Clinical laboratory managers and pathology group leaders may want to pay closer attention to shrinking hospital margins and whether this may put pressure on hospital laboratory budgets
Financial performance of the nation’s hospitals and health systems continues to disappoint hospital leaders. For the fourth consecutive month this year, hospital operating margins have remained in the red. This will, of course, affect the clinical laboratories and pathology departments at these institutions.
A recently released National Hospital Flash Report from healthcare management consulting firm Kaufman Hall indicates that 2022 has started off poorly for most healthcare organizations. The information in Kaufman’s report is based on data gathered from more than 900 hospitals and healthcare systems across the country.
The key takeaways outlined in the report for the month of April that are negatively affecting hospitals’ bottom lines include:
- More patients are utilizing urgent care facilities, telemedicine options, and primary care providers instead of seeking care at hospital emergency departments.
- Patients tend to be sicker, more expensive to treat, and require longer hospital stays compared to April of 2021.
- Expenses remain high due to labor shortages, specialty supplies, supply chain issues, and costly pharmaceuticals.
“Labor shortages, high prices for supplies, and cost increases to treat sicker patients over longer stays are ballooning hospital expenses,” Erik Swanson (above), Senior Vice President of Data and Analytics for Kaufman Hall, told Fierce Healthcare. “With a bleak consensus outlook for the US economy, those factors and their effects could be here for a while.” Clinical laboratories have been grappling with supply and personnel shortages and rising costs for many years. (Photo copyright: Kaufman Hall.)
According to the report, the operating margins for the hospitals were down nearly 40% compared to March 2022 and declined 76% when compared to April 2021. The calculated median operating margin index was -3.09% throughout April 2022. In addition, operating earnings declined almost 27% from March to April of this year and 51.5% when contrasted with April of last year.
The report also found that patient volumes, average lengths of stays, and surgeries performed had declined overall during the month of April—but that hospital expenses rose during that period—thus decreasing profit margins. Total expenditures increased by 8.3% over April 2021, and 9.6% between March and April of this year.
Inflation, COVID-19 Key Factors in Hospitals’ First Quarter Losses
The report noted that the historic rise in inflation during the month of April is fueling negative revenues for healthcare systems and hospitals. Several for-profit and nonprofit hospital systems reported losses for the first quarter of 2022.
Kaufman’s report for the month of March was slightly more positive as the healthcare organizations surveyed reported an incremental rise in patient volumes and minor expense relief, resulting in gains in volumes and revenues. March also saw an increase in outpatient and surgery volumes and lower numbers of high-acuity patients. However, that slight upward trend did not last through April.
Another reason for the year-to-date unsatisfactory revenue margins for hospitals across the country was the surge of patients seeking care for the SARS-CoV-2 omicron variant of the COVID-19 infection earlier in the year.
“The first few months of this year were decimated by the impact of the omicron wave, but as the omicron wave subsided, we had a bit of a rebound in those volumes, and that’s what you saw in March,” Erik Swanson, Senior Vice President of Data and Analytics for Kaufman Hall told HealthLeaders. “However, it wasn’t a rebound to the full historical volumes, and that is again because of that wave.”
Healthcare Organizations are Advised to Look at Expenses
The National Hospital Flash Report is published monthly by Kaufman Hall and provides vital analyses and observations on the fiscal performance of hospitals and healthcare systems. The information contained in the report includes data on margins, volumes, revenues, and expenses.
“The revenue side is a bit more challenging for organizations to control. Many are looking at their internal revenue cycle, understanding where there can be improvements in their own process, improving just the performance of the revenue cycle that improves the collections rates,” Swanson said. “Many are also trying to renegotiate with payers and negotiate perhaps as aggressively as possible to get the best rates. But I think where you see much of the levers that organizations can pull is on the expense side.”
Fluctuations in revenue mean that organizations—including clinical laboratories—will have to establish new strategies to diminish their financial shortfalls.
“Finally, because a lot of these challenges are due to these ebbs and flows in volumes, many organizations are also looking to see how they can embrace more data-driven predictive type models to look at volumes and think about how they can optimize their workforce to better handle these ebbs and flows of volume,” Swanson added. “This very often includes thinking about the appropriate size of float pools, the number of times that you need to pay overtime versus hiring new individuals, so many organizations are taking those approaches to bend the cost curve. There are quite a few levers that organizations are pulling to bend this cost curve down to ultimately improve their margins overall.”
The most recent report concluded that the first four months of 2022 have been extremely challenging for hospitals and health systems with extended negative margins taking their toll. The report also projected that the overall picture does not look favorable for these organizations for the remainder of the year and that many healthcare facilities may finish out 2022 with substantially depressed margins.
Clinical laboratory managers and pathology group leaders serving hospital and integrated delivery networks (IDNs) may want to consider how these depressed hospital margins will affect their own laboratories. It may be timely to anticipate how this fall’s budget-planning cycle might require their labs to specify how costs can be cut in the coming budget year.
—JP Schlingman
Related Information:
Hospitals Off to a Poor Financial Start in 2022
Kaufman Hall: Hospitals Face 4th Straight Month of Declining Operating Margins
National Hospital Flash Report: May 2022
National Hospital Flash Report: April 2022
National Hospital Flash Report: March 2022
National Hospital Flash Report: February 2022
Despite March Rebound, Hospital Revenues See Drastic Drop in April