As a result, health system-based clinical laboratories likely saw a decline in test orders as well a decrease in outreach revenue
Bad financial news continues in the hospital industry. According to an August 2023 National Hospital Flash Report from consulting firm Kaufman Hall, hospitals’ financial performance deteriorated in July, partly due to declines in inpatient and outpatient volumes and rising bad debt and charity care.
The implication from these findings is that hospital-based clinical laboratories saw a drop in test volume and any lab revenue associated with inpatient testing.
In an analysis of data from more than 1,300 hospitals, Kaufman Hall noted a dip in hospitals’ median calendar year-to-date operating margin from 1.4% in June down to 1.3% in July. The data also showed “a greater pullback in volume on the outpatient side, which may be attributed to patients choosing not to pursue elective procedures during the summer,” a Kaufman Hall news release stated.
Kaufman Hall’s National Hospital Flash Report by Erik Swanson, Senior Vice President, Data and Analytics, and Brian Pisarsky, Senior Vice President, Strategic and Financial Planning, is an analysis of actual and budget data—sampled from Syntellis Performance Solutions—which is representative of hospitals of various sizes and areas in the US.
“It’s clear that today’s challenging financial environment is here to stay, and hospital leaders must be proactive in seeking out opportunities to refine their operations and remain competitive,” said Erik Swanson, Senior Vice President, Data and Analytics, Kaufman Hall, in a news release. Clinical laboratory leaders would be wise to follow the same advice. (Photo copyright: Kaufman Hall.)
Expenses Declined, Bad Debt and Charity Care Rose
Here are other national data Kaufman Hall reported for July 2023 as compared to June 2023:
Adjusted discharges per calendar day dropped 7%.
Operating room minutes per calendar day declined 13%.
Emergency department visits per calendar day fell 1%.
Bad debt and charity care as a percentage of hospitals’ gross operating revenue was up 7%.
Purchased service expense per adjusted discharge was down 3%.
Labor expense per adjusted discharge also fell 3%.
Even though expenses slightly declined during July, patient volume decreases “pulled down” the margins, Healthcare Innovation reported, which called the report “a gloomy one.”
Also, the uptick in bad debt and charity care while volumes decreased created a “difficult situation for hospitals,” Medical Economics observed.
Here are the report’s “key takeaways,” according to Kaufman Hall:
All volume indicators were down, but operating margins were still better than 2022.
Outpatient volume decreased more than inpatient, possibly due to patients choosing not to have elective procedures during the summer.
The decline in expenses was “not enough to offset revenue losses,” and inflation will continue to take its toll on labor expenses.
Medicaid has been “disenrolling” members in 30 states during June and July, and bad debt and charity care have increased.
The report also called out need for improvement in providers’ discharge of patients to skilled nursing facilities. “Hospitals that prioritize care transitions to skilled nursing facilities are performing better than institutions [that] do not,” Swanson said in the news release.
“Identifying steps that can ensure a smooth transition, such as obtaining pre-authorizations and planning discharge early, will help organizations reduce expenses and improve patients’ experience,” he continued.
For Hospitals, 2023 Not as Bad as 2022
MedCity News pointed out that though July’s operating margin index decline followed four months of growth, hospitals are still way ahead of 2022 performance when median operating margins were -0.98% in July 2022.
Still, it appears hospitals are struggling to secure financial footing after 2022, an overall bad financial year for the hospital industry.
More recently, a 2023 Becker’s Hospital CFO Report compiled a list of 81 hospitals that had cut jobs since the start of the year in response to “financial and operational challenges.”
Included was Tufts Medicine in Burlington, Massachusetts. In August, the hospital “eliminated hundreds of jobs” in an outsourcing of lab outreach services to Labcorp. The Becker’s report noted that “[Tufts] said it will work with Labcorp to have the majority of affected employees transition to a similar position with Labcorp.”
Tips for Clinical Lab Financial Viability
Medical laboratory leaders need to help ensure financial health of their labs as well as quality and efficiency of services. Advice from Kaufman Hall may be applicable.
The report writers advised providers to secure payer authorizations before a “patient comes in the door.” For clinical labs, this is comparable to the need to secure insurance company authorizations for expensive genetic tests before samples are taken and tests performed.
Another tip from Kaufman Hall is to “collect and use data to inform process improvement” and “make change.” Along those lines, medical laboratories could leverage patient data to guide launch of new services, entry to markets, workflow improvement, and costs reduction.
Clinical laboratory managers and pathology group leaders may want to pay closer attention to shrinking hospital margins and whether this may put pressure on hospital laboratory budgets
Financial performance of the nation’s hospitals and health systems continues to disappoint hospital leaders. For the fourth consecutive month this year, hospital operating margins have remained in the red. This will, of course, affect the clinical laboratories and pathology departments at these institutions.
A recently released National Hospital Flash Report from healthcare management consulting firm Kaufman Hall indicates that 2022 has started off poorly for most healthcare organizations. The information in Kaufman’s report is based on data gathered from more than 900 hospitals and healthcare systems across the country.
The key takeaways outlined in the report for the month of April that are negatively affecting hospitals’ bottom lines include:
More patients are utilizing urgent care facilities, telemedicine options, and primary care providers instead of seeking care at hospital emergency departments.
Patients tend to be sicker, more expensive to treat, and require longer hospital stays compared to April of 2021.
Expenses remain high due to labor shortages, specialty supplies, supply chain issues, and costly pharmaceuticals.
“Labor shortages, high prices for supplies, and cost increases to treat sicker patients over longer stays are ballooning hospital expenses,” Erik Swanson (above), Senior Vice President of Data and Analytics for Kaufman Hall, told Fierce Healthcare. “With a bleak consensus outlook for the US economy, those factors and their effects could be here for a while.” Clinical laboratories have been grappling with supply and personnel shortages and rising costs for many years. (Photo copyright: Kaufman Hall.)
According to the report, the operating margins for the hospitals were down nearly 40% compared to March 2022 and declined 76% when compared to April 2021. The calculated median operating margin index was -3.09% throughout April 2022. In addition, operating earnings declined almost 27% from March to April of this year and 51.5% when contrasted with April of last year.
The report also found that patient volumes, average lengths of stays, and surgeries performed had declined overall during the month of April—but that hospital expenses rose during that period—thus decreasing profit margins. Total expenditures increased by 8.3% over April 2021, and 9.6% between March and April of this year.
Inflation, COVID-19 Key Factors in Hospitals’ First Quarter Losses
The report noted that the historic rise in inflation during the month of April is fueling negative revenues for healthcare systems and hospitals. Several for-profit and nonprofit hospital systems reported losses for the first quarter of 2022.
Kaufman’s report for the month of March was slightly more positive as the healthcare organizations surveyed reported an incremental rise in patient volumes and minor expense relief, resulting in gains in volumes and revenues. March also saw an increase in outpatient and surgery volumes and lower numbers of high-acuity patients. However, that slight upward trend did not last through April.
Another reason for the year-to-date unsatisfactory revenue margins for hospitals across the country was the surge of patients seeking care for the SARS-CoV-2 omicron variant of the COVID-19 infection earlier in the year.
“The first few months of this year were decimated by the impact of the omicron wave, but as the omicron wave subsided, we had a bit of a rebound in those volumes, and that’s what you saw in March,” Erik Swanson, Senior Vice President of Data and Analytics for Kaufman Hall told HealthLeaders. “However, it wasn’t a rebound to the full historical volumes, and that is again because of that wave.”
Healthcare Organizations are Advised to Look at Expenses
The National Hospital Flash Report is published monthly by Kaufman Hall and provides vital analyses and observations on the fiscal performance of hospitals and healthcare systems. The information contained in the report includes data on margins, volumes, revenues, and expenses.
“The revenue side is a bit more challenging for organizations to control. Many are looking at their internal revenue cycle, understanding where there can be improvements in their own process, improving just the performance of the revenue cycle that improves the collections rates,” Swanson said. “Many are also trying to renegotiate with payers and negotiate perhaps as aggressively as possible to get the best rates. But I think where you see much of the levers that organizations can pull is on the expense side.”
Fluctuations in revenue mean that organizations—including clinical laboratories—will have to establish new strategies to diminish their financial shortfalls.
“Finally, because a lot of these challenges are due to these ebbs and flows in volumes, many organizations are also looking to see how they can embrace more data-driven predictive type models to look at volumes and think about how they can optimize their workforce to better handle these ebbs and flows of volume,” Swanson added. “This very often includes thinking about the appropriate size of float pools, the number of times that you need to pay overtime versus hiring new individuals, so many organizations are taking those approaches to bend the cost curve. There are quite a few levers that organizations are pulling to bend this cost curve down to ultimately improve their margins overall.”
The most recent report concluded that the first four months of 2022 have been extremely challenging for hospitals and health systems with extended negative margins taking their toll. The report also projected that the overall picture does not look favorable for these organizations for the remainder of the year and that many healthcare facilities may finish out 2022 with substantially depressed margins.
Clinical laboratory managers and pathology group leaders serving hospital and integrated delivery networks (IDNs) may want to consider how these depressed hospital margins will affect their own laboratories. It may be timely to anticipate how this fall’s budget-planning cycle might require their labs to specify how costs can be cut in the coming budget year.
