Hospitals continue to struggle with margins as costs rise

Many health systems are seeing margins near zero for patient operations due to increasing costs, according to a report from Strata. The research overviews the current financial and operational health of hospitals and health systems.

The report found that the margin on patient operations is near zero for more than half of health systems. This is caused by expenses increasing from labor costs in a time when revenue is mostly flat.

While 2022 YTD median operating margin is 4.6%, there is a large degree of spread, with nearly one third of the health systems analyzed operating in the red. This represents a significant decline in performance when compared to 7% in the baseline year of 2019 and 7.9% in 2021. Additionally, 2022 YTD operating margin on patient revenue is down 58% compared to 2019 pre-COVID operating margins and down 68% compared to 2021, according to the report.

Rising costs are an issue for health systems and hospitals. Labor, supplies, and drug costs are up as patient acuity remains mostly unchanged.

For acute care hospitals, the 2022 YTD median inpatient total cost per encounter is up 29.4% compared to 2019 and up 7.2% compared to 2021. For these hospitals, the median cost of direct patient care per encounter is up 54.3% compared to 2019. Additionally, the median supply expense per encounter has increased 17% since 2019 and the median drug expense has increased 33% for the same period.

The report also found that inpatient volumes have shifted due to COVID-19, regulations, and staff constraints. In 2022, monthly inpatient volumes are down 5-14% compared to 2019. Outpatient volumes increased when compared to 2019, however if COVID-19 testing and vaccinations are removed, outpatient volumes didn’t start to exceed 2019 levels until March 2021 – 15 months later. Lastly, emergency department visits have not exceeded 2019 pre-COVID volumes. In 2022, monthly ED volumes are down 3-19% compared to 2019. Further, ED acuity has increased minimally as measured by the distribution of CPT codes.

The research also showed that many high-margin procedures and service lines are shifting to outpatient and alternative settings.

This shift was initially driven by the high volume of COVID-19 patients in the early pandemic, leading to capacity constraints in the inpatient setting. Now, inpatient staffing constraints and regulatory shifts are sustaining it. As an example, in 2021, 298 procedures were removed from the “inpatient only” rule and then reinstated as inpatient only in 2022. This exemplifies the ongoing disruption of volumes and site of care issues, according to the report.

As care sites shift, it is affecting cost structures, margins, and competition.

For example, orthopedics volume is down compared to 2019. Inpatient volume for the Osteoarthritis CARE Family (where most total knee replacement patients are attributed) is down 80% in 2022 YTD compared to 2019.

“The StrataSphere data shows the U.S. health care industry is comprised of ‘haves and have nots,’ with far too many on the ‘have not’ side,” said Steve Lefar, chief strategy officer at Strata, in a statement. “While some systems are doing well, often due to non-core patient care, a full one-third of the industry is losing money with no signs of improvement. This could become catastrophic for many communities.

“Inpatient volumes have not yet returned to pre-COVID levels. Cases are moving away from profitable procedures, and outpatient volumes have only made slight gains since 2019. Health systems, regulators and industry analysts must rethink how they model a variety of future state scenarios.”