Hospitals must ramp up productivity, savings to profit in coming years

If budget cuts and other financial pressures on hospitals continue, it could drastically impact them if they do not offset the strain with improved productivity.

A report from the Congressional Budget Office projected hospital profit margins under numerous predictive models. They conducted an analysis of 3,000 acute care hospitals that are particularly susceptible to budget cuts under the Affordable Care Act. “The main implication of our analysis is that the magnitude of those (financial) challenges depends crucially on whether and to what extent hospitals can improve their productivity over time--that is, whether they can produce the same output (treatments and procedures) at the same level of quality with fewer inputs,” the researchers wrote.

Projections under numerous possible outcomes produced several results, including:

  • Even if productivity grew on the same track as the economy at large--a growth rate of about 0.8 percent annually---the share of hospitals with negative profit margins increasing to 41 percent by 2025. Those hospitals’ average profit margin would fall to 3.3 percent.
  • Hospitals that improved their productivity by 0.4 percent per year would increase the share of hospitals with negative profit margins to 51 percent and reduce the average profit margin to 1.6 percent.
  • Hospitals that couldn’t increase their productivity or otherwise reduce cost growth would increase the share of providers with negative margins to 60 percent by 2025 and cut the average profit margin to negative 0.2 percent.

In order to hold profit margins in 2025 to the approximate 2011 level, about 6 percent, the hospitals analyzed would need to either increase their revenues with no cost increases or reduce costs at no detriment to revenues. If hospitals increase productivity at the same pace as the broader economy, revenue or cost reduction would need to move at a rate of 0.2 percent more per year.