More hospitals are doing better financially, but gap grows between the strong and struggling

So far in 2024, many hospitals are seeing improved financial performance.

Many hospitals are seeing better revenues in 2024, but there is a growing gap between those faring well and those that are truly struggling.

Hospitals are faring better than in 2022 and 2023, when many were running in the red due to rising costs and lagging volumes.

Of course, Steve Wasson, chief data and intelligence officer of Strata Decision Technology, offers some perspective.

“The bar was pretty low to begin with,” Wasson tells Chief Healthcare Executive®.

But he adds, “We keep seeing margins improve, which is great.”

The median Kaufman Hall Year-To-Date Operating Margin Index for May 2024 was 3.8%. A year ago, it was 0.3%.

“We are absolutely seeing some improved performance,” Erik Swanson, senior vice president at Kaufman Hall, tells Chief Healthcare Executive®.

While many providers are seeing better financial performance, industry analysts see a trend worth following. They are seeing a widening gap between hospitals with strong finances and those that are struggling.

While he doesn’t favor the cliche of “haves and have nots”, Swanson says the chasm between hospitals with strong balance sheets and those that are floundering can’t be ignored.

“We are seeing a growing divide between the top performers and sort of the bottom performers,” Swanson says. “So it is an uneven level of growth. That means that not every hospital is increasing.”

Speaking generally, Swanson says the top third of hospitals and health systems are “experiencing very large improvements.”

But roughly two-thirds of the nation’s hospitals are improving slightly or stagnating, Swanson says. As many as 40% of hospitals are losing money in 2024, according to Kaufman Hall.

Outpatient care

Hospitals that are seeing improved financial strength typically have one key factor working in their favor, Swanson says. They are seeing a greater shift in delivering outpatient care, and they have seen investments in delivering more outpatient care pay dividends.

“That tends to be an area where organizations accrete margin, if you will,” Swanson says. “And so for hospitals that do not have strong outpatient footprints, they're potentially at risk of losing some of that.”

While hospitals and health systems generally are finding more revenue in outpatient care, Swanson also notes that it “also the space in which market disruptors are focused on.” Hospitals face non-traditional rivals in urgent care, diagnostics and even home health.

So while hospitals should be looking to expand more services on an outpatient basis, they may need to brace for competition.

“Outpatient is a critical component for hospitals for long-term profitability and operations,” Swanson says. “It is also an area where there is risk, both from external market disruptors. And if an organization does not have that capability today, they're at risk of falling behind those that do.”

Many patients are looking to have more care performed on an outpatient basis.

“Those volumes are going outpatient,” Wasson says. “And so people are trying to set themselves up to capture that volume so they don't miss out to someone else.”

Labor costs

Hospitals that are faring better also have managed to control labor costs.

To be sure, hospitals are paying more for labor, and wages are likely to remain elevated, Swanson says.

But some hospitals have managed to secure agreements with workers on new contracts, so now they can at least deal with a degree of predictability.

“You can manage to a higher number if you know it's higher,” Wasson says.

Kaiser Permanente went through a battle with its unions, including a strike, before reaching a new four-year pact with 21% raises last fall. Wasson says that contract may have served as a benchmark for other systems negotiating with their workers.“Everyone knows that's what the market is now and so, and that's why I think it's settled to some degree,” Wasson says.

With some hospitals and health systems brokering contracts, they are also faring a bit better in recruiting and retaining staff. And that’s allowed them to reduce their reliance on temporary staffing, which is more costly. Some hospitals spent far more on contract labor out of necessity to fill openings during the worst of the COVID-19 pandemic, but analysts say providers are spending less in that area.

Reducing contract labor “has helped organizations somewhat,” Swanson says.

Still, most hospitals continue to have difficulty in filling all their openings for nurses and other key workers.

“It still is a very, very tight labor market,” Swanson says. “So that challenge persists. There's still shortages of caregivers and, frankly, of individuals of all types.”

Analysts also point to labor as another factor separating the stronger hospitals from those that aren’t doing as well.

Stronger hospitals have typically managed to control, or at least build in predictability, in their labor costs and they generally are having more success in recruiting and retaining top workers. And they typically are reducing, or at least controlling, how much they spend on contract labor, analysts say.

Reimbursements

Larger hospitals and health systems are also faring better in getting better reimbursement rates from insurers, says Alina Henderson, vice president of solutions and marketing at Strata Decision Technology. “I think negotiating power with payers is a really big component,” she says.

Some hospitals are also benefiting from having a higher percentage of patients with private insurance, and fewer relying on Medicare and Medicaid, which tend to offer more modest reimbursements.