In this episode, we’re pleased to welcome back Erik Swanson of Kaufman Hall to discuss the results of the latest National Hospital Flash Report.
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Highlights of this episode include:
- Key takeaways
- Hospital margins
- How hospital revenues performed
- Hospital expenses
- How hospital volumes performed
- How to get a copy of the latest report
Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. Kaufman Hall recently released their national hospital flash report for February 2023. This episode, I’m joined by Erik Swanson of Kaufman Hall to discuss the results of this latest report. Erik, welcome back to the show.
Erik Swanson: Kelly, thanks so much for having me, and it’s great to be speaking with you this morning.
Kelly: Yes, definitely. Well, let’s go ahead and jump in. Eric, what are the key takeaways from your latest report?
Erik: Yes. Well, January was a rather interesting month for hospitals, and there’s quite a few areas that I think present some interesting findings, particularly as we understand hospital finances, how they’ve unfolded today throughout the course of the pandemic and what that may mean for 2023. So, to begin with, what we’ve noticed here in January is that hospitals are off to a smoother start, particularly than last year, last year being the height of the omicron right around January, although performance for hospitals even with some of that improvement remains well below pre-pandemic levels, unfortunately. And what we’ll talk about is that much of this is really being driven by high expenses with revenues not keeping pace with that growth and expense. Additionally, what we’re finding is some challenges due to volumes overall and what we believe and what we think the report is beginning to tell us and what we’re observing from our clients is that we may be starting to see here what the new normal for hospitals in 2023 may look like, again, with performance that remains below that of pre-pandemic levels. And for hospitals, this will be really critical, particularly in their ability to manage their own cash given these reduced levels of profitability.
Kelly: Very interesting. And let’s talk hospital margins. How did hospital margins fair in February?
Erik: Yeah. So, as I mentioned, hospital margins in January were unfortunately still well below that of pre-pandemic levels. And the media and hospital operating margin for the month was -1%. And just for a point of comparison, in pre-pandemic levels or good years, if you will, hospital operating margins rarely exceed 3.5 to 4 percent. So the fact that these margins were below 0 in that -1% represents some tremendous challenges. That being said, as I noted before, January of last year was the height of the omicron surge. And luckily for hospitals, we haven’t had to face that type of seasonal surge this year, so these margins remain about 16% above that of last year, as well as the year prior during the pandemic. So while margins have continued to improve over the course of the last year, from the depths of the pandemic, they still have a ways to go to reach those pre-pandemic levels, and we expect for the course of 2023 that margins will still remain depressed throughout the course of the year. It is possible that we will have months where margins move solidly into the black for these hospitals. However, we expect, again, that even in those months where the operating margins are positive, the overall performance will be below that of pre-pandemic levels.
Kelly: Okay. Got it. And how did hospital revenues perform for the month?
Erik: Yeah. So, hospital revenue performance was somewhat mixed for the month. And it’s important to note here that as we think about this, there’s a variety of factors and certainly with the changing ways in which patients are accessing care influencing some of the revenues. So first off to begin with, net operating revenue, unfortunately, dropped 3% on a month over month basis from December of last year, but does remain quite a bit higher than prior years to the tune of around 5% for 2022 and 2021 and nearly 12% higher than January of 2020. What you’ll note within the revenue performance, although on an overall basis remains elevated over those pre-pandemic levels, is it is really being driven by an increase in outpatient revenue on both a month over month basis and year over year basis such that outpatient revenue is almost 20% higher than it was from pre-pandemic levels and over the course of the last few years. This really begins to represent the shift in patient care where patients are choosing to access care outside the traditional walls of the hospital and moving to access that care through outpatient sites. This is also reflected in revenue figures. We measure a metric called the inpatient-outpatient adjustment factor, which essentially measures the contribution of outpatient revenue to the total revenue being generated. And we note that that figure continues to increase over these months and remains quite a bit elevated again over pre-pandemic levels, further highlighting this shift in patients to that outpatient site of care. The last thing I’ll mention here on revenues as well. So, while revenues have grown overall as I noted, on a volume adjusted basis, when we look at net patient revenue per adjusted patient day, while elevated over pre-pandemic levels, it’s only elevated to the tune of around 7%. And as we talk about what’s driving some of the challenges for hospitals, that is not keeping pace with the growth and expense.
Kelly: Thank you, Erik. And what about the hospital expenses?
Erik: Yes. So, hospital expenses is the main story here. And no different than individual consumers and other businesses experiencing elevated expenses in the market. Hospitals themselves also experiencing those same types of challenges. So, to begin with, total expense for hospitals rose on a month over month basis, rose on a year over year basis, rose against 2021, and rose significantly over 2020, January of 2020 such that it is nearly 18% higher than pre-pandemic levels. This demonstrates an incredibly large increase in expense. Now, what is driving these large increases in expense? We can get into this. So much of the expense, perhaps unsurprisingly, is labor expense. With labor expense remaining nearly 21% above pre-pandemic levels. Now, this is happening due to a variety of reasons. First off, being the larger over macroeconomic factors as we are seeing overall wages begin to increase. Further, for hospitals and healthcare systems, the nursing shortages that exist within the space have also led to those increases in wages, not only for premium pay, but also for the utilization of contract labor or agency staff and other types of pay in order to retain those staff that the hospitals have themselves. And as we look at the expense data, we know for that nursing shortage that the FTEs per AOB or the number of FTEs, the full-time equivalents working for every occupied bed in the hospital, still is down nearly 8% from pre-pandemic levels and down 6% from last year, which means that the number of hours being worked are lower and that the labor shortages continue to persist. It’s also worth noting here that the types of patients that are coming into the hospital are sicker patients and staying longer. And as such, this is also driving up many of the non-labor categories with supply and drug expenses also remaining elevated to the tune of around 12% on a year over year basis.
Purchase service expense too as the overall expenses and inflationary pressures stress the industry and the market as a whole, those companies by which hospitals are purchasing services from are also passing their costs onto those hospitals. And those purchase service expenses remain elevated by nearly 23% over pre-pandemic levels and 6% over the last few years. So on an overall basis, expenses have unfortunately risen across all categories of labor and non-labor. Now, as I noted previously, that net patient service revenue on a volume adjusted basis while having increased by around 7% when looking at it, that has not kept pace with the volume adjusted growth and expense, which all remains elevated again on the order of 13 to 25%. So expense growth is greatly outpacing that of revenue growth, particularly as we compare relative to pre-pandemic levels.
Kelly: Wow. Thank you for that explanation. And so on a related note, how did hospital volumes perform?
Erik: Yep. So, although hospitals are experiencing highly elevated expenses, the volumes themselves remain somewhat anemic. So, as we think about these volumes, on a month over month basis, so relative to December, discharges from hospitals declined by around 2%, which also represents a 9% decline relative to pre-pandemic levels. That being said, we did note that volumes increase slightly over last year and the year prior. So again, there is some volumes beginning to return to the hospitals, but still not nearly as much as we would expect from pre-pandemic conditions. Now, what we also know is while the number of patients visiting the hospital measured by those discharges is down significantly, the patient days have not declined to the same degree. So, what this means is that the average length of stay in patients has increased quite dramatically being up 4% on a month over month basis and 7% over pre-pandemic levels. So, this is due to sicker patients coming into the hospital and staying longer, which as I noted before is those sicker patients are in the hospital. They are driving many of those expenses up. And really importantly here, with the average length of stay, is the labor shortages that I noted previously. Those labor shortages are also affecting the healthcare industry in post-acute sites of care, so those sites of care outside the hospital, which is really critical because for hospitals, that is where they will ultimately discharge many patients too. So, think skilled nursing facilities, nursing homes, and others. And as those post-acute sites of care do not have the staff to be able to take those patients, hospitals have an inability to discharge those patients. And why this is really, really critical as this means that there are patients staying in the hospital longer than they should, ultimately, continuing to require expenses to care for those patients. But there is no corresponding revenue with those patients. So, I think when looking at the volumes, one of the most important points to note here in January is this increase in the average length of stay, which leads to a lot of these other impacts of which we’ve just discussed.
I also mentioned earlier that we are seeing a shift in care to the outpatient sites and the outpatient revenue for hospitals are growing. And what we also noted in this most recent report is that is impacting volumes, particularly in those areas in which patients can choose where they’re accessing their care, ED being a primary example of this. We note that the ED visits are down 5% on a month over month basis. And down nearly 10% relative to pre-pandemic levels. And this is as patients begin to choose care in urgent care centers, retail pharmacies and clinics, telemedicine areas, or perhaps even accessing care through their primary care providers. And again, this is very important for hospitals as from a pre-pandemic era, the ED was the front door of the hospital. But given what we’ve seen in this most recent report and over the last several, that front door of the hospital has clearly shifted to different sites of care. I’ll also note along these similar lines, what we find is that operating room minutes are relatively flat on a month over month basis and remain depressed relative to pre-pandemic levels by around 4%. Again, highlighting that many patients are choosing to access surgical care in ambulatory surgery centers and other outpatient sites. Again, this is also really critical for hospitals as these outpatient settings and elective surgeries that hospitals would have traditionally performed generally are quite contributory to their positive margins. And as these volumes are pulled away, this will unfortunately lead to increased pressures for hospitals on an overall basis. So, on a large perspective here, these volumes are anemic, but do reflect care and reflect the challenges of sicker patients coming into the hospital.
Kelly: Great. I know it continues to be a challenging time in healthcare, Erik. If someone wanted to get a copy of the latest report, where can they go?
Erik: Yes, absolutely. So, these reports are free of charge, and we love to have readers reading these each month. So, to access a copy of this report or subscribe for future reports, they can navigate to kaufmanhall.com, and we have a category called insights and reports at the top of the page, and you’ll very easily be able to see our national hospital flash report as well as our physician flash report with all of these wonderful findings and more contained within.
Kelly: Great. Well, thank you so much for joining us, Erik, and for your valuable insights and information around the latest national hospital flash report.
Erik: You’re very welcome, Kelly.
Kelly: And thank you all for joining us for this episode of The Hospital Finance Podcast. Until next time…
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