Healthcare may be entering a period of stabilization after crisis mode of recent years: Kaufman Hall

If 2022 was the worst year for hospitals and health systems since the start of the pandemic, 2023 is showing signs of growing stabilization as operating margins inch up.

So says Erik Swanson, a senior vice president at Kaufman Hall.

"The core fundamentals are generally improving, and this is allowing systems to act more strategically," he told Becker's.

When the pandemic hit, and as its effects on healthcare provision lingered well into 2022, systems were really in crisis mode, Mr. Swanson said. The recent positive median operating margin in May may be a sign things are generally stabilizing even as such margins remain well below pre-pandemic levels.

While the May data showed a median operating margin of 0.3 percent, historically a bare minimum margin to even approach reinvestment opportunities is estimated at about 3.5 percent (5 to 6 percent EBITDA), Mr. Swanson said.

Signs of optimism? Volumes are picking up, and contract labor expenses are falling, for example. However, 2023 will remain a challenging year for health systems, and some more than others, Mr. Swanson said.

"We should continue to expect improving margins throughout the course of the year, but organizations are not out of the woods yet," he said.

And, while the situation is "fairly homogeneous" across the country, there are a number of factors which will make for a more successful system than others:

1. Systems that have integrated health plans are likely to do better.
   
   
2. Those with employed medical groups will generally outperform.
   
   
3. Larger systems tend to outperform smaller ones, but sometimes mergers and acquisitions to get scale can be detrimental. Rural and urban health systems differ significantly.
   
   
4. Systems that have managed contract labor well will continue to benefit.
   
   
5. Systems located in generally affluent states, such as California and New York, tend to underperform.
   
   
6. Systems that can manage increasing numbers of observed patients will continue to do better.

The gap between higher performing health systems and underperforming ones is growing, he said.

Second quarter healthcare system results are on the horizon and will be key to seeing such possible trends continue, Mr. Swanson said.