The immediate, direct impact of the pandemic on hospitals and health systems has subsided, but elevated labor expenses, inflationary pressures and declining inpatient admissions continue to affect clinical care patterns and financial performance, according to a report published May 8 by VMG Health.
However, despite these sustained trends, leaders of large health systems were upbeat and optimistic about a financial rebound on the back of first-quarter results and recent hospital sector analyses.
The above headwinds continue to exert pressure on hospital profit margins, which remain razor thin, but operating performances on average improved throughout 2023 and continue to trend in a relatively positive direction, according to the report.
Through November 2023, the median hospital calendar year-to-date operating margin was 2%, compared to -0.9% during the same period in 2022, according to Kaufman Hall. The index hit 3.9% in March, down from 4.1% in February, according to the latest report, which is based on data from more than 1,300 hospitals.
A recent market study conducted by VMG Health highlights optimism that is generally shared by hospital and health system leaders. Sixty percent of 141 hospital leaders — including CEOs, CFOs and COOs — expected financial performance in 2024 to exceed that of 2023.
The CEOs and CFOs of large for-profit health systems echoed this sentiment in their first-quarter earnings calls.
"The market for labor has normalized in very material ways compared to where it was one year or 1.5 years ago. And we're seeing it in our cost per hour as a company, which has really lined up with the expectations we had for the year, and we've seen stabilization across the elements of our compensation programs," Sam Hazen, CEO of Nashville, Tenn.-based HCA Healthcare said.
HCA CFO Bill Rutherford expects a return to normalized inflationary trends "which is generally 2.5% to 3% of wage inflation going forward," he said in the first-quarter earnings call. We believe there is continued improvement in contract labor to be achieved."
As wage inflation recedes, health systems will have an opportunity to march down labor costs and improve their bottom line.
"We took a lot of the benefit from contract labor reduction in 20223. Now don't get me wrong, there's an annualization effect that will improve in the coming year. The volume strength was also very good during the year," Sun Park, CFO of Dallas-based Tenet Healthcare said. "We believe that we'll continue to see acute care recovery in 2024, like we saw in 2023. And if we're able to open up capacity effectively to service the demand that we want — which again is consistent with our high acuity strategy — I think that's what gets us to the upper end of our guidance? It's really the volume potential there."
Franklin, Tenn.-based Community Health Systems reported $231 million in operating income in the first quarter, up from $210 million during the same period last year. CEO Tim Hingtgen pointed to progress on key operational and strategic priorities as the health system remains focused on building further momentum in 2024.
"Year-over-year for the quarter, same-store admissions were up 3.7% and at the highest level since the fourth quarter of 2019 or pre-pandemic," Mr. Hingtgen said. "Same-store adjusted admissions increased 4.2% and also reached record levels, demonstrating the strong demand for care in our markets and the favorable impacts of our outpatient access point growth investments."