What You Should Know:
– A new report from Strata Decision Technology reveals mixed signals for the financial health of US hospitals. While operating margins have improved significantly year-over-year, rising drug and supply costs threaten to undermine this progress.
– The US hospital sector shows signs of financial recovery, with improved margins and revenue growth. However, rising drug and supply costs pose a significant threat to continued progress. As healthcare leaders navigate this complex landscape, close monitoring of expenses and strategic cost-containment efforts will be crucial for long-term financial stability.
Year-to-Date Margins Show Improvement
The median year-to-date (YTD) operating margin for U.S. hospitals reached 5% in May 2024, a substantial increase compared to just 0.7% in May 2023. This positive trend suggests ongoing financial recovery for the hospital sector.
However, a closer look reveals some cause for concern:
- Modest Month-to-Month Gains: The May margin is only slightly higher than April’s 4.7%, indicating a slow improvement rate.
- Volatility Over Time: Compared to May 2023, the margin change is minimal (0.3 percentage points), highlighting ongoing financial instability.
High Expenses Threaten Gains
Rising drug and supply costs are a major concern for hospitals:
- Double-Digit Expense Increases: Drug expenses climbed 8.3% year-over-year (YOY) and supply expenses rose 8.1% YOY in May, pushing overall non-labor expenses up significantly.
- Labor Costs Rising, But Slower: Labor expenses grew at a slower pace (4.4% YOY) compared to non-labor costs.
Revenue Growth Slows, But Remains Positive
Overall hospital revenue continues to grow, though at a slower pace than earlier months:
- Outpatient Revenue Leads Growth: Outpatient revenue saw the biggest increase (8% YOY), followed by inpatient revenue (6.7% YOY).
- 13th Consecutive Month of Growth: Gross operating revenue has now increased YOY for 13 straight months.
Patient Volumes Rise Across the Board
Patient volumes are on the rise in all areas:
- Inpatient Admissions See Biggest Jump: Inpatient admissions increased 11.7% YOY, likely due to the expansion of the Two-Midnight Rule for Medicare Advantage patients.
- Outpatient Visits and Emergency Department Visits Up: These metrics also saw YOY increases, with outpatient visits rising 3.3% and emergency department visits growing 2.3%.
Physician Practices Face Pressure
High expenses are also impacting physician practices:
- Double-Digit Expense Growth: The median total direct expense per physician FTE has jumped 12.8% YoY.
- Increased Investment Needed: The level of investment needed to support physician practice operations rose 11.2% YOY.
“Hospital operating margin performance remains strong, as organizations see continued growth in both inpatient and outpatient gross revenues,” said Steve Wasson, chief data and intelligence officer at Strata Decision Technology. “At the same time, ongoing expense increases are just one of many challenges facing the industry. Healthcare leaders must stay vigilant as they navigate their organizations through those headwinds.”
