Hospital margins are on the rise

According to a new report from Kaufman Hall, nationwide hospital operating margins are slowly inching back up, particularly as labor expenses decline and revenues increase due to higher patient utilization, especially in outpatient settings.

As service volumes for both inpatient and outpatient settings continue to rise, hospitals are now reporting stronger financial performances after months of financial instability concerns due to inflation, labor costs, and more.

According to a Cowen survey, more than 300 non-profit hospitals reported a 7.5% increase in year-to-year revenue growth in May, a sharp increase from the 3.5% growth rate in April and the 4.7% growth rate in the first quarter of the year.

In addition, hospitals' median year-to-date operating margin index reached 0.3% in May, up from 0.1% in both March and April. It is also much higher compared to 2022 when many hospitals were operating with negative margins. 

Although margins are still below pre-pandemic levels, they are starting to increase again, especially as patient volumes slowly grow. On a year-to-date basis, several volume metrics, such as discharges, ED visits, and operating room minutes grew "very modestly," Kaufman Hall wrote.

"Hospitals may no longer be experiencing the post-pandemic effect of pent-up demand for inpatient services, but patients are showing us they are becoming more comfortable with receiving care in this setting," said Erik Swanson, SVP of data and analytics at Kaufman Hall.

In addition, there may be a broader shift toward outpatient care, with revenue for outpatient care growing much more quickly than inpatient care. Between 2020 and 2023, inpatient revenue increased by 20% while outpatient revenue increased by 53%.

"Now that hospital finances are showing signs of stabilization, it's an opportune time for executives to reevaluate their longer-term business strategy," Swanson said. "The continuing shift in patient demand from inpatient to outpatient services is particularly important and will inform business decisions for years to come."

Medical device manufacturers are also benefiting from the increases in service volumes, especially for surgery. According to Truist analyst Richard Newitter, the increases in service volume "will certainly help feed the view that backlog and elective volume will serve as an extended tailwind for device companies."

Health insurers to face greater financial burden going forward

These growing service volumes may be burdensome for health insurers, who will see higher medical costs going forward. Currently, health insurance stocks are down an average of 13.6%. And as of April, healthcare prices were up 3.4% compared to the year before, which consulting company Altarum said was the fastest cost growth rate since 2007.

According to Gary Taylor, managing director and senior equity research analyst at Cowen, insurers met profit and medical loss ratio expectations in the first quarter of the year, but investors are concerned that a decline in days claims payable could lead to unexpected medical expenses, which could then lead to reduced profits later on.

Days claims payable refers to how much money insurers have in reserve to pay claims, and it generally declines when utilization increases. In general, almost all of the large, for-profit insurers saw a decline in days claims payable during the first quarter, Modern Healthcare reports.

So far, insurers have attributed the declines to delays in processing COVID-19 claims, growing pharmacy spending, and higher payments to risk-bearing providers. They have also reassured investors about their cash reserves and said they will meet profit targets.

"Investors would prefer to see the reserves staying at a conservative level, given some of these uncertainties that are all out here with healthcare utilization trends," said Scott Fidel, managing director at financial services firm Stephens Inc. "It's considered at least a yellow flag when the days claims payable do start to come down." (Dreher, Axios, 6/28; Muoio, Fierce Healthcare, 6/28; Kaufman Hall National Hospital Flash Report, accessed 6/29; Tepper, Modern Healthcare, 6/26)

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