Hospital margins to end year on a high — but challenges remain

The median hospital operating margin rose to 2% in November after holding steady at 1.6% in September and October, but escalating expenses — including rising drug costs — remain a concern as 2023 draws to a close, according to a Dec. 21 report from Syntellis Performance Solutions, which includes data from more than 1,300 hospitals.

U.S. hospitals began the year with a median operating margin of -0.9%, but that figure has steadily increased and looks set to end the year at a healthier level around the 2% mark in December. November was the ninth consecutive month of positive operating margins. 

While the median hospital margin remains far below pre-pandemic levels, it has shown significant progress in recent months as hospitals continue their recovery after more than a year of negative results. 

"The operating margin increase is a positive sign for our nation’s hospitals, indicating potential stabilizing of hospital finances close to the year's end," Steve Wasson, chief data and intelligence officer with Strata Decision Technology, said. "Even with several months of sustained positive results, operating margins appeared unsteady in recent months due to persistent expense increases. It remains to be seen how rising drug costs and other expense pressures will affect margin performance heading into 2024."

Drug expenses saw the biggest increase in November, which recorded rising per-patient and per-prescription drug expenses despite decreasing drug volumes, according to the report. November data show total drug costs spiked 9% year-over-year, while supply costs rose 6.7% and purchased service costs rose 2.3% over the same period.

Total non-labor costs increased 5.1% from November 2022 to November 2023 and total labor costs rose 2.4%, pushing total costs up 3.8% year over year. While labor expenses remain high, non-labor expense increases outpaced labor expense growth for the past eight months as hospitals battle inflation and other expense pressures.

However, hospitals continued to see revenue gains, particularly for outpatient services, according to the report. Gross operating revenue jumped 7.7% year over year, driven by a 9.2% increase in outpatient revenue and a 4.5% rise in inpatient revenue. 

Despite a modest positive turning point in 2023 for some hospitals and health systems, Fitch Ratings. projects 2024 to be another "make or break" year for a significant portion of the sector.

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