What’s Driving Increased Hospital Cost Concerns?
Hospital and health systems have realized they aren’t going to grow their way out of the margin pressures that they are facing, a survey author says.
The case for greater cost control at hospitals received its latest boost from a recent national survey of hospital executives. The growing urgency comes amid shrinking margins and cash flow.
Cost control eclipsed revenue growth as the top priority among health system CEOs, according to Advisory Board’s Annual Health Care CEO Survey. The nationwide survey of 146 C-suite executives, conducted between December 2017 and March 2018, found 62 percent “were extremely interested” in cost control.
Similarly, “innovative approaches to expense reduction” was the second-leading priority (56 percent).
“It was certainly eye-opening to see cost control as the new number one issue facing hospital and health system executives because it really confirmed conversations we’ve been having with leaders,” said Rob Lazerow, managing director of Advisory Board Research.
Among the 33 topics about which executives were asked their level of concern, other leading priorities included:
- Exploring diversified, innovative revenue streams (56 percent)
- Boosting outpatient-procedure market share (50 percent)
- Meeting rising consumer demands for service (50 percent)
The recent cost concern findings followed an April report from Moody’s Investors Service that the median operating cash flow margin for 160 not-for-profit and public hospitals in 2017 declined to 8.1 percent, which was below levels recorded during the 2008-09 recession.
Similarly, the American Hospital Association’s 2018 chartbook found the percentage of hospitals with negative total and operating margins had increased by the end of 2016 to recession-era levels.
“Hospital and health system leaders have been facing margin compression—deteriorating or declining margins—for a few years,” Lazerow said, referring to trends since 2015. “Hospital and health system leaders realized they weren’t going to be able to grow their way out of the margin pressures that they are facing right now.”
According to Moody’s, the decline in median operating cash flow margin came amid accelerating expenses and reduced revenue growth, with expense growth in FY17 outpacing revenue growth for the second year in a row.
Moody’s cited an uptick in operating expenses of not-for-profit and public hospitals, with the increase stemming at least partly from the tight labor market.
After a multiyear hiring spree, hospital employment has reached all-time highs—and labor is the largest single component of hospital costs, according to a 2017 Deloitte report based on interviews with 20 health system CEOs. Deloitte estimated that labor expenses make up roughly 50 percent of total operating costs for most hospitals.
Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare