Hospitals face mounting financial pressures amid declining margins, rising expenses

Hospitals face financial headwinds: ©Spiroviewinc -stock.adobe.com

Hospitals and health systems across the U.S. saw operating margins narrow in November, driven by a combination of declining patient demand and rising expenses, according to data from Strata Decision Technology. These challenges have persisted through much of 2024, raising concerns about the financial sustainability of many organizations.

The median year-to-date operating margin for health systems decreased from 1.8% in October to 1.7% in November, marking the fourth decline in the past five months. Similarly, the median YTD hospital operating margin dropped from 4.9% in October to 4.7% in November.

“Our data reflect mounting financial pressures for hospitals and health systems as they neared the end of 2024,” said Steve Wasson, chief data and intelligence officer at Strata Decision Technology. “The persistent margin decreases for health systems throughout much of the second half of the year are particularly concerning. December’s data will provide greater clarity as to whether these pressures will continue into 2025, but the outlook at this point is not encouraging.”

Analysis of margin changes over time revealed varied impacts by region. Nationally, the median hospital operating margin was flat year-over-year (YOY) but dropped 1.9 percentage points month-over-month. Hospitals in the Northeast/Mid-Atlantic experienced the largest YOY decline at 0.7 percentage point, while the Midwest recorded the biggest YOY increase at 0.8 percentage point.

Rising expenses, declining demand

High expenses continue to exacerbate financial pressures. Total expenses rose YOY across labor and non-labor metrics. Purchased services saw the largest YOY increase at 8.2%, contributing to a 5% rise in total non-labor expense and a 4.7% increase in total expenses overall. Labor expenses grew 5.4% from November 2023 to November 2024.

On a per-patient basis, labor expense per adjusted discharge saw the largest increases, rising 2.3% YOY and 4.6% month-over-month. Non-labor expense per adjusted discharge increased 2.0% YOY and 2.7% month-over-month, while total expense per adjusted discharge grew 1.5% YOY and 3.3% month-over-month.

November saw lower patient volumes across both inpatient and outpatient metrics compared to the prior year and prior month. Emergency visits experienced the most significant YOY decline at 7.6%, followed by observation visits at 3.5%. Outpatient visits dropped 0.6%, and inpatient admissions decreased 0.3% YOY. Month-over-month, outpatient visits fell 13.5%, emergency visits declined 12.1%, observation visits dropped 8.7%, and inpatient admissions were down 6.6%.

Revenue growth amid challenges

Despite declining patient volumes, gross hospital revenues continued to grow YOY. Outpatient revenue rose 4.5%, inpatient revenue increased 2.8%, and gross operating revenue climbed 3.9%, marking the 19th consecutive month of YOY increases for these metrics. However, gross revenues declined month-over-month, with outpatient revenue down 10.1%, inpatient revenue down 6.0%, and gross operating revenue decreasing 8.6% from October to November 2024.

Net patient service revenue (NPSR) per adjusted discharge increased 1.4% YOY and 1.0% month-over-month, offering a glimmer of hope for hospitals amid challenging conditions.

Mergers and acquisitions on the rise

Amid financial challenges, mergers and acquisitions activity surged in 2024, with 45 of 72 transactions involving divestitures—organizations selling off assets. This marks the highest percentage of divestitures in the industry’s history and more than double the percentage recorded in 2023, according to Kaufman Hall. Additionally, the percentage of transactions involving financially distressed organizations hit a record high in 2024, with the average annual revenue of these distressed partners reaching $401 million—up from $219 million in 2022.

“Mega-mergers used to be between organizations of similar size, but that changed in 2024 to smaller organizations merging with significantly larger ones,” said Anu Singh, managing director in the Mergers & Acquisitions Practice at Kaufman Hall, in a statement. “While these may not all involve financially distressed organizations, it does suggest that large organizations are not immune to financial and operational challenges—a trend to monitor in 2025.”

Looking ahead

Experts anticipate continued challenges for hospitals in 2025, with potential changes in the regulatory environment and ongoing realignment of health care markets.

“The data indicate that hospitals and health systems may have better opportunities to plan their expenses,” said Erik Swanson, senior vice president and data and analytics group leader with Kaufman Hall. “Using predictive analytics and modeling could help organizations optimize their financial planning processes.”

The findings are based on data from more than 1,300 hospitals nationwide as reported in Kaufman Hall’s National Hospital Flash Report with data from Strata Decision Technology’s latest analysis.