Hospital Financials Decline as Expenses Remain High

Declines in outpatient revenue and growing labor expenses highlight challenges ahead

CHICAGO - May 2^nd, 2024 - Despite a relatively strong first quarter, hospital financials across the board worsened, with declines in operating margins, volume, and revenue, according to the latest data from Kaufman Hall.

The Kaufman Hall Calendar Year to Date Operating Margin Index-a measure of hospital profitability was 3.9% in March, a 0.2 percentage point drop from 4.1% in February, according to the latest National Hospital Flash Report. The Index represents the national median for hospital profitability-or operating revenue less operating expense-inclusive of allocations to hospitals from corporate, physician, and other entities.

Kaufman Hall experts say hospitals can expect challenges for revenue cycles and overall collections due to increases in bad debt and charity.

High Labor Expenses

The latest Physician Flash Report shows that overall labor expenses continue to rise, with Q1 2024 data showing labor accounted for 84% of total expenses.

Kaufman Hall experts say both revenue and expenses are on an upward trajectory-indicating increased productivity by providers and increases in median investment/subsidies in providers by health systems. Provider productivity increased 4% compared to Q1 2023 and the median investment/subsidy in providers increased 2% to $227,972 in the same time frame.

"With the high cost of labor unlikely to change, health systems must think critically about how to optimize downstream margins," said Matthew Bates, a managing director with Kaufman Hall. "Organizations could lean into strategies that enable physicians to be more productive as well as prioritizing outcomes related to lengths of stay or readmissions, which impact revenue."

Declines in Outpatient Volume

The Kaufman Hall analysis shows hospital outpatient revenue fell 5%, reflecting the competitive challenges of providing outpatient care.

"Declines in outpatient revenue mean hospitals providing outpatient care may face difficulties ahead," said Erik Swanson, a senior vice president with Kaufman Hall. "Organizations may need to reevaluate their assets and consider strategic partnerships to offset current and future challenges with volume."

The National Hospital Flash Report draws on data from more than 1,300 hospitals from Syntellis Performance Solutions, now part of Strata. The Physician Flash Report draws on data based on more than 200,000 providers, also from Syntellis Performance Solutions, now part of Strata.

About Kaufman Hall

Kaufman Hallprovides management consulting solutions to help society's foundational institutions realize sustained success amid changing market conditions. Since 1985, Kaufman Hall has been a trusted advisor to boards and executive management teams, helping them incorporate proven methods, rigorous analytics, and industry-leading solutions into their strategic planning and financial management processes, with a focus on achieving their most challenging goals.

Kaufman Hall services use a rigorous, disciplined, and structured approach that is based on the principles of corporate finance. The breadth and integration of Kaufman Hall advisory services are unparalleled, encompassing strategy; financial and capital planning; performance improvement; treasury and capital markets management; mergers, acquisitions, partnerships, and joint ventures; and real estate.

Kaufman Hall companies include Claro Healthcare and Gist Healthcare.

CONTACT: Nina Gabel, [email protected]

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