2023 Year to Date U.S. Hospital Financial Results
In the fall of 2022, the outlook for hospital finances seemed dire as the COVID-19 pandemic dragged on. How have things turned out so far in 2023?
Looking back in 2022, most of the population returned to "normal" life by traveling, visiting restaurants, and moving on with life as best as possible. However, COVID-19 lingered on, with the Federal Public Health Emergency (PHE) still in force and hospitalizations continuing with about 5.5% of occupied ICU beds being COVID-19 patients (according to Johns Hopkins, see below). However, the US government stopped processing COVID-19 treatment claims from hospitals in March of 2022 as funding had run out. It seemed as hospitals were once again in a pinch, with financial results soon to reflect operations without a safety net of extra federal relief payments.
COVID-19 hospitalization trends depict the number of ICU beds occupied by COVID patients over time. Source: Johns Hopkins Coronavirus Resource Center.
To make matters worse, rising inflation and labor costs were mounting a significant attack on hospital bottom lines. Most significantly is the cost of nursing labor. Before COVID (in 2019) hospitals were spending an average of 4.7% of total nurse labor expenses for contract travel nurses. In 2022, that number grew to 38.6% according to the AHA.
Indeed, by the end of 2022, Kaufman Hall was reporting the average US hospital was operating negative operating margins for the year of about -0.8%.
So how have U.S. hospitals faired so far in 2023?
First, the industry must acknowledge the difficulty facing rural hospitals. According to Chartis, 43% of rural hospitals are operating in the red, including 51% of facilities located in states yet to adopt or implement Medicaid expansion.
But what about the finances for large health systems? Here is what I see happening this year based on average financial data reported by Kaufman Hall.
In 2023, operating margins are negative for most U.S. hospital operators, with the latest year-to-date performance indicating breaking even (for the calendar year 2023).
2023 is shaping up to be better overall than 2022, with 2023 results driven by growth in outpatient business. Inpatient revenue year to date has grown 2%, while outpatient revenue has grown 12%.
Labor expenses are under control, showing a trend year over year of small increase of only 1% more than in 2022 at this same month. Total expenses including supplies and drugs are growing 2-4% higher each month vs. a year ago, meaning that non-labor inflation is still impacting the bottom line.
How can a hospital system win in this environment?
Consider how HCA and Tenet have expanded their business to outpatient and ambulatory services.
According to HCA's latest filing, 38% of their revenue is from outpatient services. HCA operated 180 hospitals and approximately 2,300 ambulatory sites of care, including surgery centers, freestanding emergency rooms, urgent care centers and physician clinics. While inpatient surgeries were flat versus last year, they have increased the number of outpatient surgeries by 1.5%. In fact, HCA does about double the number of outpatient surgeries than inpatient (1.023 million vs 522k respectively). In the first quarter of 2023 through March, HCA reported a profitable $3.172 Billion EBITDA as a company.
Tenet is also a good representation of the focused play on ambulatory services. In their March 2023 financial disclosure, Tenet shows EBITDA at $340M for the three months ending March 31, up from $280M a year ago. Same-facility system-wide surgical cases grew 7.9%. Net operating revenue increased 22.6% compared to 2022 for the ambulatory business. On the hospital operation side of Tenet, EBITDA was $402M down from $510M a year ago. Hospital surgeries grew only by 2.3%. They don't report separate results on expenses between the two business units, but the consolidated results show salaries/wages/benefits as 45% of revenue, compared to 46% a year ago, about a 3.5% reduction.
Looking again at the Kaufman Hall data, we see that business is growing faster for outpatient vs inpatient services. Before COVID, hospitals in the U.S. were already on track to earn about half their revenue from outpatient services. Now that the disruption of the pandemic is officially behind us and the PHE has ended, I expect to see hospital systems continue to push harder to expand their offerings beyond the traditional four walls of the physical hospital. This means more focus on virtual care including remote patient monitoring and hospital at home.
