, that’s true, and not many hospitals have cracked the code on how to affordably provide hospital care at home. But this expansion of remote monitoring tools, and in some cases virtual nursing, will play an important role. So hospitals with those capabilities can invest in the concept: it can be a cost-effective service that provides robust care at a lower cost and better patient outcomes and satisfaction. But certainly, many organizations that I’ve spoken to have been struggling to move those programs forward. I think we will continue
How do you see value-based contracting evolving today in the context of the financial health of hospitals and health systems going forward?
Overall, I would say that in most areas, this notion of a contested payer mix or a payer mix moving more toward the government, and higher rates of uninsured and underinsured, is going to be a challenge. , especially in the context of an aging population. But necessity is the other of invention. And many more organizations are adopting values-based agreements, and even capitation. And some organizations have done well. But a fundamental shift in thinking is needed as you move into that space. Fee-for-service type reimbursement programs will continue to be challenged and we will continue to see that shift toward value-based arrangements.
