2022 Hospital Operating Margin Losses Persist Despite First Expense Declines of the Year

U.S. healthcare providers saw mixed performance in September 2022, with some positive performance gains but not enough to curb long-running losses. Key trends in healthcare benchmarking data for the month include:

  • Hospital labor and non-labor expenses declined following eight straight months of intense expense growth spurred by inflation and nationwide healthcare labor shortages.
  • Hospital operating margins continued to dwindle as revenue decreases outpaced expense improvements.
  • Demand for hospital outpatient services rose while inpatient volumes dropped.
  • Investments needed to support physician practices decreased even as physician expenses continued to climb.

For the first time in 2022, the nation’s hospitals and health systems saw early signs of potential relief from soaring expenses in September. Hospital benchmarking reports show adjusted expenses declined year-over-year (YOY) after eight consecutive months of YOY increases across most metrics, and had minimal growth month-over-month.

Total Expense per Adjusted Discharge decreased -5.6% YOY and rose just 0.9% month-over-month, while Non-Labor Expense per Adjusted Discharge decreased -6.2% YOY and was up 1.7% versus the prior month. Hospital labor costs also eased in September. Labor Expense per Adjusted Discharge — which has steadily risen for months due to nationwide labor shortages — declined -6.9% YOY and was essentially flat, rising just 0.1% month-over-month.

Hospital Operating Margin Benchmarks

Average hospital operating margins continued to drop as revenue declines surpassed the positive shift in expenses. September marked a ninth consecutive month of hospital margin losses, with the median hospital Operating Margin down -4.3 percentage points YOY in September and -2.5 percentage points month-over-month. Median Operating Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Margin decreased -4 percentage points YOY and -2 percentage points versus August 2022.

Hospital Revenue and Volume Benchmarks

A decrease in Net Patient Service Revenue (NPSR) per Adjusted Discharge contributed to the declines in hospital operating margin benchmarks. The metric dropped -10.7% YOY and -2.4% month-over-month, outpacing the improvements in Total Expense per Adjusted Discharge.

Total hospital revenues indicated continued growth in demand for outpatient care and declines in inpatient care. Outpatient (OP) Revenue jumped 9.3% YOY while Inpatient (IP) Revenue decreased -8.9% YOY. Gross Operating Revenue was up 2.7% YOY.

Key patient volume metrics were down from prior month but rose YOY. Adjusted Discharges decreased -2.1% month-over-month but increased 9.7% compared to September 2021. Trends in Emergency Department Visits decreased -3.4% from August but rose 1.8% YOY. Operating Room Minutes were down -4.9% month-over-month but up 7.9% YOY, further reflecting growth in outpatient care.

Physician Practice Benchmarks

Physician practices also saw some relief with a -1.9% decrease in the median Investment per Physician Full-Time Equivalent (FTE) in the third quarter compared to Q2 2022, but the metric rose 2% from Q3 2021. Physician expenses continued to rise. Median Total Direct Expense per Physician FTE was $962,182 for the quarter. That is up 4.4% from Q2 2022 and up 10.7% from $868,874 in Q3 2021.

 

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