Hospitals face sixth straight month of negative margins, report finds

2022-08-02 14:00:00

Dive Brief:

  • High operating expenses took their toll on hospitals and physician groups in June, producing negative year-over-year margins for a sixth consecutive month, a new report from Kaufman Hall found. Month-to-month increases in patient volumes were not enough to offset the growing cost of care, the advisory firm said Monday.
  • Compared with May, operating margins improved, contract labor costs fell as demand slowed, and expenses cooled slightly in the latest month. But the industry has yet to turn the corner on an “enormously difficult year,” the report said.
  • “Although hospitals are seeing improved volumes and reduced expenses month-over-month, they will likely end up with historically low margins for the remainder of the year,” Kaufman Hall predicted.

Dive Insight:

Hospitals and health systems have closed the books on a challenging first half of 2022, but the outlook for the rest of the year remains gloomy. “It’s unlikely that hospitals and health systems can undo the damage caused by the COVID waves of earlier this year,” said Erik Swanson, senior vice president with Kaufman Hall.

The report echoes recent findings of other industry watchers. Fitch Ratings late last month cautioned that it could take years for provider operating margins to recover to pre-pandemic levels and may require “transformational changes” in the business model to drive improvement.

Costs for materials and labor are stalled near highs this summer, keeping hospital expenses “extremely elevated” compared to before the coronavirus pandemic, Kaufman Hall said. Total expenses dropped slightly in June, down 1.3% from May, due to a decrease in patient acuity. Still, expenses are up 7.5% from June 2021 and up 9.5% year to date.

Patient length of stay declined 2.1% in June from May, patient days fell 2.6%, and emergency department visits fell 2.6%. Despite the mixed volume numbers, hospital gross operating revenue rose 1.2% in June from May.

The median year-to-date operating margin index for hospitals was negative 0.09% through June.

The trend is somewhat better for physician practices. The median investment and subsidy per full-time provider remain materially higher than a year ago but eased slightly in the second quarter compared to the first quarter of the year, Kaufman Hall said.

For medical groups, net patient revenue per full-time employee rose 5.6% to $388,856 in the second quarter of this year compared to the first quarter. The number is up 38% from the second quarter of 2020, but only slightly ahead (1%) year to date. Increased provider productivity, particularly in primary care and surgical specialties, led to a 3.1% gain in net patient revenue per provider, according to Kaufman Hall.

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Written by Ritesh Kardam

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