- Nearly two-thirds of 104 U.S. health systems saw deteriorated operating margins from fiscal year 2015 to fiscal year 2017. For systems reporting decline, the overall hit tallied in at a $6.8 billion loss, a 44% reduction overall.
- A new Navigant study analyzed for-profit and nonprofit provider networks and found that the average operating margin declined by almost 39% over the same time span, from 4.15% in 2015 to 2.56% in 2017. Nonprofit systems had a slightly lower than average decline, reporting margin drops of 34%.
- Though a slew of interwoven factors have contributed to hospitals’ operating woes, the report pinpointed one main cause: expenses grew by 3 percentage points faster than revenue. The 2008 recession didn’t help the matter, as the decade-ago economic downturn put enormous pressure on hospital bottom lines and increased the number of uninsured Americans. The ACA added coverage for more than 21 million people between 2014 and 2015.
The report is quick to point out, however, that in the three years after the introduction of the ACA, health systems experienced slowing demand for services that were once foundational for providers. About 27% of hospitals studied lost money on operations in at least one of the three years and 11% saw negative margins across all three.
The Navigant study isn’t the only one showing concern about hospital finances. A recent Moody’s Investors Service report found that not-for-profit and public hospitals spent more than they gained in revenues for the second consecutive year in fiscal 2017. Moody’s said the gap puts facilities “on an unsustainable path.”
Navigant found multi-year reductions in the rate of topline operating revenue growth. Co-author Rulon Stacey, managing director and leader of Navigant’s Healthcare Strategy practice, said in the report that lower expenses didn’t offset revenue declines.
The drivers of topline weakness included:
- Less demand for core hospital services, such as surgery and inpatient admissions, caused partly by rising out-of-pocket costs from high-deductible health plans.
- Lower collection rates for private plans in non-ACA expansion states.
- Lower Medicare payment rates.
- Lower patient volume (attributed to value-based insurance contracts) that isn’t able to “offset steep upfront payer discounts and significant hospital population health investments,” according to a press release.
The biggest operating income drops were found in the nation’s fastest-growing regions: the West, Southwest and south central America. Navigant also determined that size and market dominance didn’t protect health systems against operating declines. Three of the six largest operating income declines came from the three largest for-profit systems, which all had at least $15 billion in operating revenues in 2017, according to the report.
“There was no statistical relationship between total operating revenues and operating profit in 2017, or the change in operating profit from 2015 to 2017,” Navigant said. “This finding flies in the face of the incessant chorus of advocacy for scale and market dominance among prominent strategy firms and their colleagues in investment banking. Scale was of no help in system operating performance during this difficult period.”
Navigant National Advisor Jeff Goldsmith, the lead author of the report, said in the release that margin pressures are happening at a time of a healthy economy. Goldsmith called this unusual. Often, hospital financial performance drops a year or two after a recession — not during peak economic times.
This issue could set hospitals up for trouble in an even more difficult financial ecosystem if the economy falters.
“Any downturn in the economy will erode investment earnings health systems experienced last year and increase pressure to contain Medicare expenses. Organizations that cannot manage their operating performance more effectively will be damaged financially,” Goldsmith said.
Navigant made four suggestions for hospitals looking to reverse the trend: invest capital in areas of “reachable” demand based on local market growth potential; adjust physical capacity, including beds and ambulatory sites, to the demand and consolidate or eliminate excess capacity; improve use of clinical capacity by enhanced patient throughput; and leverage managed care tools to improve risk contract performance and reduce Medicare operating losses.
“To reverse this operating performance trend, system management and boards must take a fresh look at their strategies based on the markets they serve, and size and target their offerings to actual market demand,” Stacey said.
Original Link: Hospital operating margins dropped 39% over 3 years