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Last year was the worst financial year for hospitals and health systems since the start of the COVID-19 pandemic, with operating margins taking a particular hit, according to Kaufman Hall’s latest Flash Report.
December was the only month in which hospitals realized positive margins. Despite the end-of-year upswing, about half of U.S. hospitals finished 2022 with a negative margin as growth in expenses outpaced revenue increases.
Hospitals faced prolonged increases in labor expenses last year. The increases were driven in part by a competitive labor market, as well as hospitals needing to rely on more expensive contract labor to meet staffing demands. Increased lengths of stay due to a decline in discharges also negatively affected hospital margins.
Outpatient settings saw increased volume; the front door of the hospital continues to shift away from the emergency department, said Kaufman Hall. Hospitals experienced increased outpatient volumes, including in surgical settings.
The December bump, in which hospitals barely broke through to a positive operating margin at 0.2%, was the result of returning volumes and a relaxing of the competitive labor market, data showed. But the expense increases hampered these gains.
What’s more, expense pressures are unlikely to recede in 2023, analysts project. Hospitals that embrace better workforce management strategies, secure more stable supply lines, and more effectively negotiate with payers are likely to have better financial years in 2023. Hospitals should also leverage their outpatient footprint and improve relationships with post current patient volume trends, according to Kaufman Hall.
WHAT’S THE IMPACT
In December, hospitals saw a 3% increase over November in net operating revenue, led by a 5% gain in inpatient revenue. For the whole year, that translated into a 2% gain over 2021. Outpatient revenue grew 8% over that time, though inpatient revenue was flat.
Total expense and total labor expense climbed 2% during the month, while non-labor expense rose 4% in December, up 3% for the year.
Discharges and adjusted discharges were up 5 and 2% during the month, and for the year were down 2% and up 3%, respectively. Adjusted patient days were up 2% for the month and 3% for the year.
Emergency room visits were down 3% in December but were up 8% over the course of the full year. Operating minutes, meanwhile , saw a 2% month-over-month decline but were up 2% for the year.
THE LARGER TREND
Labor challenges spurred Moody’s Investors Service to adopt a negative credit outlook for the healthcare sector, with a December 2021 report showing that the main factors were nursing shortages and increased labor costs, which were projected to decrease operating cash flow by between 2% and 9% amid comparatively modest revenue gains.
The shortages, while mostly reducing the availability of nurses and skilled staff such as lab technicians, will also affect less-skilled and entry-level positions. Other factors pushing expenses higher are supply chain disruptions, increased drug costs, higher inflation and increased investment in cybersecurity.
However, a recent JPMorgan Chase report shows most healthcare CEOs and CFOs are optimistic for the future and expect to increase revenues.
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