Blog Post

3 things to know about hospitals' recent margin compression

August 31, 2017

    After several years of restrained cost growth, last year marked the first time since 2013 that not-for-profit providers saw annual expense growth outpace annual revenue growth. Coupled with continued price and volume pressures, rising expenses contributed to a significant deterioration in hospitals' financial performance for FY 2016. And the outlook for future years is anything but rosy. As Beth Wexler, a Moody's Vice President, projected, "Tighter margins will weigh on the sector going forward."

    With so many of our supplier members now in the throes of planning and budgeting for 2018, we've received a surge of inquiries about hospitals' current financial situation and, more significantly, about the potential implications for hospital budgets, capital spending, and broader cost-cutting initiatives.

    While the future forecast is still hazy, Advisory Board's Financial Leadership Council research team recently dug into available hospital performance data and modeled future hospital finances under a variety of scenarios.

    Below are three early insights from those analyses—and make sure to join us for a webconference on Thursday, September 7 as we dive deeper into the looming health system margin crunch and what it could mean for suppliers, service firms, and other vendor partners.

    Register for the Webconference

    1. Hospital margins are softening

    Many hospital executives are reeling from three successive years of negative margin growth. According to Moody's latest reports, last fiscal year's operating margin of 5.6% represents a significant 0.5 percentage point drop from FY 2015, which continues a slow downward trend. That's a far cry from the anemic industry margins during the 2008 financial crisis. But instead of focusing on how much better things are than a decade ago, hospital leaders are feeling pinched—both because future budgets are often based on prior year's revenues and because they have an ominous sense that their best days may be behind them.

    2. The negative impact of DSH cuts and rising bad debt expenses are starting to outweigh the benefits of coverage expansion

    While there's little question that many hospitals benefited from the ACA's insurance expansion by reducing the losses associated with charity care, the growth in high deductible health plans and subsequent consumer cost-sharing has left many hospital CFOs with an unexpected spike in bad debt. When coupled with the ACA's planned disproportionate share hospital (DSH) cuts, this rising bad debt expense is projected to more than offset the gains of reduced charity care. And if action (or inaction) by the federal government increases the ranks of the uninsured without also restoring DSH payments, the financial impact on hospitals would only get worse.

    3. Today's margin pressures point less to a singular market shock than to a fundamental shift in health care provider economics

    In 2008, hospital executives could blame rapid margin compression on the global financial meltdown. When hospital leaders again felt financial pressure in 2011 and 2012, they attributed their angst to the anticipated reimbursement cuts in the recently-passed ACA. This time around, things feel different. There's no obvious culprit or cycle to blame. Instead, we posit that today's margin pressures are the result of numerous long-anticipated challenges to both revenues and expenses. We're witnessing a structural change in hospital and health system economics. Providers will need innovation, flexibility, and fortitude to transform care delivery models. And they'll need trusted, creative partners every step of the way.

    Learn more at our webconference on the looming health system margin crunch

    Join us on Thursday, September 7 for a deeper dive into this latest analysis of hospital margin performance and emerging financial constraints.

    This webconference—led by Christopher Kerns, Executive Director of Advisory Board's Strategy and Finance Research, and Jessica Liu, Practice Manager overseeing Advisory Board's membership for suppliers and services firms—will help you understand what's driving the current hospital margin crunch and what it might mean for your own 2018 plans and partnership strategies.

    Register Now

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