Hospital operating margins stabilizing at end of Q2

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Hospitals and health systems ended the second quarter with margins stabilizing, but high costs continue to pressure operations heading into the second half of the year, according to Strata's Monthly Healthcare Industry Financial Benchmarks report.

The median, year-to-date health system operating margin held steady at 2.3% for a second consecutive month in June, while the metric decreased slightly to 4.9% for the nation's hospitals.

Growth in labor expenses outpaced nonlabor expense increases, which represents a reversal from the prior month as hospitals saw some of the year's first decreases in supply and drugs expenses, data showed.

Patient volumes were down across most measures in June, with outpatient visits seeing some of the biggest declines, down 4.2% year-over-year and 10.2% month-over-month.

Median physician expenses remained high at $1.08 million for the quarter, up 16.3% from the second quarter of 2023.

WHAT'S THE IMPACT?

Looking at changes in operating margins over time, the median change in hospital operating margin was flat from June 2023 to June 2024, but decreased 0.5 percentage point from May to June 2024. 

Results varied for hospitals in different regions. Those in the Midwest and Great Plains saw the median year-over-year change in operating margin decrease at 3.8 and 2.7 percentage points, respectively. Other regions saw increases ranging from just 0.1% for hospitals in the Northeast/Mid-Atlantic to 2.4% points for those in the South.

Expense-wise, labor expenses grew faster than nonlabor expenses for June YOY, after the opposite was true the month before. Total labor expense was up 5.2%, while total nonlabor expense increased 3.3% from June 2023 to June 2024, leading to a 4.8% increase in total expense over the same period.

Hospitals saw some easing of expenses month-over-month. Total expense was down 2.8%, total labor expense decreased 3.0%, and total nonlabor expense was down 2.7% from May to June.

Hospitals saw gross revenues improve compared to prior year but drop versus the prior month. Growth in inpatient revenues once again outpaced outpatient revenue increases. Year-over-year, gross operating revenue rose 3.6%, inpatient revenue was up 4.7%, and outpatient revenue increased 1.8%.

Month-over-month, gross operating revenue dropped 6.5%, inpatient revenue decreased 5.4%, and outpatient revenue was down 7.6%.

THE LARGER TREND

Eighty four percent of health systems cite lower reimbursement from payers as a top cause of low operating margins, according to a report published by the Healthcare Financial Management Association and Eliciting Insights, a healthcare strategy and market research company.

Higher labor costs are the biggest drivers of margin pressure according to 96% of health system CFOs, with 99% of CFOs 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.