Kaufman Hall report shows top hospitals separate through outpatient services.
By Daniel Beaird
Four years after the Covid-19 pandemic ravaged hospital finances, some are starting to return to profitability, although unevenly. Growth has accelerated for the top one-third of hospitals and significantly outpaced the rest, which have stagnated or worsened.
Repertoire recently spoke to Erik Swanson, senior vice president of data and analytics with Kaufman Hall about its recent National Hospital Flash Report that sampled both actual and budget data over the last three years from more than 1,300 hospitals on a recurring monthly basis. It partnered with Syntellis Performance Solutions, now part of Strata, on the report, which is a representative of all hospitals in the U.S. both geographically and by bed size.
Data shows relatively stable margins as patient volume has increased, but once adjusted for volume, revenue and expenses have also declined. While expenses are still high compared to previous years, the growth rate is slowing down.
“But the spread between the top performers and the bottom ones has really grown,” Swanson said. “However, it’s not broadly based on geography and size plays less of a role than one may think.”
Size still matters slightly, and some larger health systems outperform those that are smaller, but it’s not universally clear cut that as size and scale increases performance does too. It plays a role at the upper echelon, according to Swanson, but more importantly health systems that have a large or mature ambulatory footprint outperform those that do not.
“Outpatient revenue composition is probably the largest indicator of performance,” Swanson said. “Those that have outpatient-type departments really outperform.” He adds that keeping labor costs down particularly through contract labor utilization also plays a key role in an organization’s performance.
“Labor rates have increased continuously over the last several years, but organizations that raised their employee rates early were able to outperform those that didn’t because they were able to retain their talent better than others,” he explained.
However, he returns to outpatient footprints and those that offer ancillary services like laboratory, imaging centers, pharmacy and more that have seen better performance. “Post acute care has helped mitigate pressures related to inflation and those systems that have at least some connections to their own post-acute sites of care tend to outperform,” he said.
Stabilization, utilization
As conditions continue to stabilize, health systems are beginning to get a better idea on what might happen in the future.
“That’s been a little unpredictable over the last few years,” Swanson said. “But organizations are starting to take steps toward future planning, capital needs, strategic deployment of capital, management of expenses and utilization. Then, care pathways and care transitions are incredibly important right now for organizations.”
Price challenges related to goods and services remain sticky due to inflationary pressures. But while prices are still high, utilization is better.
“We’re returning to normal patterns and acuity of patients, which is good,” he said. “But as patients continue to seek more care in ambulatory settings, the acuity of the patients coming into the hospital is going to continue to rise. So, the sicker acute patients will be cared for in those hospital settings and that requires a greater utilization of goods and supplies, including drugs, that are more expensive.”
Swanson says an aging population with chronic conditions will require more specialty pharmaceuticals that cost more, so those challenges will persist for hospitals.
“The name of the game will be organizations understanding how they put patients into the appropriate sites of care to treat them and hopefully at the lowest cost,” he said. “But recognizing that hospitals will continue to have some real pressures as patient populations age and the acuity rises.”
Ongoing labor headwinds
As the patient population ages, labor shortages persist and those that are best able to deploy their staff to meet their needs most effectively are ahead of the curve. Some are leveraging data and using methods like workforce optimization and others are determining how to use the staff they have to cover demand through predictive analytics.
“That has really borne a lot of fruit for organizations doing that,” Swanson said. “Those that generally build up their internal flow pools and resources of nurses and other staff that can effectively move across units or even across states in very large systems tend to outperform organizations that don’t have that in place.”
Some health systems are partnering with local nursing schools and even high schools, according to Swanson, to build up their workforce pipelines. That can stretch from being affiliated with some schools to helping sponsor some educational programs in those schools.
“But there’s still wage pressure across all spectrums of skill level,” he said. “Organizations are competing against Amazon fulfillment centers and other companies in the community for lower paid staff. We see it a lot in physician offices with front office staff but there’s also some wage challenges with physicians, so it affects everyone.”
Two-thirds still operating at margins below zero, merger volume rising
Those wage pressures affect all health systems and 40% of hospitals in Kaufman Hall’s National Hospital Flash Report are still operating at margins below zero. Can they remain independent? That’s the question they’re asking themselves.
“The challenges hospitals faced during the pandemic were pretty universal,” Swanson said. “But the recovery has been very uneven. The expanding divide between the top and bottom performers is interesting and it’s leading to growing hospital mergers.”
Larger health systems are seeking to acquire and partner with smaller ones as there were 31 announced hospital mergers in the first half of 2024 and 65 announced deals in 2023. That was up from 53 in 2022, according to Kaufman Hall. Smaller health systems that are struggling financially are also pursuing mergers before their status worsens.
“While we’ve seen years of increasing performance post pandemic, those median levels of performance are still below that of pre pandemic levels,” Swanson noted. “The concentration of growth is really in the top one-third of hospitals.”
The volume grew significantly in the third quarter of 2024 with 27 announced transactions. Eleven of the transactions involved Steward hospitals and one of those 11 – Health Care Systems of America’s assumption of operations at eight hospitals in Florida, Louisiana and Texas – was among the four mega merger transactions announced in the third quarter. The others were:
- Florida-based Orlando Health’s announced acquisition of Alabama-based Brookwood Baptist Health from Tenet.
- Prime Healthcare’s planned acquisition of eight Ascension-owned hospitals in Illinois.
- The intended combination of South Dakota-based Sanford Health and Wisconsin-based Marshfield Clinic Health System.
According to Kaufman Hall’s M&A Quarterly Report: Q3 2024, the various transactions involving Steward Health Care facilities illustrate the current state of the market, while other announced transactions represent continuing themes of portfolio realignment and expansion into new markets.
The quarterly report states notwithstanding the financial difficulties facing all Steward facilities in the wake of the parent company’s bankruptcy, attractive assets are finding buyers in established, regional not-for-profit health systems that see opportunities for expansion and growth.
As finances begin to stabilize at least for some hospitals, health systems are finally seeing a clearer path forward four years after the Covid-19 pandemic.