Hospital Operating Margins Remain in the Red
This report highlights the latest trends in financial performance for U.S. hospitals and physician groups, drawn from monthly data from more than 135,000 physicians and over 1,300 hospitals.
U.S. healthcare providers continued to face high expenses and negative operating margins as long-running financial pressures persisted in the second month of 2023. Key trends for February include:
- Hospital operating margins remained in the red, continuing trends seen throughout 2022 as inflation and other economic challenges persist
- Overall hospital expenses continue to be elevated versus 2022, but labor expenses dipped month-over-month for the first time in five months
- Hospital revenues reflect ongoing growth in outpatient services compared to during the Omicron surge in early 2022
- The level of investment needed to support physician practices grew as per-physician practice expenses continued to rise
Note: Figures represent median year-over-year change by month for hospital data and December 2022 to February 2023 annualized versus 2022 for physician data.
Hospital operating margin benchmarks
Latest benchmarks illustrate the interplay of revenues and expenses on historically tight hospital operating margins
Hospital Operating Margins remained in the red in the second month of 2023, as they were throughout 2022. A look at trends in hospital Operating Margins over the past 12 months clearly illustrates the long-running financial pressures hospitals face amid high expenses and shifting volumes.
For hospitals nationwide, the median, actual year-to-date (YTD) Operating Margin was -0.9% in February, down from -0.8% the month before. Over the past 12 months, the median YTD Operating Margin fluctuated from a low of -2.4% in April 2022 to -0.4% in September of 2022.
Year-over-year (YOY), the median change in hospital Operating Margin rose 3.4 percentage points in February compared to lows seen during the Omicron surge in February 2022. It was only the second consecutive increase in the metric following 12 months of YOY declines. Operating Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Margin rose 3.3 percentage points YOY. Month-over-month, the median February 2023 change in Operating Margin was down -0.8 percentage points and Operating EBITDA Margin decreased -0.2 percentage points.
Hospital expense benchmarks
Monthly analysis examines fluctuations in average hospital expense metrics nationwide
Overall hospital expenses remained high for the second month of 2023 as hospitals and health systems continue to feel the effects of inflation, workforce shortages, and other economic challenges. Similar to trends seen in January, Total Expense rose 2.9% YOY in February and Total Non-Labor Expense had the biggest YOY increase at 5%. Total Labor Expense rose just 0.8% from February 2022 to February 2023.The relatively small YOY change may signal potential easing in rising labor costs, but it remains to be seen whether it will become a trend.
Supply Expense was up 5.2% YOY and Purchased Services Expense increased 4.7% YOY, while Drugs Expense decreased -1.7% versus February 2022, during the Omicron surge. Overall expenses decreased month-over-month. Total Expense was down -5.9% and Total Non-Labor Expense decreased -3.7%. Total Labor Expense declined -8.9% compared to January 2023, marking the first month-over-month decrease in the metric in five months and again suggesting some possible easing in labor costs.
Hospital volume and revenue benchmarks
Monthly hospital volume and revenue metrics reveal underlying trends in patient demand
Many hospital volume metrics increased in February versus the same month last year but were down versus January 2023, while revenues continued to reflect growth in outpatient care from 2022.
YOY, Adjusted Discharges rose 9.8%, Adjusted Patient Days increased 2.9%, Emergency Department (ED) Visits rose 12.9%, and Operating Room Minutes increased 8.6%.The Average Length of Stay (LOS) decreased -5.2% versus February 2022. Compared to January 2023, however, Adjusted Discharges and Adjusted Patient Days were down -5.9% and -9.4%, respectively. ED Visits decreased -9.5% and Operating Room Minutes were down -4.7% month-over-month.
Gross Operating Revenue rose 10.5% YOY, driven by a 16.1% YOY increase in Outpatient (OP) Revenue as more people used outpatient services. Inpatient (IP) Revenue also rose 2.2% versus February 2022. Month-over-month, Gross Operating Revenue decreased -7.1%, OP Revenue was down -4.9%, and IP Revenue decreased -11.0%.
Physician practice benchmarks
A look at last quarter’s key performance indicators from more than 10,000 physician practices
Per-physician expenses and the level of investment needed to support physician practices continued to increase in February, rising above 2021 and 2022 levels. For December 2022 to February 2023 annualized, Total Direct Expense per Full-Time Equivalent (FTE) — including advanced practice providers — rose to $956,717, up 5.9% from 2022 and 16.2% from 2021. Investment per Physician FTE was $266,632 for the annualized three-month period, up 6.7% compared to 2022 and 16.4% versus 2021.
Median Net Revenue per Physician FTE rose 4.9% above 2022 and 12.1% above 2021 to $656,798 over the same period. Physician productivity was essentially flat, with Physician work Relative Value Units (wRVUs) decreasing just -0.1% from 2022 but up 9.2% from 2021.