Hospital margins remain flat but stable, non-labor expenses rise, Kaufman Hall finds

Hospital margins are stabilizing, if flat, a new report by Kaufman Hall has found. 

The March issue of the National Hospital Flash Report looked at data from more than 900 hospitals. It found that the unpredictability that plagued hospital margins for the last three years is relaxing as small margins become the new normal. External economic factors like labor shortages, higher material expenses and a growing segment of patients seeking care outside the hospital continue to affect hospital finances. 

Hospital margins in February were down slightly from the previous month, at -1.1%. However, it was the eighth month where variation in month-to-month margins dropped compared to the last three years. Flat margins are likely to continue in the near term, the report predicted. 

“After years of erratic fluctuations, over the last several months we are beginning to see trends emerge in the factors that affect hospital finances like labor costs, goods and services expenses, and patient care preferences,” Erik Swanson, senior vice president of data and analytics at Kaufman Hall, said in a press release. “In this new normal of razor-thin margins, hospitals now have more reliable information to help make the necessary strategic decisions to chart a path toward financial security.”

Though discharges, patient days and emergency department visits were down due to the shorter month, hospitals experienced moderate growth in volumes in February on a per-day basis. Meanwhile, the average length of stay in the hospital was down. 

February marked a shift from labor to goods and services as the primary driver of hospital expenses, led by inflationary pressures. Non-labor expenses rose 6% year over year. Labor expenses, meanwhile, appeared to hold steady, which could be indicative of less dependence on contract labor, the report suggested. 

Outpatient revenue continues to grow as patients seek more of their care away from inpatient settings. February’s outpatient revenue was up 14% compared to the same month the year prior. 

“Hospital leaders face an existential crisis as the new reality of financial performance begins to set in,” Swanson added in the announcement. “2023 may turn out to be the year hospitals redefine their goals, mission, and idea of success in response to expense and revenue challenges that appear to be here for the long haul.”