Large health systems publicly reported billions in profits for the first half of 2024 and Kaufman Hall data shows a strong uptick in year over year hospital margins. Average operating margins reached nearly 5% in January, up from 2.7% in the previous month, and have hovered between 4.4% and 4.1% since then.
But the margin averages don't tell the whole story. The actual financial performance for hospitals and health systems, especially smaller and rural organizations, is much more nuanced.
"I think one of the biggest misconceptions in healthcare continues to be this ideology that the hospitals are obtaining record profits," said William Davis, president of the Illinois region at Deaconess Illinois in Evansville. "The facts, however, paint a completely different picture."
The American Hospital Association released a report May 2 depicting a "more realistic climate" of continued significant financial pressures for hospitals nationwide. The report found economic inflation grew 12.4% between 2021 and 2023 while Medicare inpatient reimbursement rates grew just 5.2%.
S&P released a report in August also outlining the financial challenges for hospitals; expenses continue to rise faster than revenue (although the gap is narrowing) and cash reserves depleted to less than 200 days cash on hand for the first time in a decade last year. Cash flow hasn't meaningfully improved since the pandemic either, and many organizations report it being below long-range margin targets.
Labor costs are also on the rise despite health systems offloading expensive travel nurse contracts. Fierce competition for talent has forced organizations to offer signing and retention bonuses, increase salaries and redesign benefits. Strata's Monthly Healthcare Industry Financial Benchmarks report in late July showed labor expenses grew 5.2% year over year in June.
"Health systems are not immune to the increasing labor costs, drug costs, and supplies costs compounded with stagnant reimbursement rates," said Mr. Davis. "Many health systems have had to find ways to maneuver with tight bottom lines causing difficult decisions on which service lines to maintain. These types of strategic decisions are what keep many healthcare administrators like myself up at night as we look to better serve our communities with ever increasing financial pressures."
Tracea Saraliev, a board member of Dominican Hospital Santa Cruz (Calif.) and PIH Health, has also seen misunderstanding related to the economics of healthcare.
"There is a huge misconception by consumers that healthcare profitability is evenly distributed within the ecosystem of healthcare," she said. "This distortion is even more severe among health system providers where there is a wide variation in margin based on payer mix, contracted insurance rates, geographic markets, service lines and portfolio composition within the continuum of care."
Some health systems are struggling to remain operational and are forced to join a larger system or close, while others are highly profitable and going on a buying spree, she told Becker's. Both Kaufman Hall and S&P have sounded the alarm about the widening gap between the financial results from best and worst performing hospitals.
"Healthcare economics very much remains paradoxical to even the most savvy of consumers," said Ms. Saraliev.