Hospitals

Q1 Was Pretty Good For Hospital Finance — But It’s Unclear If It Will Stay That Way

Hospitals’ operating margins and patient volumes dropped slightly in March. While hospitals were doing relatively well financially during the first quarter of the year, this new data could suggest more financial challenges ahead for hospitals. But right now, it’s unclear whether the recent declines in hospitals’ margins and volumes will be short- or long-term.

Hospitals’ operating margins and patient volumes dropped slightly in March, according to a new report from Kaufman Hall

Hospitals’ single-month operating margin index closed out March at 3.4% — a small dip from February’s 3.6%. It’s also worth noting that March ended with a year-to-date operating margin index of 3.9% — which is still significantly higher than the 1.9% index that ended 2023.

While hospitals were doing relatively well financially during the first quarter of the year, the report’s data could suggest more financial challenges ahead for hospitals. Right now, it’s unclear whether the recent declines in hospitals’ margins and volumes will be short- or long-term, said Erik Swanson, senior vice president at Kaufman Hall.

“Nothing we have indicates that we should expect a large drop in volumes, but the next couple of months will help us understand those longer-term trends more fully,” he explained.

The report also revealed that hospitals’ outpatient revenue decreased by 5% in March, due mainly to the competitive outpatient care landscape.

“Many hospitals are pivoting to offer more outpatient care options in the wake of shifts of volume. However, they are often finding themselves competing for patients with an increasing number of peer organizations, retailers and other nontraditional providers,” Swanson noted.

He also highlighted hospitals’ ongoing increases in incurred bad debt and charity, as well as increased days in accounts receivable, as additional financial challenges.

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A Deep-dive Into Specialty Pharma

A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.

In his view, some of the increase in accounts receivable balances is due to the Change Healthcare cyberattack, as organizations are extending the time period in which they will collect. But rising bad debt may also be a symptom of larger trends, such as shifting payer mix away from commercial payers, Swanson added.

To offset declining revenue and volume trends, the report recommended that hospitals consider boosting their growth in high-performing areas like ambulatory surgery centers, pharmacies and imaging services. Depending on the hospital, it might also be a good idea to establish a retail presence, Swanson noted.

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