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Hospital operating margins showed slight improvement from February to March, but year-over-year they’re still down almost 49%, marking the third straight month in which margins lagged – suggesting that hospitals still have a long road to travel before they recover financially from the worst of the COVID-19 pandemic.
The numbers from March in Kaufman Hall’s new flash report, the latest data available, showed some positive signs. COVID-19 cases and hospitalizations declined throughout the month, with the seven-day average of new cases plummeting more than 53% from March 1 to March 31. That resulted in some early signs of relief, as expenses eased with fewer high acuity patients. Outpatient volumes and revenues showed some rebound as well.
Despite the encouraging signs, though, healthcare providers continued to struggle with inflation, national labor shortages and the ongoing impacts of the coronavirus, with actual hospital margins negative yet again.
Margins were still above the all-time low seen in March 2020, when hospitals dealt with not only widespread shutdowns, but also the halting of elective procedures early in the pandemic. The median change in operating margin rose 32.7% from February to March and 85.6% compared to March 2020; the median change in operating EBITDA margin increased 26.7% month-over-month and 98.1% versus March 2020.
Still, the year-over-year figures showed a 48.7% and 37.8% decline in operating margin and operating EBITDA margin, respectively.
WHAT’S THE IMPACT?
Outpatient volumes improved for the month. Inpatient volumes increased, but at a slower pace compared to recent months. Patient days rose 4.3% vs. February and 1.2% year-over-year. Adjusted patient days increased 12.5% month-over-month and 4.2% year-over-year, while adjusted discharges rose 18% vs. the previous month and just 0.5% compared to March 2021.
Average length of stay was the only metric to decline month-over-month, with a decrease of 6.2% vs. February levels due to fewer high acuity patients requiring longer hospital stays. Compared to prior years, average length of stay remained high, increasing 4.6% year-over-year and 10% vs. March 2020.
Surgery volumes increased as patients continued to return after the Omicron surge delayed many nonurgent procedures. Operating room minutes rose 17.3% month-over-month, but were down 0.7% compared to March 2021. Emergency department visits also increased, rising 16.8% month-over-month and 6.5% year-over-year.
Higher volumes contributed to revenue increases in March. Gross operating revenue rose 14% month-over-month, 6.6% year-over-year and 35.1% compared to March 2020.
Outpatient revenue had the largest increase as COVID-19 mitigation efforts were lifted. Outpatient revenue was up 16.1% compared to February, 2.7% year-over-year and 34.9% versus the first month of the pandemic in March 2020. Inpatient revenue increased 5.4% month-over-month and 15.8% compared to March 2020, but was up just 0.3% year-over-year.
Hospitals saw some improvements in adjusted expenses month-over-month as volume growth outpaced expense growth in March, but labor shortages, supply chain issues and inflation continue to push expenses up relative to prior years.
Inflation, meanwhile, registered at 8.5% year-over-year in March, its highest rate since 1981. The increase was driven by ongoing supply chain problems, soaring demand and rising energy prices, the report found. The U.S. labor market remained tight in March as unemployment dropped to a two-year low of 3.6% and non-farm payrolls added 431,000 jobs.
THE LARGER TREND
Some of these trends were foreshadowed by a November 2021 report from Fitch Ratings showing that labor shortages and supply chain challenges are a rising threat to profit margins.
Multiple factors are contributing to labor pressures, including staff burnouts caused by the enduring COVID-19 pandemic and an overall shortage of qualified help, which has resulted in higher costs to hire temporary staff, and to wage inflation. Furthermore, the report noted that lack of staff is forcing some in-patient behavioral health and senior-housing operators to lower admission rates.
Supply chain issues are also adding pressure to profit margins, mainly due to higher transportation costs incurred by distributors. The medical-device subsector is also being impacted by the global shortage of semiconductors needed for their manufacturing processes.