As Costs Continue to Grow, So Is the Gap Between High- and Low-Performing Hospitals

Hospital finances seem to be stabilizing overall — but a closer look shows that there is a widening gap between the highest- and lowest-performing organizations, according to a report released by Kaufman Hall this week.

For the report, Kaufman Hall examined data from more than 1,300 hospitals. It showed that hospitals’ year-to-date operating margin index held steady at 4.1% in June for the second month in a row.

Erik Swanson, senior vice president at Kaufman Hall, said that there are several factors contributing to the growing gap between hospitals that are performing well financially and those that aren’t.

“Higher-performing hospitals have developed strategies to pursue opportunities in outpatient services, which are growing at a significantly faster pace than inpatient services. They also have been more effective at driving down utilization of more expensive contract labor — often, they increased wage rates for full-time employees, which seems to have helped them recruit and retain full-time staff,” he explained.

Swanson also pointed out that hospitals with strong finances also tend to be very focused on patient throughput, which leads to timely and appropriate patient discharges.

In his opinion, smaller hospitals that are continuing to struggle financially should adopt a “no-regrets’ strategy.

“A ‘no regrets’ strategy for these hospitals is to focus on efforts to stabilize financial performance through operations improvement and accurate revenue capture. These efforts will help keep the organization on a financially sustainable path and will also help position the hospital for possible partnership opportunities,” Swanson stated.

Kaufman Hall also released another report on healthcare finances this week, with this one showing that rising labor costs are here to stay. 

The report demonstrated that health systems continue to battle declining revenue and increasing labor expenses — in the second quarter of this year, labor expenses accounted for 84% of health systems’ total costs.

This aligns with recent research from Strata Decision Technology, which showed that healthcare providers’ labor expenses grew by 5.2% while their non-labor costs rose by 3.3% from June 2023 to June 2024. This resulted in a 4.8% increase in overall expenses during the 12-month period, according to the report.

“Unlike most businesses, hospitals and health systems cannot easily change prices to account for rising costs. More than half of the average hospital’s revenues come from government programs such as Medicaid and Medicare, and these payments cannot be negotiated — and typically pay below costs. Revenue from commercial health plans is tied to multi-year contracts and rates are renegotiated only when existing contracts expire,” Swanson said.

These cost pressures will remain a huge burden for smaller and rural hospitals, Kaufman Hall’s research showed.

Picture: Feodora Chiosea, Getty Images