New financial data for the hospital industry illustrate continuing challenges even as some trends improve.
Fitch Ratings released an analysis in early March that offers scant reason for optimism. Titled “Early NFP Hospital Medians Show Expected Deterioration; Will Worsen,” it draws on data from hospitals with earlier 2022 financial year-ends. Those numbers show “materially weaker profitability and liquidity relative to FY21 due to expense increases and investment market losses,” according to the analysis.
Looking at the year ahead, “Fitch does not expect a rapid financial recovery for most providers, although hospitals under operational pressure will begin to see breakeven results on at least a month-to-month basis at some point in 2023 with revenue growth and expense pressures easing.”
Margins continue to sag
Fitch’s analysis adds that “margins are not expected to return to pre-pandemic levels for quite some time.”
Kaufman Hall’s latest National Hospital Flash Report, using January data compiled by Syntellis Performance Solutions, shows that hospital financial performance appears to be steadying — but the improvement doesn’t qualify as a recovery from the pandemic-era downturn.
“Hospitals entered 2023 on more stable footing, following the worst financial year since the start of the pandemic,” the report summary states. “However, they still face a range of persistent challenges, including higher labor expenses, lower patient volumes and a fundamental shift in where patients access care services.”
The median hospital operating margin was -1% — worse than December by 0.3 percentage points. The latest number nonetheless represents an improvement from the first half of 2022, when median margin consistently was below -2%. The lack of an omicron-like surge in COVID-19 cases has been cause for relief.
The slight month-over-month downturn could be attributed to the typical annual purchasing cycle, which ramps up in January. Yet volumes and total revenues also slipped, while expenses increased.
Fitch’s FY22 preliminary report put operating margin at 0.9%, a decline from 3.8% the year before. “Salary and other expense reduction remain key to improving margins, as expense growth is outpacing revenue growth,” the report states.
Performance thus continues to lag relative not only to pre-pandemic times but also to 2021. The Kaufman Hall report posits that the current situation could be “a new normal for hospitals.”
Headwinds on the road to recovery
Some of the challenges facing the industry can be seen at HCA Healthcare, the nation’s largest hospital chain with more than 180 facilities.
For the fourth quarter of 2022, HCA reported slight year-over-year increases in revenue and net income. Labor costs as a percentage of revenue improved quarter-over-quarter and year-over-year, and RN turnover was 26% lower compared with the average of the previous four quarters.
For 2023, labor costs as a percentage of revenue are projected to be flat, with contract labor costs coming down while wages increase as part of what may be a reset of the labor market.
“We have made significant investments in our people,” Sam Hazen, CEO of HCA Healthcare, said during an investor call. “We adjusted our wages to deal with movement in the market resulting from some visibility that we had with our overall competitive positioning.”
While supply costs also are stabilizing, other operating expenses such as utilities and insurance could be subject to inflationary pressures in the high single digits this year, Hazen said.
Looking to stabilize volumes
HCA’s surgery volume in Q4 can be seen as disappointing, with a year-over-year decrease of 0.1% for inpatient procedures and an increase of 0.3% on the outpatient side. Leaders said the biggest drag on performance was that the quarter included one less business day compared with Q4 2021. Industrywide, according to Kaufman Hall, operating room minutes were flat year-over-year in December and up 18% in January.
One hindrance for HCA is issues with capacity constraints, which created scenarios “where we were unable to deliver services,” Hazen said. In the most recently completed quarter, he added, the organization “had some moments where we were unable to receive transfers or take certain patients into our facilities.”
Specifically, for 2% of admissions, HCA could not receive patients through the usual transfer centers and “had to find alternative solutions,” Hazen said.
Going forward, he said, there are opportunities for the health system to “improve our throughput through our case management initiatives [and] increase the head count in our facilities in order to take care of these patients.”
Such steps also will help HCA raise its case mix index, given that transfers who don’t get seen generally are “slightly more acute than our average in most instances,” Hazen said.
Ahead of the curve
For HCA, the emergency department is one service line that has exceeded expectations during the pandemic, with an 11.4% increase year-over-year for Q4. The industrywide increase for December was 4% as reported by Kaufman Hall.
“The resiliency of the emergency room for communities is even greater than we thought,” Hazen said. “And the demand there is very strong because our emergency rooms and other people’s emergency rooms are a solution set for people whenever healthcare is needed.”
HCA’s orthopedics revenue increased by 6% for the quarter amid what Kaufman Hall describes as a need for the industry to “explore how to treat lower-acuity patients in novel settings as patient volumes continue to shift to outpatient locations.”
“In many instances, we fully absorbed, we believe, most of the shift over the last three years during the pandemic, with the orthopedic business moving from inpatient to outpatient,” Hazen said.
Another area of optimism is contracting, with most of the organization’s negotiated contracts over the last three quarters of 2022 coming in with payment increases in the mid-single digits.
“We are encouraged by the outcomes of those negotiations,” Hazen said. “I think there’s a general recognition in the payer community that the input costs for providers are up. And so, given those inflationary pressures, they recognize that there’s a sensitivity to responding to that, and we’re trying to be appropriate in our ask.”