For the third year in a row, patients seeking treatment at Froedtert Health, a Milwaukee-based system, have been sicker than they were in years past. And the specialty drugs it purchases for conditions such as hepatitis C are getting more expensive.
As a result, Froedtert saw its supply costs shoot up 14.5% in its fiscal 2014, which ended June 30. Salary and fringe benefit costs also increased a combined 14.4%, in part because of higher-acuity patients but also because of its strategy of buying physician practices.
The overall rise in expenses narrowed its operating margin for fiscal 2014. Despite a 10.4% year-over-year increase in revenue, it finished the year with a 5% operating margin compared with 5.6% the previous fiscal year.
After a quiet 2013, many health systems such as Froedtert are beginning to see volume pick up, particularly in states that have expanded Medicaid under the Patient Protection and Affordable Care Act to adults earning up to 138% of the federal poverty level. Demographic trends, such as the aging baby boomers, also are moving in hospitals' favor.
But as more care is delivered in an outpatient setting, the patients who wind up in the hospital tend to have more complex medical needs than they did in the past. These higher-acuity patients require more equipment and more sophisticated technology, driving up supply and labor costs at a time when systems also are facing public and private payment squeezes.
As a result, for many systems across the country, the expense side of the balance sheet is growing almost as fast as the revenue side, prompting providers to look for new ways to cut costs.
A Modern Healthcare analysis of fiscal 2014 financial results for 59 not-for-profit health systems found that operating expenses increased an average of 6.2% while revenue increased 6.7%. More than half of the systems in the analysis reported a year-over-year decline in their operating surplus.
While higher patient volume is generally a good thing for hospitals, providers are also seeing more patients who previously were uninsured or underinsured, said Lori Pilla, vice president of supply chain optimization at Amerinet, a group purchasing organization. At the point where these patients arrive for care, they often require a higher level of service.