Health system operating margins declined in August
It's the second consecutive month in which operating margins tightened, Strata's data shows.
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Performance metrics were mixed for many healthcare organizations in August, with patient demand stalling as expenses continued to rise, according to new data from Strata Decision Technology.
Health systems nationwide saw operating margins narrow again for the month. The median year-to-date (YTD) health system operating margin dropped from 2.1% in July to 1.9% in August. At the same time, the median YTD operating margin for hospitals rose slightly from 4.8% in July to 4.9%.
"This is the second consecutive month that we've seen operating margins tighten for the nation's health systems," said Steve Wasson, chief data and intelligence officer at Strata Decision Technology. "As our largest healthcare organizations, these entities already struggle with thin operating margins and feel expense pressures on a magnified scale. While it's encouraging to see expense increases slow somewhat compared to the concerning spikes in July, they remain on the rise with no signs of stopping."
WHAT'S THE IMPACT?
Hospital operating margins saw minimal change compared to the prior year, with the median change in hospital operating margin rising just 0.9 percentage points from August 2023 to August 2024.
Margin changes varied by region, with hospitals in the Northeast/Mid-Atlantic seeing the biggest decrease, at 1.1 percentage-point year-over-year (YOY), and hospitals in the South seeing the biggest increase, at 1.9 percentage points.
Patient volumes dropped across most key metrics for the month, representing a return to declines seen in June after a rise in patient demand in July. Outpatient visits decreased 0.5%, observation visits were down 4.2% and emergency visits decreased 4.9% YOY.
Inpatient admissions increased for the month at 3.5% YOY. From July to August 2024, inpatient admissions decreased 0.7%, but outpatient visits rose slightly, up 0.4%.
Looking at patient volumes across different service lines, infectious disease had the biggest YOY increase, at 20.5%, due in part to recent increases in cases of pertussis, COVID-19 and other infectious diseases reported by the Centers for Disease Control and Prevention.
Hospital expense increases eased somewhat compared to double-digit increases in July. Nonlabor expenses rose faster than labor expenses for the month, with total nonlabor expense up 6.2% YOY and total labor expense up 5.4% YOY. Total expense increased 6.2% from August 2023 to August 2024.
Looking at specific nonlabor expenses, supply expense was up 5.5% compared to a 16.4% YOY increase in July. Drugs expense increased 4.6% YOY in August, versus 17.3% the prior month, and purchased service expense rose 12%, the same level as in July.
Hospital revenues continued to rise across most metrics. Gross operating revenue and inpatient revenue both increased 6.1% while outpatient revenue was up 5.6% YOY. By region, increases in gross operating revenue ranged from 4.6% for hospitals in the Northeast/Mid-Atlantic to 7% for those in the Midwest.
THE LARGER TREND
Eighty four percent of health systems cited lower reimbursement from payers as a top cause of low operating margins, according to a report published by HFMA.
Higher labor costs are the biggest drivers of margin pressure according to 96% of health system CFOs, with 99% indicating that nursing is the top driver of labor shortages. Other roles such as lab technicians and radiology technicians are also experiencing shortages.
Research from the Urban Institute released in 2023 examined the financial vulnerability of hospitals and health systems throughout the pandemic. The study found that operating margins plummeted to negative 40% in April of 2020, underscoring how important federal support was for hospitals to remain financially viable during the pandemic.
Last year many hospitals faced cash shortages brought on in part by labor costs and inflation, according to Plante Moran's Duane Fitch. Plante Moran works with hospitals on creating Centers of Excellence in one or two service lines to make sure they are optimizing performance in those lines.
Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.
