Kaufman Hall: Hospitals’ “New Normal” in Finances Looks to Stay Sub-Optimal For Now | Healthcare Innovation

The “new normal” for hospital and health system finances may be a sub-optimal one for some time to come, based on the latest financial results reported by the leaders at the Chicago-based consulting firm Kaufman Hall, with a negative median year-to-date operating index for hospitals reported from January of this year.

As a press release posted to Kaufman Hall’s website on Feb. 28 noted, “2023 could represent a new normal for hospitals as the financial effects from the COVID-19 pandemic continue to linger, according to the newest data from Kaufman Hall. The latest National Hospital Flash Report finds that hospitals continue to experience the same challenges that made 2022 the worst financial year since the start of the pandemic, including higher labor expenses, lower patient volumes, and a fundamental shift in where patients are accessing care services.”

The press release noted that “Hospitals realized stronger financial performance in January 2023 compared to the previous year, as the start of 2022 coincided with the Omicron variant surge. The median year-to-date (YTD) operating margin index for hospitals was -1 percent in January 2023, compared to -3.7 percent in January 2022. The 2023 YTD operating margin index was still lower than that of 2021 at -0.1 percent, and 2020 at 3.1%.” In other words, hospitals have only partially recovered from the extreme financial distress of 2020, the year in which the COVID-19 pandemic emerged and wreaked the most havoc on the U.S. healthcare system.

The press release went on to note that “Patient volumes, emergency department visits, discharges and total revenues were down in January 2023 compared to December 2022. Meanwhile, expenses—particularly related to labor—increased over the same period. Total net operating revenue decreased by 3 percent month-over-month, while total expenses rose by 1 percent. Total labor expenses rose by 3 percent month-over-month,” adding that, “Notably, drug expenses have increased 12 percent compared to YTD 2020. The increase in drug expenses tied with lower patient volume and longer emergency department stay time indicates that hospitals are serving sicker patients in inpatient settings since the start of the pandemic.”

And it quoted Erik Swanson, senior vice president of data and analytics at Kaufman Hall, as stating that “The trends in increased drug spending and decreased patient volume are indicators of a new landscape in how patients are utilizing hospital services in their care experience. Hospitals continue to see outpatient sites driving increased revenue. Hospitals must continue to explore how to treat lower-acuity patients in novel settings as patient volumes shift to outpatient locations,” he added.

Operating margins still challenging

The press release noted that “Hospital operating margins in January 2023 were down slightly from -0.7 percent in December 2022 to -1 percent in January 2023 following the trend of persistent negative margins throughout last year. One factor that contributed to the dip in performance, according to Kaufman Hall experts, is the normal trend of hospitals making purchases for the year in January.” “While we have seen a stabilization in operating margins over the past several months, the trendline continues to show that hospitals will be in a tough spot financially for the foreseeable future,” Swanson said. “With future COVID surges possible and challenging financial months ahead for hospitals, managing cash on hand will be critical to weathering the storm.”

The key takeaways the report itself noted were as follows:

>   The Consumer Price Index (CPI) increased 0.5 percent in January and 6.4% annually; the seventh straight month of decline in the rate of inflation and slowest since October 2021

>   However, inflation remains stubbornly elevated by support of rising food, gasoline, and housing prices; food prices rose 0.5 percent in January, while housing costs rose 0.7 percent, making up for the bulk of the CPI increase

>   The Federal Reserve raised its benchmark interest rate for the eighth straight meeting, moving the Fed’s base policy rate 25 basis points higher to a range between 4.5 percent and 4.75 percent

>   Fed officials stressed the need for further rate increases to cool inflation despite a cautious optimism that the “disinflationary process has started”

>   The U.S. economy added 517,000 nonfarm payrolls in January and the unemployment rate fell to 3.4 percent, the lowest jobless level since May 1969

>   The resilient U.S. labor market, cooling inflation, and deeply inverted yield curve highlight the divergent challenges the U.S. economy faces in 2023

>   The S&P 500 index rose 6.2 percent in January; the first January gain since 2019 was buoyed by strong earnings and encouraging inflation data