- Major U.S. health systems rebounded on their operating margins last year by an average of 13%, but they still average at 30% below 2015 levels, according to a Navigant analysis released Wednesday.
- The 38% decline in average operating margins from 2015 to 2017 was attributed to value-based contracts with commercial payers, a higher percentage of Medicare and Medicaid patients and rising claims denials, according to the report.
- Meanwhile, 30% of health systems say flat or declining inpatient volumes are the greatest threat to revenue, with downward pressure on commercial insurance rates close behind, according to a separate survey from Kaufman Hall published Tuesday.
As the analysts note, the Affordable Care Act dramatically changed the healthcare landscape in 2010, including in ways still being felt by provider bottom lines. Another upheaval could be on the horizon, as the nation waits for the courts to once again rule on the constitutionality of the landmark act.
And the ongoing shift toward value-based payments is rearing up on balance sheets as well. Commercial payers and CMS are continuing to roll out models that don't focus on the volume of service, a change health systems are still trying to cope with.
According to Navigant, nearly 65% of systems improved margins from 2017 to 2018, up significantly from the 35% that saw a rise from 2015 to 2017. Over the full four-year period, about half saw declines in operating income, and four systems dropped more than $300 million each.
Performance varied markedly by region. From 2017 to 2018, the greatest margin improvements were in New England and the South Central region. They declined in the Northeast, Southeast and Midwest.
Inpatient admissions weren't a factor for the growth, as they remained relatively stagnant. M&A activity was key, however, along with improved commercial revenue yield and revenue cycle management.
Navigant found that from 2015 to 2018, smaller health systems performed better financially than larger systems. Analysts said this could be due to a lag in expense management following heady M&A following the Affordable Care Act.
"Our analysis reinforces our belief that rigorous control over staffing, improved clinical effectiveness, and better resource use are vitally important to the short- and long-term financial health of hospitals and health systems," report co-author and Navigant Managing Director Alex Hunter said in a statement.
Nearly half of health executives surveyed by Kaufman Hall said rising salaries were the biggest hurdle to controlling expenses (followed by a lack of capital at 23% and the supply chain at 12%). Four in 10 cited labor costs as the having the greatest potential for cost savings (while only 8% though technology could do so), but the same category topped the list of barriers to cost transformation.
That comes as hiring in the healthcare industry hasn't shown signs of slowing. Last month, the sector led the country for new jobs with 38,800 added. Gains year-to-year have averaged 2.5% for 2019, up from 1.8% in 2018.
Highest on the list for new investments over the next three years were capital projects/new facilities and expansion of primary and outpatient services. Two-thirds of those surveyed said they had found some success in cost transformation goals.
The reports come as health systems are set to report their third quarter earnings in the coming weeks. Universal Health Services will be the first of major for-profit hospital operators to report — scheduled for Thursday after the market closes.
The Navigant report looked at more than 100 U.S. health systems making up 44% of the country's hospitals, using data from Standard & Poor's global market intelligence database. Kaufman Hall, partnering with Axiom, a consulting firm, and the Healthcare Financial Management Association, surveyed hospital executives and based the report on nearly 170 responses from September.