Health systems are seeing better financial performance this year

According to a STAT+ analysis of 20 large nonprofit health systems, 16 reported higher operating and net margins in the first quarter of 2024 compared to the same period in 2023. These higher margins are largely due to increased patient volumes and reduced reliance on expensive contract labor.

For example, Henry Ford Health System saw its patient revenue grow almost 20% year-over-year in Q1 of 2024. The organization credited this increase to more admissions and outpatient visits and higher demand for pharmacy services.

Similarly, BayCare Health System also had a nearly 20% increase in patient revenue. The health system saw more patients, but also made more per patient. BayCare hospitals had a 12% increase in patient revenue while spending 11% less on staffing for each discharge.

For-profit health systems, such as HCA Healthcare, also reported strong inpatient demand in Q1. "Actually, we had the best portfolio performance, I think I've seen in my experience in the company, with 56 of our hospitals growing greater than 10%," said HCA CEO Sam Hazan.

According to Rick Kes, a healthcare partner at the tax and consulting firm RSM, higher volumes are only one part of hospitals' broader strategy to improve their margins over the last few years. Other aspects include combating insurance denials and getting better deals for key supplies like medical devices and medications.

"It's a very, very concerted effort within the industry to look at margin and say: How do we improve this? We're not going to get some unbelievable change in reimbursement from third-party payers," Kes said. "We need to reevaluate how our margin is made up and become a lot more focused on squeezing as much as we can out of everything we do." 

Will hospital volumes ever return to what they were?

Separately, Mike Eaton, New England market president for the consultancy Navvis Healthcare, noted that demand alone will not be enough for health systems to maintain sustainable margins. Instead, health systems will need to ensure patients get the care they need before they end up in the ED.

"Demand has exploded, and we have to care for it outside of the hospital," Eaton said. "Those that are gaining profitability are doubling down on that."

Rising hospital prices are keeping inflation high

Unlike supermarkets and retailers, hospitals didn't raise prices early in the pandemic, in part due to the fact that their prices were already set in previous contracts with health insurers. However, as hospitals renegotiated their contracts, prices have begun to increase.

According to the Labor Department, prices for medical care increased by 2.7% year-over-year in April. Meanwhile, prices for hospital services grew by 7.7%, the largest increase in any month since October 2010.

However, the price increases vary depending on the service offered. Turquoise Health, a healthcare price transparency platform, also found that there were differences between the increases for list prices, the prices negotiated with third-party payers, and the prices for patients paying cash.

For example, the list price of a chest X-ray increased 5.7% year-over-year in Q1 while the negotiated price increased 4.2% and the cash-pay price increased 7.1%.

According to David Lubarsky, CEO of UC Davis Medical Center, these higher prices are due to hospitals not receiving sufficient reimbursements from health insurers and to new medical advancements. "It's a different product," Lubarsky said. "And yes, it costs more. But in terms of what you're getting, is it [valuable?] The answer continues to be yes, that we are delivering greater value through the implementation of new science, new techniques, new procedures [and] new devices."

Currently, rent increases are the biggest driver of inflation, but economists say that growing hospital prices are also contributing. In April, the consumer-price index increased by 3.4% from the year before.

"It's the one big thing that's obviously not helping out here," said Mark Zandi, chief economist at Moody's Analytics.

Economists also said that they expect higher hospital inflation to persist as labor market disruptions from the last few years continue to impact wages and health insurance contracts.

"We're not expecting much slowing," said Alan Detmeister, an economist for UBS. "This was a very large shock that we saw in the healthcare industry over Covid, and it takes years for those to pass through to the prices." (Bannow, STAT+ [subscription required], 5/20; DeSilva, Modern Healthcare, 5/23; Evans, Wall Street Journal, 5/16)

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