Hospital operating margins continued to struggle during first quarter

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Operating margins at hospitals and health systems have been hit hard by the pandemic, and the Omicron surge was an additional setback as the healthcare industry continued to struggle at the beginning of the year.

The impact of the Omicron variant has been palpable, as median operating margins remained in the red for a second straight month in February, and most organizations saw declines in margins, revenues and inpatient volumes, according to the latest Kaufman Hall Flash report.

The median Kaufman Hall Operating Margin Index reflecting actual margins for the month was -3.45%, up from -4.52% in January, but still well below sustainable levels. Recovery from the Omicron surge is likely to be slow, and there could be additional setbacks ahead if other variants, such as the Omicron subvariant BA.2, lead to future surges.

The improvement in median margin was driven by disproportionate increases among hospitals that saw margin gains in February compared to hospitals that had margin declines. Even so, most U.S. hospitals reported margin declines for the month.

The median change in operating margin was down 11.8% from January to February, and the median change in Operating EBITDA Margin decreased 7.5% month-over-month. 

Year-over-year, the median change in operating margin was down 26.7%, and the median change in operating EBITDA margin declined 24.3%. Median margin changes were the most dramatic compared to just before the start of the pandemic, with operating margin down 42.4% and operating EBITDA margin down 37.5% vs. February 2020.

WHAT'S THE IMPACT?

In terms of volumes, outpatient volumes were slow to recover in February, while inpatient volumes decreased with the drop in COVID-19 hospitalizations. Patient days were down 13.3% month-over-month and 4.7% compared to February 2020. Adjusted patient days decreased 7.6% from January to February and 4.7% vs. February 2020.

Fewer severely ill COVID-19 patients also contributed to shorter hospital stays. Average Length of Stay (LOS) dropped 5.3% month-over-month, but rose 3.6% YOY and 12.6% vs. the same month in 2020.

Surgery volumes saw moderate increases as some patients returned for nonurgent procedures that were delayed during the Omicron surge.

Poor volume performance led to month-over-month revenue declines in February. Gross operating revenue was down 7.4% and outpatient revenue dropped 5% from January levels. Inpatient revenue had the biggest decrease, down 19.3% following a nearly 3% increase the prior month due to January's spike in COVID-related hospitalizations.

Hospital expenses saw improvements month-over-month as hospitals got some relief following the intense demands of the Omicron surge. Total expense per adjusted discharge was down 4.5%, Labor expense per adjusted discharge decreased 6.1%, and non-labor expense per adjusted discharge dropped 3.6% from January to February.

Widespread labor shortages and ongoing supply chain challenges continued to drive up year-over-year adjusted expenses. Total expense per adjusted discharge rose 10.4% compared to February 2021 and 30.7% vs. February 2020.

Labor expense per adjusted discharge was up 15.3% year-over-year vs. 2021 and 32% compared to February 2020. Staffing levels declined once again, highlighting the influence of labor shortage wage pressures in pushing up overall labor costs. Full-Time Equivalents (FTEs) per adjusted occupied bed dropped 2.8% month-over-month and 4.8% year-over-year. They were flat vs. February 2020. 

Non-labor expenses per adjusted discharge rose 8% compared to February 2021 and 25.8% vs. February 2020. Drug expense per adjusted discharge had the biggest increase of any expense metric versus pre-pandemic levels at 40.6%.

THE LARGER TREND

Some of these trends were foreshadowed by a November 2021 report from Fitch Ratings showing that labor shortages and supply chain challenges are a rising threat to profit margins.

Multiple factors are contributing to labor pressures, including staff burnouts caused by the enduring COVID-19 pandemic and an overall shortage of qualified help, which has resulted in higher costs to hire temporary staff, as well as wage inflation. Furthermore, the report noted that lack of staff is forcing some in-patient behavioral health and senior housing operators to lower admission rates.

Supply chain issues are also adding pressure to profit margins, mainly due to higher transportation costs incurred by distributors. The medical device subsector is also being impacted by the global shortage of semiconductors needed for their manufacturing processes.
 

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com