Decreased Volume Variability & Declining Labor Expenses Are Helping Hospitals’ Finances Bounce Back

While hospitals’ operating margins are still in a worse place than they were before the pandemic, 2023 is ending as a much better year for hospital finance than 2022, according to a report that Kaufman Hall published this week. 

Hospitals’ median year-to-date operating margin index rose to 1.1% in August, up from 0.9% in July. This figure was in the red from January 2022 to February 2023, according to the report. In other words, hospitals’ financial performance in August improved from July, with operating margins continuing to stabilize as they have been doing throughout the year.

For the report, Kaufman Hall’s analysts examined data from more than 1,300 hospitals of all sizes. They found that hospitals’ financial performance in August improved compared to July, with operating margins continuing to stabilize as they have been doing throughout the year.

The principal reason that hospitals are beginning to bounce back financially this year is due to the lack of large Covid-19 surge, Erik Swanson, Kaufman Hall’s senior vice president of data and analytics, said in an interview.

At the beginning of 2022, hospitals were facing the omicron surge. This caused a “tremendous amount of instability in volumes,” Swanson pointed out. A Covid-19 surge can lead to an uptick in volume in certain units, such as respiratory units, but it also causes many other patients to delay or defer seeking hospital care, he explained. 

The variability of patient volumes made hospitals’ staffing planning quite difficult, which led them to rely heavily on expensive contract labor, Swanson added.

“That’s how 2022 started, and it put organizations in a really bad position. In 2023, that hasn’t occurred — that variability in volumes has not necessarily impacted hospitals, and the lack of that fluctuation allows hospitals to better anticipate and manage the demand that they’ll see and therefore deploy their resources more efficiently,” he declared.

In August, hospitals’ labor expenses per adjusted discharge dropped by 8% compared to July, which indicates a decreased reliance on contract labor. 

Swanson pointed out that while hospitals’ labor costs are still high and the workforce shortage is still severe, things have been improving slowly. During the pandemic, hospitals were desperate for contract staff, so the agencies providing these workers could simply charge more, he explained. The current demand for contract labor isn’t as high, agencies don’t feel as comfortable inflating their prices. 

“Now organizations can resource plan more effectively. They understand who they potentially need to hire and can build more efficient ways of deploying staff so that they don’t require as much contract labor. That has the added benefit of the demand for contract labor declining — so do the rates that they can charge organizations. That is what’s leading to the softening of the contract labor expense. It’s not a matter of volumes being high or low — it’s a matter of how much volumes bounce around,” Swanson said.

Another trend that is helping hospitals’ financial margins is that patients are starting to resume more normal courses of care — meaning they aren’t coming to hospitals “quite as sick as they had been in prior years” and their lengths of stay are decreasing, Swanson explained. This type of stability improves hospitals’ resource planning and allows them to discharge patients more efficiently, he added.

The final trend that is boosting hospitals’ financial performance this year is that many Americans are choosing to receive care in outpatient settings. This has helped “buoy finances to some degree” for hospitals that have that outpatient footprint, Swanson declared.

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