Hospital operating margins are improving

For the report, Kaufman Hall analyzed data from over 1,300 hospitals across the United States. The hospitals are representative of all hospitals in the country, both geographically and by bed size.

In August, hospitals' year-to-date operating margin index was 1.1%, a slight increase from the 0.9% reported in July. 

Hospital expenses increased by 4% from July to August, with 13% increases to supply costs and 11% increases to drug expenses. However, these higher costs were largely offset by increased revenue. Between July and August, net operating revenue per day increased by 8%, with outpatient revenue (12% increase) surpassing inpatient revenue (4% increase).

Hospitals also saw more consistent patient volume. In August, operating room minutes increased by 14% from July, and ED visits rose 3% month-over-month. At the same time, the average length of stay decreased by 4%.

Commentary

Although hospital operating margins are still below historical levels, more hospitals are now reporting positive margins. In comparison, over half of all hospitals were reporting negative margins in 2022.

According to Erik Swanson, Kaufman Hall's SVP of data and analytics, hospital leaders should begin planning for the future as margins slowly increase. Although some hospitals put off building and improvement projects during the pandemic, leaders should consider starting some of these projects soon.

"This period of relative stabilization is the time for hospitals to re-engage in capital planning efforts," Swanson said. "Hospitals may be feeling reluctant given the last few years, but those that wait may find themselves falling behind their competitors and missing out on key opportunities."

However, even with hospitals' improved financial performance, some analysts predict that their overall recovery will be slow. For example, Fitch Ratings recently projected that hospitals would continue to experience relatively weak margins for the rest of 2023 and into 2024.

The American Hospital Association (AHA) also emphasized that hospitals are still recovering from the financial difficulties of the pandemic. "Hospitals and health systems are still recovering, and will need to be financially strong and healthy in order to keep their patients and communities healthy," AHA said. (Bettelheim, Axios, 10/3; Kaufman Hall National Hospital Flash Report, accessed 10/3; Southwick, Chief Healthcare Executive, 10/3)

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