Hospital operating margins tick up in May thanks to trimmed labor costs, returning volumes

Nationwide hospital operating margins inched upward again in May thanks to a combination of reduced labor expenses and higher revenues, particularly in outpatient settings, according to the latest monthly industry report from consulting firm Kaufman Hall.

The company’s median year-to-date operating margin index rose to 0.3% in May as single-month median operating margin index landed at 1.8%, per the report published Tuesday.

Several volume metrics have also climbed “very modestly” on a year-to-date basis, the firm wrote, suggesting that many consumers are settling back into receiving their care inside of a hospital.

“Hospitals may no longer be experiencing the post-pandemic effect of pent-up demand for inpatient services, but patients are showing us they are becoming more comfortable with receiving care in this setting,” Erik Swanson, senior vice president of data and analytics at Kaufman Hall, said in a statement.

Still, comparisons to early 2020 revenue sources are compelling evidence of a broader shift toward outpatient care, the firm wrote. Of the 38% increase in year-to-date gross operating revenue per calendar day seen from 2020 to 2023, inpatient revenue was up 20% while outpatient revenue jumped a staggering 53%, according to the report.

Based on those numbers, Swanson said hospitals can expect to see a slow increase in operating margins going forward, but the industry likely won’t see a return to pre-pandemic margins without embracing outpatient care delivery in earnest.

“Now that hospital finances are showing signs of stabilization, it’s an opportune time for executives to reevaluate their longer-term business strategy,” Swanson said. “The continuing shift in patient demand from inpatient to outpatient services is particularly important and will inform business decisions for years to come.”

Just looking at the change from April to May, net operating revenue per calendar day rose 2%, and gross operating revenue per day increased 4%. Inpatient daily revenue ticked up 1% while outpatient revenue increased by 6%.

Across month-to-month volumes, discharges increased by 1% and adjusted discharges per calendar day rose 4%. Emergency department visits per calendar day increased by 5% while operating room minutes per calendar day was up 5%. Meanwhile, average length of stay decreased by 3% month over month.

Though hospitals’ total expense per calendar day remained flat from April to May, daily labor expense dipped by 1% and purchased service expense per day fell by 3%. Though these were somewhat offset by a 7% increase in daily supply expense and a 6% rise in daily drug expense, hospitals were ultimately able to decrease their total expense per adjusted discharge by 4%, according to the report.

“While labor costs remain significant, expenses in May were well below comparable levels from May 2022,” the firm wrote.

Kaufman Hall’s monthly reports incorporate information from more than 1,300 U.S. hospitals, the data from which are collected by Syntellis Performance Solutions.