Report Shows That Hospital Margins Continue To Shrink During Pandemic
With Covid-19 showing no signs of abating, and with the pandemic most likely consuming the US healthcare system for the next 6-12 months, hospitals and healthcare systems must continue to rein in costs in order to operate profitably for the short- and medium-term. Even after Covid-19 is finally under control, it may take some time before hospital procedural volumes return to their pre-pandemic levels.
Hospital operating margins suffered extremely during the early days of the pandemic when outbreaks were raging unchecked and much was unknown about the virus. During the summer and early fall of 2020, hospital volumes picked up and nearly reached pre-pandemic levels. However, the recent surge in Covid-19 cases in the US has once again threatened the financial stature of hospitals and healthcare systems in the US. A recent report by Kaufman Hall outlined the ongoing struggles of the US healthcare industry and how profit margins are being pressured by the complexities brought on by Covid-19:
“Margins have been down consistently year-to-date (YTD) since the start of the pandemic, but have fluctuated from month to month. Even with emergency FDA approval of a vaccine, October’s downturn likely will continue as COVID rates rise throughout the fall and winter. Hospital and health system leaders are bracing for difficult months ahead, as the combined forces of the pandemic and seasonal flu drive many individuals, and local and state governments to recommit to stricter preventive measures, causing many to delay non-urgent procedures and outpatient care. The result will exacerbate volume declines and could further destabilize hospitals financially, with a potential return to the significant losses seen in March and April.
Eight months into the pandemic, the Kaufman Hall median Operating Margin Index remained below 2019 performance at 2.4% YTD through October with CARES Act funding, and -1.6% without CARES. The Kaufman Hall Operating EBITDA Margin Index was 7.3% YTD with the federal aid and 3.8% without CARES.
October margins were down compared to 2019 measures, but above budget. Operating Margin fell 69.4% YTD (6.0 percentage points) and 9.2% (1.4 percentage points) year-over-year (YOY), but was 5% (0.5 percentage point) above budget, not including federal CARES funding. Operating EBITDA Margin fell 41.6% YTD and 9.8% (1.7 percentage points) YOY, but was 3.1% (0.3 percentage point) above budget without CARES. With the federal relief, Operating Margin fell 18.7% YTD (1.7 percentage points) and 8.5% YOY (1.2 percentage points), but rose 6.8% (0.7 percentage point) above budget. Operating EBITDA Margin declined 12.8% YTD and 8.1% (1.5 percentage points) YOY, but was 4.2% (0.5 percentage point) above budget with CARES.
Rising expenses and an eighth consecutive month of shrinking volumes contributed to October’s poor margin performance. Adjusted Discharges fell 11.2% YTD, 9.3% YOY, and 5.5% below budget, while Adjusted Patient Days decreased 7.7% YTD and 2.9% YOY, but were up 1.4% above budget. Operating Room Minutes fell 11.7% YTD and 5.6% YOY, as patients continued to delay non-urgent procedures.
Emergency Department (ED) Visits remained the hardest hit, falling 16% both YTD and YOY in October. Hospitals did see month-over-month increases in both ED Visits and inpatient volumes, due in part to rising COVID cases. ED Visits rose 1.9% month-over-month while Discharges were up 7.6%. Hospital leaders should be prepared to see mounting increases as cases escalate in the months ahead.
Gross Operating Revenue (not including CARES) also fell 4.8% YTD and 1.4% below budget, but was flat compared to October 2019 levels— a discouraging sign following YOY increases for three of the last four months. Declining outpatient visits were a major contributor, driving Outpatient Revenue down 6.6% YTD and 2.6% YOY for the month. Meanwhile, Inpatient Revenue declined 2.4% YTD but rose 2.6% YOY.
Expenses continued to rise as hospitals replenished staffing levels in light of rising COVID cases, and incurred the costs of drugs, personal protective equipment, and other supplies needed to ensure safe care. Such increases will put hospitals in a tenuous situation if volumes plummet. Total Expense per Adjusted Discharge rose 13.5% YTD and 12.2% YOY in October. Labor Expense per Adjusted Discharge rose 15.2% YTD and 10.8% YOY, as organizations continued to bring back furloughed employees.
Non-Labor Expense per Adjusted Discharge rose 13% both YTD and YOY, with Purchased Service Expense per Adjusted Discharge seeing the biggest increase at 16.9% YTD and 18.6% YOY. Drugs and Supplies Expense per Adjusted Discharge continued to rise rapidly at 15.1% and 8.9% YOY, respectively. These expenses will increase further as the severity of patients rises, a trend reflected by the 3.8% YOY increase in Average Length of Stay.”
Download the entire report here: National Hospital Flash Report: November 2020
As hospitals look for ways to bolster operating margins, one area that is ripe for extreme waste reduction is supply management. Supplies are the second-highest expense bucket for hospitals after labor- and are increasing dramatically during Covid-19’s surge. At many hospitals, supplies are managed with inefficient processes and outdated technologies. Across a large hospital or a health system, these inefficiencies can result in tens of millions of dollars in waste each year. The waste can come from several factors including overstocked inventories, losses from product expirations, missed charge capture, and labor inefficiencies, which combined can exceed 8 figures in value for larger healthcare providers.
Implementing an enterprise-wide supply tracking system is one move large hospitals and health systems can make to improve their finances while standardizing processes and data. If your hospital or health system currently wastes money in poor management practices of its supplies and implants, consider a system such as iRISupply. The system uses RFID technology to keep a perpetually accurate count of inventory and captures patient to supply association right at the point of dispensing from the cabinet. The smart cabinets, when combined with interfaces to the EMR and materials management system, greatly reduce the documentation burden on clinicians while improving data flow throughout the hospital or health system. Additionally, the system’s powerful, built-in analytics allow for continuous improvement by providing real-time statistics about your inventory. For example, you can identify slow-moving or unused items that may need adjustments, leading to a more efficient and profitable operation.