Hospitals are seeing better margins, but how much can they improve?

After some difficult months with weak margins, hospitals may have some reason to be optimistic, Steve Wasson says.

Steve Wasson, general manager of data and intelligence at Syntellis Performance Solutions

Wasson is executive vice president and general manager of data and intelligence at Syntellis Performance Solutions, a firm which provides data and software for hospitals and higher education institutions. (Syntellis was recently acquired by Strata Decision Technology.) While many hospitals are still dealing with slim margins, Wasson says he’s encouraged by the improvement in the last few months.

“Now, if you put it in the bigger context, it's still not great,” Wasson says. “If you go back to a 3-year view, 4-year view, these margins would not be something you'd be celebrating.

But in the context of the difficult period hospitals have seen over the past two years, he says, “We're moving in the right direction.”

In an interview with Chief Healthcare Executive®, Wasson talks about the better outlook for hospitals, the challenges ahead, and how health systems can prepare for success.

“The takeaway for me right now is, I'm seeing a little optimism,” Wasson says. “I'm seeing a little bit more pep in people's step, which is great. And I think that we want to see that continue.”

Return to pre-pandemic levels?

Healthcare analysts note that from a financial perspective, 2022 was a miserable year for hospitals. While hospitals are doing better this year, many health systems should expect weaker margins for the rest of 2023, and into 2024, Fitch Ratings projects.

While some analysts have said hospitals may have a difficult time returning to pre-pandemic levels in terms of financial performance, Wasson sees some reasons for hope.

“I do think they can get back there,” Wasson says. “I don't count that out. And the reason is that people know how to operate. I mean, you know, people do make good decisions.”

Hospitals are seeing better volume, and they’re also seeing a more consistent stream of patients, he says. In 2022, hospital volume could vary widely month to month, but Wasson says he’s seeing more stability this year.

Health systems face higher costs for labor and supplies, but they’re relying less on staffing agencies to fill vacancies, he says.

Just as importantly, hospital leaders now have more time to plan than they did through much of the pandemics, when they were dealing with surges of patients arriving with new variants while juggling workplace shortages. Healthcare executives are putting more energy into long-term planning, including focusing on areas of strength and moving away from some weaker areas, Wasson says.

“I think CFOs and CEOs and others in these organizations are able to plan out,” Wasson says, “What does a better margin look like? What's the workforce I really need? What are the service lines I'm actually going to be in?”

Growing gap

In Wasson’s view, hospitals are faring better, but some systems are having more success than others. Generally, larger hospital systems are seeing more strength, while smaller hospitals continue to have a difficult road.

“We definitely see some ‘haves’ and ‘have nots’ sort of playing out,” Wasson says. “But in the aggregate, we're seeing some trends toward improvement.”

Like some other analysts, Wasson sees a widening gap between health systems with financial strength and hospitals that are struggling.

Many of those smaller hospitals don’t have the ability to coax better reimbursement rates from insurance companies, he notes.

“They don't have the negotiating clout,” Wasson says. “They don't have the volume. They don't have a way to optimize service lines.”

Planning ahead

Hospitals need to be having discussions with their payers, and Wasson says he’s seeing evidence those talks are occurring, with the improvement of revenues for some hospitals.

“Get pointed with what you need to be successful with your payers,” he says. “Because you know, the way that these reimbursements work, you only get so many times at the negotiation, but your expenses have accelerated over that time in between.”

With many hospitals struggling to recruit and retain staff, health systems need to develop partnerships to provide a steady supply of workers.

If they aren’t already, hospitals should be exploring partnerships with higher education institutions, such as universities and community colleges.

Hospital executives should also look at partnerships with other organizations to help them with services where they are struggling, or areas where they’re solid but not superior.

Even with modest margins, healthcare executives should be looking for areas where they can grow, Wasson says.

“I think sometimes people are hesitant, when their margins are down, to think about growth,” he says. “So don't forget to think about that.”

Expect more outpatient growth

Health systems need to be planning to serve more of their patients on an outpatient basis.

Outpatient revenue has been outpacing inpatient revenue, and Wasson says he expects that to continue. More patients are looking for treatment outside the hospital, he says.

“If these organizations aren't thinking about the outpatient, in context with the impatient, I think they're going to be left behind,” Wasson says.

“More and more care is just being provided in that setting, ambulatory surgery centers, …  things are being done in the office,” he adds. “So that has to be a part of your strategy, because those volumes are moving there.”

With health systems having more time to plan and seeing some improvement in volumes, Wasson has some optimism that hospitals are going to see better margins in the coming months and begin approaching levels before the pandemic.

“I'm hopeful that that will continue, and not be just languishing and really just these thin margins,” Wasson says. “Now, healthcare doesn't have big margins anyway, I mean, even in the best of times, but I do think they can get back there. …  I don't know when. Maybe it's a little bit longer than we'd all hoped. But I do think they can get back to a more, you know, sustainable margin.”