Hospital margins are stabilizing as patients resume more normal patterns of care, according to the latest Kaufman Hall National Hospital Flash analysis, which reported positive operating margins for the sixth month. Although the financial situation has shown improvement, median operating margins, now slightly above 1%, are well below both pre-pandemic numbers and the 3% operating margin necessary to sustain operations and invest in growth.

Although patient volumes are increasing, a greater percentage of patient revenue originates from the outpatient setting, underscoring the continued shift away from hospital-based settings to lower-cost sites of care. Additionally, hospitals are challenged by decreasing reimbursement rates as more patients age into Medicare or federal-payer insurance. Adding to the financial challenges is an increase in bad debt and charity care resulting from Medicaid eligibility reevaluations, causing millions to lose access to Medicaid coverage.

Expenses remain elevated, as a “labordemic” is expected to continue through 2024 due to shortages in many categories of health workers. Increased staffing costs will continue to drive high operating expenses and drain balance sheets as health systems continue to access cash reserves to support operations. This economic trifecta of reduced reimbursements increased operating expenses, and minimal margins is leading to projects being delayed, put on hold, or canceled altogether.

In this challenging financial market, some health systems are seizing the opportunity to double down on higher growth, higher margin outpatient and ambulatory care services, focusing on geographies with favorable demographics, commercial payers and strong population growth. There is significant growth in specialty care like behavioral health, cancer centers, and proton therapy centers. As the last of the Baby Boomers age into Medicare by 2030, the demand for post-acute care and inpatient rehabilitation continues to be in high demand.

Erik Swanson from Kaufman Hall states, “this ‘new normal’ is an incredibly challenging environment for hospitals.” Understanding this, the model of providing care based on what was profitable in the past has shifted. The industry must work collaboratively to transform the existing hospital business model and create new and unexpected value.

In today’s evolving healthcare world, DPR is committed to staying ahead of the industry’s everchanging needs and partnering with health providers throughout the entire lifecycle of project development. While technology and regulations change, the foundation of healthcare remains the same: providing an exceptional care environment for patients.

As a leading healthcare builder, we take that charge seriously. DPR’s healthcare team, backed by a team of clinical operations specialists, regulatory and design professionals, digital health advisors and data analysts, provides our builders unique insight into health organization’s current condition, performance opportunities, and future growth opportunities—enabling enhanced conviction in the clinical and operational decisions informing capital investments in real estate and technology.

Photo: McGinn Photography