Despite sectorwide financial recovery, not all are hospitals are finding their footing

Broadly speaking, the hospital sector is a much stronger state financially than it was in 2022 or even early 2023 amid industry reports of higher medians and margin improvements being shared by several larger systems.

On a hospital-by-hospital basis, however, there’s a fair chance that any given facility is still losing money going into the new year, according to an analysis from Kaufman Hall.

In a recent post, the healthcare consulting firm reiterated the trends painted by its monthly market reports—negative sectorwide operating margins that turned positive last March and reached 2.3% year to date by December, which is still lower than the 4% and above that persisted “through the worst of the 2021 COVID period.”

That reading is in line with other indicators of recovering hospital finances. Fitch Ratings, for instance, issued a preview of its rated nonprofit hospitals this week that cited late-2023 improvements in labor expenses and other indicators as signs that full-year 2023 median results “will improve, but remain well below pre-pandemic levels.”

Recent reports from major systems like Cleveland Clinic, Ascension and CommonSpirit Health have outlined higher demand, growing revenues and either a return to or path toward positive operating margins.

Additionally, Syntellis—the data platform through which Kaufman Hall obtains the numbers for its own analyses—reported Thursday that the median hospital operating margin among 1,300 facilities reached 5.2% in January, a roughly two-year high.

But Syntellis’ report also noted persistent high expenses and declines in days of cash on hand, suggesting “ongoing financial uncertainties.”

The Kaufman Hall analysis had similar reservations concerning sectorwide stability and highlighted that about 40% of hospitals in the dataset are still losing money from operations going into 2024. In contrast, the firm pointed to a portion of “high-performing” hospitals that “are doing better and better” and “effectively pulling away from the pack.

“The data shows that throughout the pandemic, hospitals with good financial results improved those results, but of more consequence, hospitals with poor financial performance saw that performance worsen,” Kaufman Hall wrote in a post outlining its analysis.

When digging into both sides of the inverted bell curve, the firm said that it found differences in the characteristics and strategic and managerial tactics of high-performing hospitals. These more profitable organizations tended to have higher and accelerating outpatient revenues, “hyper-focused” on patient throughput and shorter lengths of stay, and more quickly reduced their contract labor spend—the latter of which also correlated to higher wage increases for full-time employees.

“In other words, rising wage rates have appeared to attract and retain full-time staff which, in turn, has allowed those hospitals to reduce contract labor more quickly, all of which has led to higher profitability,” the firm wrote.

Kaufman Hall noted in the post that there was no significant difference between the average operating margins of rural and urban hospitals. However, “the real damage is being done” among the lowest performing 20% of the rural hospitals, where operating margins are “much lower” than the struggling urban hospitals.

With poor-performing hospitals' negative operating margins reaching as low as -19%, Kaufman Hall warned that “continuation of this level of financial performance is not only unstainable but also makes crucial re-investment in community healthcare impossible.”

It also reaffirmed that obstetrics and delivery services, a leading money loser for hospitals, are being curtailed more frequently among rural hospitals—"a health policy issue of major and growing consequence.”

A Chartis report from earlier this month warned that 418, or about a fifth, of the nation’s rural hospitals are vulnerable to closure and could contribute to the “rural care deserts” found throughout the country. Hospitals’ financial distress also drove a larger portion of merger and acquisition activity in 2023, a trend that will likely continue well into 2024, Kaufman Hall wrote in a prior report.