After months of gradual but steady improvement, hospitals in July saw their financial gains reversed, experiencing 'some of the worst margins' since the beginning of the Covid-19 pandemic, according to Kaufman Hall's latest National Hospital Flash Report.

Radio Advisory episode: Who's making money? A look at hospitals and health plans after Covid-19.

Hospital financial performance declined in July

According to the report, hospitals' median operating margin index was -0.98% through July. Overall, hospitals' median operating margin decreased 63.9% from June and 73.6% from July 2021.

In July, hospitals saw their outpatient volumes drop compared to June. In particular, operating room minutes decreased by 10.3% from June and 7.7% year-over-year. The report found that this decline in outpatient volumes may be due to more patients choosing to go to ambulatory centers instead of hospitals for surgical procedures, which is a "sign of a larger shift to ambulatory care and new ways of accessing care out of the hospital."

However, even as volume was reduced, hospitals also saw sicker patients who required longer stays. In July, the average length of a patient's stay increased 2% from June and 3.4% from July 2021. In addition, patient days also increased by 2.8% from June, although they were down 2.6% compared to July 2021. ED visits also increased by 2.6% from June.

Overall, this reduction in volume, combined with sicker patients, led to a decline in revenue for hospitals in July. Gross operating revenue was down 3.6%, and outpatient revenue was down 4.8% in July compared to June. Inpatient revenue also saw a 0.7% decline from June and a 1.5% decline from July 2021.

Although total expenses decreased by 0.4% from June, they were still up 7.6% from July 2021. In addition, inflation and labor shortages contributed to hospitals' total costs increasing 9.6% in the year-to-date.

According to the report, hospitals in July experienced "some of the worst margins" since the beginning of the pandemic—especially since they can "no longer count on supplemental federal funding to buffer these mounting losses, as they did in previous pandemic years."

Having negative operating margins this far into the year, as well as margins being down 73% year-over-year is "very, very troubling," said Erik Swanson, SVP of data and analytics at Kaufman Hall. "It's really quite stark."

Long-term planning is needed to offset declining hospital margins

As hospitals struggle with declining operating margins, "leaders should not lose sight of long-term capital and strategic planning, despite the urgency of day-to-day pressures," the report said.

To help tackle staffing challenges, Swanson recommended hospitals optimize their workforces through data-driven approaches, particularly those aimed at ensuring there is appropriate coverage at the lowest cost. In addition, hospitals could consider creating internal and larger staff float pools, as well as an internal staffing agency, or renegotiating contract workers.

Outside of the workforce, hospital leaders could address financial pressures with their supply chain management or renegotiate contracts with their vendors.

"2022 has been, and will likely continue to be, a challenging year for hospitals and health systems, but it would not be prudent to focus on short-term solutions at the expense of long-term planning," Swanson said. "Hospitals and health systems must think strategically and make investments to strengthen performance toward long-term institutional goals despite the day-to-day financial challenges they experience." (Cass, Becker's Hospital CFO Report, 8/29; Henderson, MedPage Today, 8/29; Kaufman Hall National Hospital Flash Report August 2022, 8/29)