A recent report says hospitals are seeing financial relief as operating margins stabilize, but leaders are being warned to proceed with caution.
The latest data from Kaufman Hall shows hospitals are seeing some financial relief as revenue increases offset rising expenses and operating margins stabilize, the August 2023 report says.
The median year-to-date operating margin index increased from 0.9 percent in July to 1.1 percent in August, according to the data. While these margins are still below historical levels, it's noteworthy that hospitals have consistently achieved positive margins since March.
Another win coming from the Kaufman Hall report is in revenue growth. Hospitals experienced robust revenue growth, outpacing expense increases, the report said. Net operating revenue increased by 8 percent month-over-month, while gross operating revenue rose by 9 percent.
Inpatient (4 percent) and outpatient revenue (12 percent) also posted significant gains from July to August. Hospital CFOs should continue to focus on revenue optimization strategies, particularly in the outpatient setting, where care transitions have been evident.
[See: The Exec: Critical Access CFO On Shifting Your Focus To Outpatient Services]
While margins seem to be trending in a positive direction and are starting to show a gradual recovery from the financial challenges brought on by the pandemic, CFOs are being told to remain cautious.
Ben Finder, director of policy research and analysis at the American Hospital Association, recently took aim at the “false narrative from hospital critics” that tell leaders they are in the financial clear.
“Hospital critics frequently focus exclusively on a fleeting period of stability, ignoring other available data that show the real costs of cascading waves of illnesses, inflationary pressures, and skyrocketing expenses for drugs, labor, supplies and equipment,” Finder said in his recent AHA blog post.
Taking a look at the big picture shows a much different story, Finder says.
Fitch, Moody’s, and S&P all released reports describing how nearly every metric of hospital and health system financial health declined in 2022, Finder said.
“Operating margins and earnings deteriorated significantly, days cash on hand (a measure of financial resilience) declined, and as a result, most agencies are reporting significantly more credit rating downgrades than upgrades,” Finder said.
CFOs know they need to be looking at big-picture results when examining financial health, and it’s evident that while finances have been improving, hospitals and health systems won’t be out of the woods any time soon.
The Kaufman Hall report paints a cautiously optimistic picture for hospital CFOs. Positive operating margins, efficient expense management, and revenue growth indicate a continued recovery from pandemic-related challenges, but as patients resume more typical care patterns and days of cash on hand remain low, CFOs must remain vigilant in managing costs and optimizing revenue while adapting to the evolving healthcare landscape.
Amanda Norris is the Director of Content for HealthLeaders.
KEY TAKEAWAYS
The median year-to-date operating margin index increased from 0.9 percent in July to 1.1 percent in August, new data shows.
But while margins are trending in a positive direction, CFOs are being told to remain cautious and to keep their eye on the big picture.