November 3, 2021

The ‘perfect storm’ that tanked hospital margins in September

Daily Briefing

    Hospitals saw a double-digit decline in median operating margin in September, according to new research—largely due to "a perfect storm" of factors, including an increase in high-acuity patients, decreases in overall volume, and rising expenses.

    Provider financial outlook: Continued volume recovery—but modest gains in margins and huge variability across the board

    Why hospital margins plummeted in September

    According to a new report from Kaufman Hall, hospitals experienced an 18.2% decline in median operating margin from August to September, not accounting for federal relief funds through the CARES Act.

    The report cited several factors behind this significant decline, according to HealthLeaders Media, including more high-acuity patients, lower volumes, and higher expenses.

    For instance, data from the report indicated hospitals saw fewer Covid-19 patients in September, but they also saw more high-acuity patients with non-Covid conditions. This led to the average length of stay increasing by 0.7% month-over-month and by 4.8% year-over-year. Although high-acuity, inpatient cases can increase revenue, any gains are often offset by higher costs of care needed to treat these patients.

    In addition, hospitals saw declines in volume in September for almost every measure, including a decline of:

    • 6% for ED visits
    • 5.1% for adjusted discharges
    • 4.5% for operating room minutes
    • 3.7% for adjusted patient days

    These overall declines in volume also likely contributed to falling revenue, according to the report. In particular, the report found that between August and September gross operating revenue decreased by 1.4% and outpatient revenue decreased by 3.3%. According to HealthLeaders Media, this decreased revenue suggests patients may still be concerned about accessing care amid the recent delta-driven Covid-19 surge.

    At the same time, hospitals saw their expenses increase across the board. Overall, hospitals' total expenses increased by 2.2% in September, with 1.4% of that figure coming from increased labor costs alone.

    Rick Kes, a health care senior analyst with RSM, said rising labor costs have been a challenge for all health care providers. Although staffing nurses has been the primary issue for many hospitals, some hospitals have also struggled to fully staff non-clinical roles, such as positions in their billing and collections departments, Kes said.

    "I work with clients across the U.S. and I haven't seen any region tell me anything other than labor is their biggest issue," he said.

    Ultimately, Kes said that while the 18.2% median margin decline in September is "pretty alarming," it isn't surprising considering the number of high-acuity patients and higher expenses noted in the report.

    "It's taking multiple different things that could go poorly for you and putting them all together and all of them hitting at a very short period of time," he said. (Bannow, Modern Healthcare, 11/1; Pecci, HealthLeaders Media, 11/1)

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