The SVP of data and analytics discusses the new normal for hospital finances.
Kaufman Hall has, for the last several years, been publishing a monthly report that provides insights on the state of hospital finances in the U.S. The data offers an understanding of the economics of hospitals’ day-to-day operations and can also hold clues to what the future may hold.
The most recent Kaufman Hall data showed that hospital margins were -1.1% in February 2023, down slightly compared to the -0.8% in January. Flat margins are likely to continue in the near term, Kaufman Hall says, because of "external economic factors" such as expenses, inflation, and labor issues. Non-labor expenses grew by 6% year-over-year, highlighting a shift in the primary driver of financial pressures from staffing issues to things like the cost of goods and services. Additionally, patients continued to seek more of their care away from inpatient settings, with February 2023 outpatient revenue up 14% compared to February 2022.
"As we look at 2023, we find that the operating performance is still well below pre-pandemic levels. However, it is not quite as bad as it was in 2022 when the Omicron surge happened," Erik Swanson, senior vice president of data and analytics says.
"As we look at this data, particularly from a bottom-line perspective of operating margin, the amount of variation both month to month in how that operating margin moves, as well as across systems nationwide, has begun to narrow somewhat. This would seem to indicate that we are starting to move into a phase of understanding what this new normal may look like," he said.
Swanson recently connected with HealthLeaders to discuss the latest Kaufman Hall analysis and offer an understanding as to what hospitals’ financials might look like in 2023.
HealthLeaders: What is driving hospitals’ financial challenges?
Erik Swanson: At the highest level, the bottom-line issue is that expenses have outpaced revenue growth—that is ultimately what is driving the depressed margins. Recently, the growth in non-labor expenses has outpaced the growth in labor expenses—but it’s important to note that labor expenses are still up double-digit percentages from pre-pandemic levels. But, what we are seeing now is that some of those labor pressures have abated slightly and that is due to the reduced reliance on contract labor.
However, on the non-labor side, what we’re seeing this year is inflationary challenges are driving up expenses on the non-labor side. Those goods and consumables commodity-type items have become more expensive from a supply chain or materials perspective. Additionally, as overall wage rates across all industries have taken hold, organizations are passing many of those costs on through some of those goods and services, as well.
It's also important to note from a commodities perspective as patients are coming into the hospital, they're a bit sicker and they're staying longer. And so, as such, they often require more supplies, and the utilization of supplies is greater. So, it's not only as is the cost going up of those supplies, but the amount of supplies that hospitals have to use for each patient has also increased. And finally, what I'll say here is, as with the overall inflationary pressures, particularly for purchase services, and services that hospitals are outsourcing to other firms, they have also increased their rates and the cost of those services. So those have also been heavy pressure here in the last month or two on hospitals. So while we're seeing a little bit of easing of challenge on the labor side, we're unfortunately now seeing more pressure coming on that non-labor side due to many of those issues that I just noted.
HealthLeaders: In the report, you noted that healthcare leaders are facing an "existential crisis," can you elaborate on that?
Swanson: As we think about the new normal, one thing to note here is that over the last eight months, if you will, while we've seen that variation in operating margin decline, it is true that on a month-by-month basis, margins have generally been in the red. Hospitals and healthcare systems are beginning to contemplate what that future looks like and what it means. In some cases, that may mean shifting away from what may have traditionally been a very large inpatient delivery model of services to this hybrid-type approach and more outpatient. They are getting a better understanding of what that physical footprint and infrastructure look like. There are a lot of questions here, given these challenges, the high cost of delivering this inpatient care, and what it may mean. If I take this even a step further, what we also know has been happening really over the last year is that the days cash on hand, the liquidity that these healthcare systems hold has also been declining.
When we talk about this existential conversation, that's what it's about. It's a reevaluation of the type of care and services being delivered, what the patient demand may be, and it may be under a very different model than they had traditionally operated under.
HealthLeaders: What strategies are hospitals utilizing to maintain their financial stability?
Swanson: There is no single strategy, it is highly multifaceted, and all levers must be pulled. When we talk about labor expenses and managing the workforce, a lot of organizations are looking at how they can think about workforce optimization by employing data and analytics in a more useful way to understand the appropriate complement of staff and workforce that they’d need to deliver care in the appropriate ways and in the most economical fashion. Reducing the reliance on contract labor is another lever to pull. Some organizations are re-examining their float pool size or perhaps even creating their own internal staffing agency for some of those large systems. Some are considering recruitment retainment and those pipelines for ensuring that talent is coming in. Some organizations are partnering closely with local nursing schools, in some cases offering tuition assistance or even full tuition assistance to build a pool of candidates to address some of the labor shortages. That strategy will take a few years, but it’s useful. It's also critical to create an environment where everyone works to the top of their license and top of their ability across the organization.
What we’re seeing on the non-labor side is around more effective supply chain management by building scale and leveraging that to get preferred rates with vendors and in many cases, reducing the amount of variation in suppliers.
Finally, I'll say on the revenue side negotiating with payers as those opportunities arise and negotiating in a way such that those dollars are focused on where the patient populations will be, versus where they have historically been, is important. Some organizations are exploring where to move on as they move more towards a value-based care model. Organizations that had greater value-based care models tended to outperform those that did not during the pandemic. There are a lot of strategies here. And then the very last thing I’ll say is to think strategically about what care looks like. What does care delivery in the future look like? And making sure that they are positioning themselves for the future, while managing their day-to-day, but not losing sight of what that future may hold.
Amanda Schiavo is the Finance Editor for HealthLeaders.