Hospitals more stable to start the year, but challenges remain

Photo: Emir Memedovski/Getty Images

Hospitals entered 2023 on more stable footing, following the worst financial year since the start of the COVID-19 pandemic. However, they still face a range of persistent challenges, including higher labor expenses, lower patient volumes and a fundamental shift in where patients access care services, according to Kaufman Hall's latest Flash Report.

The start of 2022 coincided with the Omicron surge of COVID-19, putting hospitals in a difficult financial position to start the year. With no spike in cases this January, hospitals entered 2023 on more stable footing but continued to experience the same challenges that made 2022 such a dismal year.

Hospital operating margins in January were down slightly compared to December 2022. One factor that contributed to the dip in performance, according to Kaufman Hall experts, is the normal trend of hospitals making purchases for the year in January.

The median year-to-date (YTD) operating margin index for hospitals was -1% in January 2023, compared to -3.7% in January 2022. The 2023 YTD operating margin index was still lower than that of 2021 at -0.1%, and 2020 at 3.1%.

WHAT'S THE IMPACT

Patient volumes, emergency department visits, discharges and total revenues were down in January compared to December 2022. Meanwhile, expenses – particularly related to labor – increased over the same period. Total net operating revenue decreased by 3% month-over-month, while total expenses rose by 1%. Total labor expenses rose by 3% month-over-month.

Notably, drug expenses have increased 12% compared to YTD 2020. The increase in drug expenses, along with lower patient volume and longer emergency department stay time, indicates that hospitals are serving sicker patients in inpatient settings since the start of the pandemic, Kaufman Hall said.

"The trends in increased drug spending and decreased patient volume are indicators of a new landscape in how patients are utilizing hospital services in their care experience," said Erik Swanson, senior vice president of data and analytics at Kaufman Hall. "Hospitals continue to see outpatient sites driving increased revenue. Hospitals must continue to explore how to treat lower-acuity patients in novel settings as patient volumes shift to outpatient locations."

Hospital operating margins in January were down slightly from -0.7% in December 2022 to -1% in January 2023 following the trend of persistent negative margins throughout last year.

THE LARGER TREND

According to the previous Flash Report, which looked at December 2022 as well as the full year, December was the only month in which hospitals realized positive margins. Despite the end-of-year upswing, about half of U.S. hospitals finished 2022 with a negative margin as growth in expenses outpaced revenue increases.

Hospitals faced prolonged increases in labor expenses last year. The increases were driven in part by a competitive labor market, as well as hospitals needing to rely on more expensive contract labor to meet staffing demands. Increased lengths of stay due to a decline in discharges also negatively affected hospital margins.

Outpatient settings saw increased volume; the front door of the hospital continues to shift away from the emergency department, said Kaufman Hall. Hospitals experienced increased outpatient volumes, including in surgical settings.

The December bump, in which hospitals barely broke through to a positive operating margin at 0.2%, was the result of returning volumes and a relaxing of the competitive labor market, data showed. But the expense increases hampered these gains.
 

Twitter: @JELagasse
Email the writer: Jeff.Lagasse@himssmedia.com