3 Takeaways for CFOs from the Q2 Earnings Reports

From expenses to admissions, there are a few key indicators that CFOs need to know that both positively and negatively affected recent earnings reports.

The financial outlook for hospitals across the nation is moving in a positive direction, albeit with challenges still standing in the way.

After the largest for-profit health systems released their second quarter earnings report earlier in the summer and as nonprofits continue to release theirs, patterns have emerged indicating America's hospitals are beginning to see some financial relief.

It's evident that now is still not the time for CFOs to let their financial guards down, but the squeeze may be lessening for some.

Here are three significant trends we saw in the second quarter:

Labor costs down, total expenses still up

Arguably the biggest priority for healthcare CFOs right now is reducing costs without sacrificing potential growth. Part of that task is finding a way to bring down labor costs, which have been a thorn in executives' sides amidst a workforce shortage.

The second quarter, however, saw some health systems produce encouraging results. HCA Healthcare slashed labor costs by 20% compared to last year's second quarter, while also increasing nurse hiring by 9%, CEO Sam Hazen told investors.

Community Health Systems (CHS) cut its labor costs by 15% to $74 million, a drastic change from its peak of $190 million in the first quarter of 2022, CEO Tim Hingtgen said on an earnings call.

Other hospitals, however, saw their labor costs go in the opposite direction and even with improvement in that area, HCA or CHS couldn't bring down their total expenses for the quarter, which increased 7.6% and 1.9%, respectively.

Bringing down total expenses remains an obstacle for healthcare leaders, but having a process-oriented mindset can help, Ochsner Health CFO Jim Molloy recently told HealthLeaders.

"It is important to develop a culture in which leaders seek continuous improvement, while also measuring the appropriate things and benchmarking yourself in key areas against best-in-class organizations," Molloy said. "While it is important to always keep a mindset toward reducing expenses, the true key to success for any organization is disciplined growth."

Admit one (or more)

Another positive development for hospitals has been the rise in admissions as demand has rebounded after the COVID-19 pandemic kept patients away.

Universal Health Services (UHS) experienced an increase of 7.7% in adjusted admissions, following an uptick of 10.5% in the first quarter.

At Tenet Healthcare, same-hospital admissions increased 3% year-over-year, with non-Covid admissions up 5%, contributing to a strong overall second quarter.

Meanwhile, Mayo Clinic saw a 6.5% rise in outpatient visits, an area many hospitals are both experiencing growth and targeting to maintain financial stability.

Stacy Taylor, CFO at Nemaha County Hospital, recently shared with HealthLeaders why focusing on outpatient services has been vital to the critical access hospital.

"We try to stay in the market by bringing in as many outpatient doctors that we can from the bigger cities so that they can see patients here. This way, patients are not driving an hour to get to the city, and we can see them here at the hospital in a rural setting," Taylor said.

Operating margin inching forward

Even as most hospitals underperformed, the median year-to-date operating margin index for June increased to 1.4%, according to Kaufman Hall's National Hospital Flash Report.

Comparatively, the operating margin index was at 0.7% in May, and the bump in June was partly a result of fiscal year-end accounting adjustments, Kaufman Hall noted.

The increase was helped by a dip in aforementioned labor costs, as the report found the proportion of full-time equivalents per adjusted occupied beds fell 8% from May.

Further indicating a shift away from inpatient settings, the report also revealed an increase in outpatient revenue.