Finance leaders take heed, your outpatient volumes dropped 5% while physician compensation shot up 2%.
The nation's hospitals booked thinner operating margins in March thanks to lower volumes and revenues combined with rising labor costs, according to Kaufman Hall's latest National Hospital Flash Report.
The consultants say that health system bean counters can expect much of the same going forward as they also contend with growing bad debt and charity care.
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. 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," KH says.
Margins were nicked by the continued rise in labor costs, with KH's latest Physician Flash Report for Q1 2024 showing that staffing accounted for 84% of expenses. There is nothing to indicate that this trend will abate anytime soon, considering the ongoing clinical shortage nationally.
The dramatic rise in clinician labor costs is not exactly breaking news for hospital finance executives. A March survey by the Hospital Financial Management Association for that rising labor costs were by far the biggest concern for hospital CFO.
But acknowledging the problem doesn't make contending with it any easier. In what has become a game of Whack-A-Mole for CFOs, cutting labor expenses oftentimes means cutting into staffing or hours. That can lead to staff unrest and turnover and that hurts retention in a red-hot seller's market for clinician labor. Further, any cost savings seen in staff reductions often are lost in the cost of replacing those workers, or hiring temp labor, and accounting for the expected reduced productivity of replacement workers until they're up to speed.
KH reports that increases in revenues and expenses for health systems also signal increased productivity and compensation for their physicians, whose productivity grew 4% in Q1 24, when compared to Q1 2023 and whose "median investment/subsidy" grew 2% to $227,972 during the same period.
"With the high cost of labor unlikely to change, health systems must think critically about how to optimize downstream margins," Matthew Bates, managing director with Kaufman Hall, says in the report. "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."
Outpatient Volumes Down
Outpatient volumes fell 5% in March, which KH attributed to "the competitive challenges of providing outpatient care."
"Declines in outpatient revenue mean hospitals providing outpatient care may face difficulties ahead," says 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.
“With the high cost of labor unlikely to change, health systems must think critically about how to optimize downstream margins.”
Matthew Bates, managing director, Kaufman Hall
John Commins is the news editor for HealthLeaders.
KEY TAKEAWAYS
Kaufman Hall's metric for hospital profitability was 3.9% in March, a 0.2 percentage point drop from 4.1% in February.
Margins were nicked by the continued rise in labor costs, with KH reporting that staffing accounted for 84% of expenses.
Hospitals revenues can expect much of the same going forward as they also contend with growing bad debt and charity care.