In this episode, Erik Swanson, Managing Director leading Kaufman Hall’s Data and Analytics Group, discusses the latest Kaufman Hall Hospital Flash Report with data through April 2025.
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Learn how to listen to The Hospital Finance Podcast® on your mobile device.Highlights of this episode include:
- Current financial outlook for hospitals
- Divergence in performance
- Improvements in patient volume metrics and inpatient revenue in early 2025
- Strategies that high-performing peers are using to achieve success
- Operating margin index includes data points for hospital performance with and without corporate allocations
Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. We’re pleased to welcome Erik Swanson. Erik is a managing director leading Kaufman Hall’s Data and Analytics Group. His responsibilities focus on building cutting-edge data science tools and leveraging big data to provide deeper and more timely insight, drive operational improvement, and develop thought leadership to help clients and consultants achieve the most meaningful outcomes. His areas of expertise span artificial intelligence and machine learning, big data analytics, and parallel computing, along with deep healthcare knowledge with a focus on performance improvement and synergy, financial planning, and strategy with providers of all types and sizes. Erik is a frequent contributor of thought leadership and currently publishes the National Hospital Flash Report and is a regular speaker for industry associations, organizational boards, and annual conferences. Erik holds an MPH in healthcare management and policy from Columbia University, an MS in physiology and biophysics from the University of Illinois at Chicago School of Medicine, and a BS in biomedical engineering. In this episode, we are discussing the latest Kaufman Hall Hospital Flash Report with data through April 2025. Welcome and thank you so much for joining us, Erik.
Erik Swanson: Hi, Kelly. Thank you so much for having me
Kelly: Yeah. It’s great to have you back. Well, let’s go ahead and jump in. So, the latest National Hospital Flash Report highlights financial improvements hospitals have made in the first four months of 2025, relative to the same time frame in 2024. So, how would you describe the current financial outlook for hospitals?
Erik: Yeah. Thank you for that, Kelly. Well, it’s a very interesting time for hospitals at the moment. We’ve certainly observed some improving financial performance over last year, as well as over the last 12 months. And as hospitals stand today with a median operating margin from our report at around 3.3%, it generally shows a relative amount of stability in that financial performance. That being said, I often say that while we have slightly above 3% median margin, this stability is somewhat tenuous. And a 3.3% margin does not leave a great deal of room for potential shocks, external impacts, especially given what hospitals have gone through over the last number of years, including the pandemic. As such, many hospitals find themselves with decreased days cash on hand, and that 3.3% margin does not necessarily create enough operating margin growth for those organizations to replenish those days cash on hand. And as such, we’re continuing to see here very strict control around capital spending and being very strategic in how that capital is being expended. Additionally, what I would just say here, driving some of this tenuous nature of the performance is that on an overall basis, expenses have increased substantially over the last several years. Revenue has also increased to offset that to some degree, but hospitals are working in an environment here where fundamentally those expense levels are significantly higher than they have been in the past. And so, again, any shocks to the hospital’s expenses can greatly diminish their performance. And again, with the low single-digit margins, it does not leave a great deal of room for those potential deleterious impacts.
The last thing I might just say here is that when looking at these expenses that are driving some of this tenuous nature here, we are seeing expenses in both labor and non-labor side of the house. Interestingly enough, some of the labor expenses have attenuated to some degree over the last few years. This is owing a little bit to the reduction in the reliance of contract labor. But what is the most challenging indicator here that hospitals will be faced with some headwinds over the course of the remainder of the year is particularly around non-labor. And so, again, we are seeing non-labor expense increases with much of that being driven by drug expense. And for organizations that are treating older and older populations, those with more chronic illnesses, those that require specialty pharmaceuticals, that will only lead to additional pressure on their organizations. And additionally, throughout the course of the pandemic, many organizations chose to outsource a number of their key operations and are now purchasing those services. And again, that’s another area where we’ve seen expenses increase. And again, any potential headwinds relative to some larger macroeconomic challenges, potential tariff impacts, et cetera, may again only pressure hospitals further. So taken together, hospitals find themselves today having had improved performance over the prior several years. But again, are in a situation here where any of those external shocks could greatly impact the organizations. And given the relatively low levels of margin being returned by hospitals, does not give them a great deal of breathing room. So, I think most hospital operators today feel better than they have over the last several years, but certainly organizations are not out of the woods, given some of these headwinds that I’ve just mentioned.
Kelly: Yeah. I mean, that still is a really narrow margin. So, like you said, the littlest thing could set that off. Thank you for giving us all that great information too. You’ve noted before that hospital financial performance varies widely and that many hospitals have struggled even as the overall outlook has stabilized. Are you still observing a divergence in performance?
Erik: Yes. We absolutely are. And not only are we seeing a divergence in performance, we continue to see a growing divide between the top and bottom performers. Interestingly enough, when you look at the data, what they show is that the top third performing set of hospitals within our sample are growing faster than the bottom two-thirds. So said another way, this is representative of those top performers pulling away from the pack while the remaining two-thirds effectively stagnate. So, although these margins have improved, as I’ve noted, it’s on an unequal basis. Some of the impacts of this here are given this increased divergence between performance of the top and bottom performers, we saw in 2024 an increased amount of M&A activity, especially for financially distressed systems, as those systems who were performing more strongly and increasing their lead were able to acquire and support those who were potentially in financially distressed situations. And the size of those smaller party in terms of those M&A transactions also increased. Now, here in 2025, we are not seeing that same level of activity. And again, a lot of this is owing to the really unusual volatility in some of the economic uncertainty that exists that’s driving that slowdown. But critically, what this is demonstrating is that there are hospitals and systems that are doing better than they ever have before, but it is a minority of the total population. And so, it really highlights this difference between ways in which organizations can operate and how they’re positioning themselves strategically that allow them to outperform some of their peers.
Kelly: No. That makes a lot of sense. The latest Flash Report also highlights some improvements in patient volume metrics and inpatient revenue in early 2025. So, what do you think is driving these trends?
Erik: Yeah. Absolutely. So, one of the large factors here is really what I would just call a resumption of more normal care patterns. So, throughout the course of the pandemic, where patients chose to receive care, if they chose to receive care, or if they chose to delay care, certainly impacted organizations quite substantially. We are now beginning to see a resumption of more typical care patterns. Interestingly, though, and you alluded to this, is where that care is returning and where those volumes are coming back is different than it has been over the last several years. So, a few points to note here. So, number one, we’re continuing to see more inpatient growth than we have over the last few years. And why this is critical to understand is that that inpatient care that is returning tends to be of a higher acuity and is more costly care that hospitals need to provide. And so, to my point earlier about the cost of specialty pharmaceuticals and supplies, as these sicker and higher acuity patients come into the hospital for inpatient care, the cost of delivering that care is going to increase as well. So, it is really, really critical for organizations to manage and ensure that they’ve got the right population that is being admitted into the hospital. Additionally, outpatient growth has grown substantially into an even greater degree than inpatient growth over the last several years. And this is really owing to patients choosing to receive care in those outpatient settings. So, we can often think about this as wanting to receive care in an ambulatory surgery center or a hospital outpatient department or an urgent care facility or even a retail pharmacy. And so those changes that have created some greater consumerism, if you will, in the market, are driving patients to those outpatient settings.
Now, ultimately, for the health and well-being of our entire healthcare environment, that is likely generally a positive impact as patients choose to go to sites where the cost of delivering care tends to be lower. However, for hospitals and systems that don’t have strong outpatient footprints, this will be very, very challenging for those, since those tend to be areas in which margin is a creative, if you will. So, it creates positive margin for the systems, whereas that inpatient care can be quite expensive. This is one of the reasons why we are seeing that divergence in performance between some of the top performers and bottom performers, and it’s owing to the size of that ambulatory footprint, if you will. Further, it remains to be seen what will happen with site neutrality and the role that site neutral payments, that is organizations potentially being reimbursed at the same levels, irrespective of the site of care. As those types of reforms come into play or being included in those payer contracts, we should expect to see an even greater push towards that outpatient setting. And again, that indicates here that hospitals and systems that have that setting will tend to be able to take advantage of it. Those without are going to struggle likely owing to greater and greater populations of higher acuity inpatient care.
Kelly: Yeah. No. I mean, thank you for sharing those trends with us. And I’ve heard a lot about, I mean, all of those things that makes a lot of sense. So, for hospitals that are looking to improve their performance further, what are some of the strategies that their high-performing peers are using to achieve success?
Erik: Well, long is the day, I suppose, or long gone is the day, I suppose, in which basic blocking and tackling is enough to drive really sufficient and excellent performance. Now what we’re seeing is that the highest performing organizations are very much taking a data-driven approach to all of their decision-making. So, as we begin to think about this, this is thinking about how we use more advanced analytics to not only predict what may occur, but potentially prescribe. An excellent example of this is a workforce. How do we expect and understand what we believe we will need relative to a staffing perspective in the next week, the next month, the next year? And how do we build the most appropriate staffing levels to accommodate those volumes? Some of the top organizations are using some really interesting technology and approaches to address those questions. I mentioned the importance of ambulatory footprint. Again, top organizations really going through very interesting scenario type analyses, the ability to model their own markets and their competitive environment, to really understand the dynamics of where patients are looking to receive care and what those financial impacts may be, depending on how an organization chooses to align their broader strategies, either through the types of services and service lines they offer or the sites of care through which they offer it.
We’re also seeing organizations, again, make efficient use of vendor sourcing and negotiations, often through active participation in GPOs and other types of collaboratives of the sort. Again, really critical here for managing those non-labor expenses that I noted, and those who are taking full advantage of it tend to be outperforming those who are not. And then last but not least, what I would just say is, again, in the whole theme of technology and data-driven type tooling, obviously the use of AI is becoming quite a bit more ubiquitous. And again, organizations that have learned how to integrate that into their daily workflows and improve efficiency, improve the efficacy of the type of work that they’re pursuing, have also seen some gains from that front. So again, really a judicious use of AI and strategic use of AI in managing their performance. And last but not least, what I would say here is given that more and more hospitals are becoming parts of systems and we’re thinking more and more about systemness, the ability for those top-performing organizations to leverage their centralized or shared services across their hospitals in scalable ways to reduce some of that overhead burden is also becoming quite important. And some avenues in which top-performing organizations are pursuing that some of the underperforming organizations may not be pursuing in greater degree.
Kelly: No. We appreciate you sharing those strategies with us. So your operating margin index now includes data points for hospital performance with and without corporate allocations. What changes in the healthcare industry prompted you to add this new metric?
Erik: Yeah. So, as I just alluded to, as hospitals become part of systems and the systemness grows, the impact of those shared services type functions and folks will often refer to these as overhead or shared services. Corporate services is another way in which it’s commonly referred. So, understanding those functions and the value that it provides and the cost onto each hospital is ultimately critical for understanding the totality of expenses at each hospital. So, we’ve chosen to include this new metric to be able to provide a fair comparison, if you will, to understand for hospitals as part of systems, if you were to layer on all of those corporate and shared service expenses that a freestanding hospital would have included wholly within their own organization, what would that ultimately look like? And so, when you begin to pull in those shared service expenses through what are typically these corporate allocations, it allows us to be able to have a fair comparison of what we might call a fully loaded expense-based hospital and allow us to understand what is the appropriate value being derived from those types of expenses.
You’ll note in our report that the contribution, if you will, of those allocations on the expense side is quite significant. Without those allocations, the margins would be just shy of 7% for hospitals as part of systems. When you include those expenses, it drops to 3.3%. And so, for many hospitals, this is the single largest line item of expense that they receive from their corporate offices, and therefore really, really critical in understanding the performance of each of those individual business units. And last, we spoke a little bit about what are higher-performing organizations doing. Again, this drives the point home around what is the value received for those services. And so, in noting that large delta between those two margin figures, it highlights that if hospitals and organizations are receiving allocations from their corporate offices, are they receiving the value that they want for it? And it allows those hospital operators to use our Flash Report to understand that impact and evaluate whether or not they believe they’re receiving that value. And if not, to begin exploring with the system, additional ways in which they may ultimately receive greater value from the costs and expenses that are ultimately being incurred. So those are the reasons why we’ve ultimately included these metrics and show both with and without those corporate allocations to create those fairer comparisons.
Kelly: Yeah. Y’all have definitely created a great tool for everybody. Well, thank you so much, Erik, for sharing your insights with us on Kaufman Hall’s latest Hospital Flash Report. If a listener wants to learn more or contact you to discuss this topic further, how best can they do that?
Erik: Yeah. There are plenty of ways. We try to make it very easy. So, the easiest way is to go to kaufmanhall.com. You will then find these reports that we’ve just spoken about under the Insights and Reports section. Not only will you see our National Hospital Flash Report, but you’ll see a number of other key reports that the industry has found to be incredibly useful, including our Physician Flash Report, our M&A Report, and a variety of other articles. So, I’d encourage the readers to go to kaufmanhall.com and read those. They’re free to access. To the extent that any individuals want to learn even more, there is an email address, flashreports@kaufmanhall.com, that you can email to reach out to myself and our team of experts to help answer any questions. So those are the easiest ways to get in contact with us.
Kelly: Great. Thank you for sharing that with us. And thank you all for joining us for this episode of The Hospital Finance Podcast. Until next time…
[music] This concludes today’s episode of The Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit besler.com/podcasts. The Hospital Finance Podcast is a production of BESLER | SMART ABOUT REVENUE, TENACIOUS ABOUT RESULTS.
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