Given the historic financial pressures borne by hospitals and health systems over the last eighteen months, there is tremendous focus on organizations’ margins. Simply put, this metric tells us how an organization’s costs compare to their revenues and is one, but not the only, indicator of a hospital or health system’s financial health.
Kaufman Hall’s recent National Hospital Flash Reports have found that median hospital operating margins have essentially broke even. While this finding represents a meager stabilization from the unprecedented financial losses that many hospitals and health systems incurred over the last few years, it should not be interpreted that the financial struggles of hospitals and health systems are over. In fact, Kaufman Hall said in their July report "Most hospitals underperformed in June as high expenses and economic pressures persist."
The fact that hospitals and health systems are estimated to finally breakeven in the aggregate does not negate the impact of sustained negative operating margins. What it does not show is that median hospital operating margins were negative for over a year between January 2022 through February 2023. In other words, hospitals costs’ consistently outweighed revenues every month.
This is unsurprising given that data show hospitals’ total costs increased 17.5% between 2019 and 2022. Labor costs, which generally account for about half of a hospital’s total expenses, rose even faster, driven in part by increased reliance on exorbitant rates charged by contract labor agencies during that period. The recent median margin data also mean that essentially half of hospitals and health systems are still operating at a financial loss, with many more just barely covering their costs.
Some analyses seem to suggest that anything above a zero percent margin is inherently bad, as though the operating goal of hospitals and health systems should be to incur financial losses. This would be financially reckless and ignores the reality that hospitals and health systems need some margin to keep pace with new life-sustaining advances in medicine, help support their workforce and continue to keep their doors open to care for their patients and communities.
The Need to Invest in New Technologies and Projects that Enhance Patient Care and Safety
For example, hospitals and health systems need to invest in new technologies that enhance care delivery, such as bedside ultrasounds or remote patient monitoring technology, which can enable virtual nurses to assist bedside nurses in monitoring patient health. And while the rapid adoption of health technology has already yielded better outcomes, it has been accompanied by necessary investments in cybersecurity to protect these systems against ongoing cyber threats.
Moreover, hospitals need funding to reinvest in capital projects. For example, hospitals and health systems in California have begun projects to comply with new seismic building codes and safety standards. When hospitals and health systems experience break-even operating margins, they are often forced to delay or forgo investments that directly benefit patients.
The Importance of Financial Reserves
Hospitals and health systems also need operating margins to build financial resiliency in their organization. With limited sources of funding, many hospitals and health systems rely on financial reserves to withstand periods of operational disruption or financial distress and continue to provide services to their communities, who often rely on them as their sole source of care.
Disruption and distress are often unpredictable, and our communities rely on hospitals to play a critical role during these times. For example, hurricanes or tornadoes can wreak havoc on a community, injuring community members and destroying infrastructure. When these events occur, hospitals stand ready to lead the emergency response, creating capacity to meet patient surges and, in some cases, cope with damage at their own facilities at the same time. And at break-even operating margins, hospitals are unable to create the reserves necessary to guard against such challenges that may arise in the future.
Comparison to other Health Care Groups
It also is worth comparing hospitals’ break-even operating margins against other health care entities. For example, the operating margins for pharmaceutical companies in the first quarter of 2023 alone ranged from 17.5% for Johnson & Johnson to 34.3% for Pfizer. Similarly, net profits for insurance companies are staggering. From 2020 to the first quarter of 2023, United Healthcare alone reported nearly $60 billion in profits.
2022 was the most financially challenging year that hospitals and health systems have faced since the pandemic, and many of those same challenges persist. Moreover, hospitals and health systems face new financial headwinds and uncertainties, as states begin Medicaid redeterminations and disenrollments and Congress considers new proposals to cut hospital payments.
Hospitals and health systems need to be financially strong and healthy so that they can continue to keep their patients and communities healthy.
Bharath Krishnamurthy is AHA's director of health analytics and policy.