Hospital margins inch up in March as volume, revenue growth outpace expenses

Hospital margins inched upward to “razor-thin, near-zero levels” in March, a month-to-month improvement driven by volume gains across inpatient and, to a greater extent, outpatient settings, according to the latest monthly report from Kaufman Hall.

Still, the upward trajectory was held in check by higher expenses across labor and non-labor spending alike, the firm reported.

These increases, alongside ongoing capacity and discharge bottlenecks, mean that most hospitals are still vulnerable should a recession or another public health emergency appear, Kaufman Hall wrote in the report.

“While it appears that hospital finances are stabilizing, that doesn’t mean that all is well,” Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said in a release. “Under the seemingly calm surface, there are significant challenges—especially labor shortages and diminished margins—that could quickly reach the surface should another crisis arise.”

Kaufman Hall’s index of median year-to-date operating margins was a flat 0% for March, up from February’s -1.5%. The industry’s operating margins improved 8% year over year and are 19% higher on a year-to-date basis compared to the same period in 2022, according to the firm’s report.

Net operating revenue increased 12% month over month and now sits 5% higher than in March 2022. The gain primarily came from the outpatient setting (14% month over month, 9% year over year) though revenue growth was also strong among hospitals’ inpatient settings (10% month over month, 5% year over year).

Total discharges were up 13% month over month and 7% year over year, while adjusted discharges increased 14% month over month and 7% year over year, according to the report. Emergency department visits rose 13% month over month and 7% year over year as operating room minutes rose 12% month over month but fell 1% year over year.

Average length of stay, however, was down 4% month over month and 5% year over year as net patient service revenue per adjusted discharge dipped 2% month over month and 3% year over year, metrics that suggest a reduction in patient acuity, the firm noted.

Hospitals’ total expenses rose 8% month over month and 4% year over year, which was slower than the revenue growth that allowed March margins to reach a break-even point.

Total labor expense increased 9% month over month but sits even compared to March 2022. Total non-labor expense rose 6% month over month and 5% from a year ago, with the firm calling out a 15% month over month increase in supply expense as well as a 14% month over month rise in drug expense as major contributors.

Kaufman Hall’s monthly reports incorporate information from more than 900 U.S. hospitals, the data from which are collected by Syntellis Performance Solutions.

Though the healthcare advisory firm isn’t ready to ease its concerns, the upward trajectory outlined in the report is in line with trends recently reported by major for-profit systems. First-quarter earnings numbers from HCA Healthcare, Tenet Healthcare, Universal Health Services and Community Health Systems all outlined returning volumes and projected increasing demand for care services through the rest of the year.