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February 2, 2022

Hospital margins are improving. (But they're still below pre-pandemic levels.)

Daily Briefing

    Hospitals saw improved volumes and margins in 2021 compared with 2020, according to a new report from Kaufman Hall—but performance is still lower than pre-pandemic levels due to rising labor costs and supply chain issues.

    How omicron impacts our provider volume outlook

    Hospital margins at the end of 2021

    According to the report, hospitals' median change in operating margin, excluding federal relief funds from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, increased 44.8% in 2021 compared with 2020. However, this was still 3.8% below 2019 margins.

    Compared with 2020, hospitals saw their volumes increase for several measures in 2021, including:

    • Adjusted patient days, 11.8%
    • ED visits, 10.9%
    • Operating room minutes, 8.3%
    • Adjusted discharges, 6.9%
    • Average lengths of stay, 3.5%

    Increased volumes resulted in higher hospital margins in 2021 than 2020, but they still remained thin overall. Without CARES funding, the median operating margin index was 2.5% in 2021 and -0.9% in 2020. With CARES funding, it was 4% in 2021 and 2.8% in 2020.

    Overall, hospitals' gross operating revenue for 2021 was higher than both 2020 and 2019, increasing by 14.7% and 12.1%, respectively. However, higher revenue was offset by supply costs and increasing workforce shortages, the report found. Since 2019, total expense per adjusted discharged has increased by 20.1%, labor expense per adjusted discharged has increased by 19.1%, and non-labor expense per adjusted discharged has increased 19.9%.

    How the omicron surge affected hospital margins

    At the end of 2021, hospitals saw a significant increase in volumes, revenues, and expenses as the omicron variant led to record numbers of cases and hospitalizations.

    According to the report, the seven-day moving average of Covid-19 cases increased 353.5% from 86,975 on Dec. 1 to 394,407 on Dec. 31. This spike in cases consequently resulted in a 98.3% increase in Covid-19 hospitalizations over that same period.

    Specifically, hospitals saw increases in adjusted discharges (5.5%), adjusted patient days (3.9%), and ED visits (7.3%). However, there was no change to operating room minutes, which "suggests that many providers and non-Covid patients may have canceled care due to rising Covid caseloads—a trend that has been seen in previous waves of the pandemic," according to the report.

    In December, gross operating revenue without relief funding increased 4.4% compared with November, and inpatient and outpatient revenue increased 6.2% and 2.9%, respectively. However, hospital margins continued to be weighed down by growing expenses. Total expenses increased 3.7%, and total labor expenses increased 2.8%, although adjusted discharges declined by 1.8%.

    Overall, hospitals saw a median 38% increase in operating margins from November to December 2021 without CARES funding and a 49.5% change with funding.

    "As we enter the third year of the pandemic, hospital and health system leaders face worsening labor shortages that are driving up costs across health care," said Erik Swanson, SVP of data and analytics with Kaufman Hall. "Organizations are having to pay high salaries to attract the workforce they need, while also paying more for drugs and other supplies. Managing through these challenges will require organizations to build new levels of agility and efficiencies." (Plescia, Becker's Hospital CFO Report, 1/31; Muoio, Fierce Healthcare, 1/31; Kaufman Hall report, accessed 2/1)

    How Covid-19 is changing the future of the health care industry


    Read on to get Advisory Board's take on how Covid-19 will reshape demand, purchaser strategies, the competitive landscape, and delivery models.

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