Healthcare system finances are moving in the right direction, but labor constraints and higher expenses continue to affect the bottom line.
Large for-profit systems released their latest quarterly results starting in July, followed by nonprofit reports that will continue to roll out over the coming weeks. Analysts projected at least some financial improvement for most healthcare organizations during the quarter, but remain cautious in their optimism. The road to full recovery will be long, they say.
Related: Takeaways from health systems' first-quarter earnings results
"It continues to be a challenging environment out there," said Mark Pascaris, director at credit ratings agency Fitch Ratings. "The improvement in 2023, while better than 2022 for most folks, is still a bit of a slog."
Here are five takeaways from the latest round of earnings reports.
1. Health systems stress efficiency.
Healthcare systems are making organizational changes to help manage expenses and operate more efficiently, from implementing new technologies to reorganizing operations and cutting administrative employees.
Boston-based Mass General Brigham, which reported its fiscal third-quarter results, is planning to launch in October a centralized hub at its Somerville office where staff can more efficiently manage transfers into and throughout the system. The system said it found more than 3,000 overlapping transfer requests in 2022 and is hoping the center will help streamline the process.
Community Health Systems in Franklin, Tennessee, is rolling out its Project Empower plan to redesign workflows, standardize operations, increase transparency, reduce complexity in administrative tasks and integrate enterprise resource planning software. The changes will start later this year, President and Chief Financial Officer Kevin Hammons said on the quarterly earnings call.
The for-profit system also continues to hone its footprint and has sold or agreed to sell hospitals in states such as Florida, West Virginia and North Carolina.
2. Market expansions are underway.
Health systems are eyeing expansion in new or existing markets with strong population growth. An aging population is adding to the demand for healthcare services.
HCA Healthcare, a Nashville, Tennessee-based for-profit, is looking to build hospitals in areas such as Salt Lake City and Las Vegas. While selling off some hospitals, Community Health Systems has added almost 200 beds in more favorable markets in the last 1 1/2 years, CEO Tim Hingtgen said on an earnings call this month.
King of Prussia, Pennsylvania-based Universal Health Services is on track to open three hospitals in Nevada, Florida and Washington, D.C., within the next few years, in addition to three freestanding emergency departments in the next six months.
Mayo Clinic is planning an extensive redevelopment at its main campus in downtown Rochester, Minnesota.
"There's still some cautious optimism out there about what the future might hold," said Rick Kes, healthcare partner at professional services firm RSM.
Kaiser Permanente also has big growth plans. The Oakland, California-based nonprofit system announced plans in late April to acquire Geisinger Health in Danville, Pennsylvania, creating a new nonprofit entity called Risant Health that would buy up more health systems. Tom Meier, corporate treasurer, declined in early August to provide any updates on the deal.
3. Labor costs remain a challenge.
Labor costs are starting to decline from a year ago, especially as the overwhelming need for contract labor subsides. HCA, for example, reduced contract labor costs by 20% compared with last year's second quarter and the employer also hired 9% more nurses, CEO Sam Hazen told analysts in late July.
Contract labor costs fell to about $74 million in the last quarter at Community Health Systems, down from a $190 million peak in 2022's first quarter, Hammons said on the earnings call.
Despite the improvements, labor costs remain well above pre-COVID-19 pandemic levels. Shortages in clinical and non-clinical roles also persist. Many analysts say labor costs will never return to 2019 levels. A Moody's Investors Service report published this month said costs for permanent staffing have "irreversibly risen."
RSM's Kes noted trends in labor costs and staff shortages vary based on geographic location.
4. Operating margins are trending positive.
The median year-to-date operating margin index landed at 1.4% as of June, according to consulting firm Kaufman Hall's latest National Hospital Flash Report, which draws data from more than 1,300 hospitals. The margin was 3.8% in June.
Kes said an uptick in revenue due to patient volume increases and stabilization on labor costs helped boost health systems' margins.
"It's still a long way off from the kind of operating metrics that we had been accustomed to seeing before the pandemic. Our question as analysts now is, 'How long is it going to take?' and, 'What is the new normal?'" Fitch Ratings' Pascaris said.
5. Patient volumes are better in some markets.
Inpatient and outpatient volumes in some areas are beginning to improve.
At Universal Health Services, same-facility acute admissions in the second quarter grew 7% year-over-year, driven partly by returning demand for deferred procedures. Behavioral health admissions grew 3%.
Mayo Clinic reported a 6.5% improvement in outpatient visits and an 8.4% jump in surgeries during the first half of 2023. Its patient service revenue increased more than 10%, to $3.5 billion.
Sacramento, California-based Sutter Health got a $337 million revenue bump from patient services, and patient care revenue at Mass General Brigham increased by $206 million.
In general, health systems are seeing a faster rate of growth in outpatient volumes. Those numbers are becoming increasingly important to a health system's performance as more services move out of the hospital.
However, outpatient care is a doubled-edged sword. It costs less to provide those services, but they tend to pull in lower reimbursements, raising questions among providers and payers about how the outpatient trend will affect financial performance in the long run.
