Hospital volumes rebound in October, but large hospitals feel pressure

U.S. hospitals turned a profit in October as volumes unexpectedly rebounded, marking five out of the past six months where providers recorded positive operating margins, according to a new report.

Operating earnings before interest, taxes, depreciation and amortization increased 9.8% year over year while operating margins jumped 20.9%, according to Kaufman Hall's analysis of more than 600 hospitals. Those metrics increased 19.6% and 46.5% respectively from September to October.

Hospitals were aided by month-over-month and year-over-year increases in adjusted discharges and surgical volumes. Bad debt and charity care levels both fell along with labor and purchased services expenses, despite rising pharmaceutical costs. Modest decreases in length of stay also helped.

"We were a little surprised that this month was a hell of a lot better than last month," said Jim Blake, a managing director at Kaufman Hall. "September looked like the beginning of a bad trend—October surprised us. It took pressure off quite a few of hospitals except for some of the largest ones."

Still, discharges and emergency department visits didn't reach expectations, dropping 0.3% and 1.6% year over year respectively, and it remains to be seen whether this is a true reversal from a long trend of volume decline, according to the report. The findings are bolstered by a number of for-profit hospital chains that note an ongoing decrease in inpatient volumes.

The drop in discharges and ED utilization are being offset by growth in the outpatient business, which hospitals will have to manage appropriately given that inpatient business weighs heavily on operating margins, researchers said.

"The data indicate that hospitals are not flexing labor and workforce as much as they could," said Erik Swanson, vice president of Kaufman Hall. "Rather than reducing workforce or optimizing staffing to levels of demand, staffing levels are remaining relatively fixed."

The largest hospitals significantly outperformed their smaller peers relative to outpatient services. But, the big players were not able to capitalize on that trend as they struggled to manage costs, according to the report.

While adjusted patient days increased, patient revenue per adjusted patient day also increased, highlighting that the majority of hospitals still operate on a majority fee-for-service basis. As evidenced in other reports, the shift to a value-based care model has been slow.

Providers should try to prepare for potential policy changes to the best of their ability, especially given the industry's increasing dependence on government payment brought on by the aging population, researchers said.

The federal government is likely to challenge any lines of business that significantly boost hospital margins, as indicated by the 340B drug discount program price cap that will go into effect next year. The CMS also proposed to pay the same rate for services delivered at off-campus hospital outpatient departments and independent doctors' offices.

Whenever the CMS creates a cost-cutting initiative, health systems can expect that commercial payers will make similar cuts in the coming years. If and when commercial payers push a similar reduction on 340B drugs, it could be another $1 billion-plus payment reduction for health systems, except this time it wouldn't be revenue-neutral, according to the report.

Providers can stay ahead of these changes with real-time data, Blake said. They can transition from cost-cutting to diagnosing the problem and turning around operations as soon as they notice a change, he said.

"It's a game-changer," Blake said.