Why the change in hospital margins dropped by double digits in September

U.S. hospitals saw a median operating margin decline of 18.2% between August and September, a new report found.

A confluence of lower volumes and rising expenses made September a difficult month for hospitals, according to healthcare consultancy Kaufman Hall, which reports monthly on the finances of more than 900 mostly not-for-profit hospitals.

“It’s almost a perfect storm,” said Erik Swanson, Kaufman Hall’s senior vice president and the report’s author.

Volumes were down by almost every measure in September month-over-month, the report found. Adjusted discharges declined 5.1%, adjusted patient days declined 3.7%, emergency room visits fell 6% and operating room minutes fell 4.5% in that time. That likely contributed to gross operating revenue falling 1.4% month-over-month.

At the same time, Kaufman Hall found total expenses grew 2.2 between August and September. Within that, labor costs grew 1.4%.

An 18% median margin decline in one month is “pretty alarming,” said Rick Kes, a healthcare senior analyst with RSM. On the other hand, when accounting for the higher acuity patients and higher expenses Kaufman Hall observed, it shouldn’t be surprising, he said.

“It’s taking multiple different things that could go poorly for you and putting them all together and all of them hitting at a very short period of time,” Kes said.

Rising labor costs—especially among nurses—are a struggle for all healthcare providers, Kes said.

“I work with clients across the U.S. and I haven’t seen any region tell me anything other than labor is their biggest issue,” he said.

The traditional fixes would be to encourage more people to go into nursing and for health systems to partner with universities to attract a pipeline of graduates, but that’s a two to four-year timeline, Kes said.

It’s not just clinical roles, either. Kes said some hospitals are struggling to keep their billing and collections departments fully staffed.

Some of Kaufman Hall’s metrics suggested COVID-19 cases may have waned in September over with the prior month. However, hospitals still saw higher acuity patients being treated for non-COVID conditions that went unmanaged or undiagnosed during the pandemic. That was evidenced by the fact that discharges fell at a higher rate than patient days month-over-month and length of stay increased 0.7%, Swanson said.

“What we’re seeing is patients coming in to receive care having higher acuity and ultimately are staying longer,” he said.

Some of that is because patients delayed care during the pandemic and are now coming in sicker than in the past. “In most cases, it’s just sicker patients other than COVID,” Swanson said.

That’s partly behind the spike in drug costs, which jumped almost 4% month-over-month and more than 40% per adjusted discharge year-over-year. Specialty drugs that require infusions and chemotherapy drugs tend to be very expensive. The majority of increased drug spending is due to utilization rather than price increases, Swanson said.

The fact that Kaufman Hall found hospitals’ outpatient revenue fell 3.3% between August and September—even as inpatient revenue grew 1.5%—indicates patients are still nervous about returning for elective services while the Delta variant is active.

Emergency room visits were up almost 20% in September year-over-year, but down 6% month-over-month, according to the report. Some hospitals report patients are showing up with exacerbated chronic conditions and more advanced diseases than before the pandemic.

Several reports showed emergency room visits plummeted at the height of the pandemic and some have predicted they’ll never fully recover. Kaufman Hall’s report shows they’re still down 10.5% from the same point in 2019, before the pandemic hit. Swanson called the recovery in ER visits “stubbornly slow.”

Most of Kaufman Hall’s monthly hospital reports since the worst points of the pandemic have signaled recovery, but September’s didn’t fit that mold, especially because of the margin decline, Swanson said.

“This was certainly a bit of a turn,” he said.