Becker's Hospital Review

20 THOUGHT LEADERSHIP How some hospitals are not only surviving, but thriving financially By Madeline Ashley K aufman Hall's most recent July 2024 "National Hospital Flash" report shed a light on financial stability that is continuing to spread across hospitals in the U.S. From improved outpatient revenue and shorter average length of stay, the report found that the monthly operating margin index for hospitals was 3.8% in July, up from 3.3% in June. In June, the flash report also pointed to improvements in hospitals, but continued uneven growth between higher- and lower-performing hospitals. "As we are starting to see a bit more stability, the key here with this growing divide between the top and bottom performance, it doesn't mean that we're in the clear, necessarily," Erik Swanson, senior vice president of data and analytics for Kaufman Hall, told Becker's. "is [report] doesn't mean everything's all sort of rosy and peachy, things are improving, but there's going to be some sustained headwinds here for hospitals and particularly those in that bottom third, bottom half." Becker's connected with Mr. Swanson to take a deeper dive into these reports and to learn more about hospital trends and strategies that can help boost financial performance. Editor's note: Responses have been lightly edited for clarity and length. Question: Can you share some driving factors and challenges related to the divide we're seeing between high- and low- performing hospitals? Erik Swanson: When we compare higher performers to lower performers, some will call it a bifurcation, some will call it a trifurcation, but while there are some clear signals, it is also a mixture of all these factors together. It is not universally true to say a top performer is a large hospital in an urban setting, put the stamp on it. ere's a little bit of a variety there. No. 1, probably unsurprisingly, is payer mix. Organizations that have higher commercial payer mixes tend to be in those top performers. Second is organizations who have done a better job at managing contract labor. Interestingly, one of the things we find there is that those top- performing organizations actually tend to have higher wage rates for their employees than the lower performers, which is sort of interesting. It tells you that organizations that have taken an effort to remain very attractive, be attractive employers, have sort of returned dividends and helped them manage and have that talent pool by which to draw upon and mitigate some of those contract labor resources. ird, and this one's very clear, organizations that have larger and more substantial outpatient footprints outperform those that do not. It's changing a little bit, but those are the spaces in which margin really is being produced for many organizations, whereas the cost for caring for higher acuity inpatients does not necessarily yield those kinds of returns. at's why that piece is so critical. One other component of that outpatient area is the amount of activity they're doing in the ancillary spaces. So this is things like tests, imaging, pharmacy, laboratory, etc. Generally, those that have higher proportions there also tend to outperform. Last, but not least, is urban and rural. It's not universally true that the big urban hospital is always doing better than the small rural hospital, however, what you will find is at the bottom end of performance, that does tend to be concentrated with small rural hospitals. at's not to say there aren't some rural hospitals that are doing okay, but generally, when you look at that very bottom, 20% if you will, it's concentrated to rural hospitals for a whole host of reasons. Q: The monthly operating margin index for hospitals was 3.8% in July, up from 3.3% in June. What are some ways you're seeing hospitals work to get their margins up? ES: ese operations are complex and multifaceted and there is no single intervention that we are observing with clients that move them from one bracket to another. However, there are some key differences. Areas that do take a very data-driven focus on performance improvement, and this could be cost reduction, but it could also be that outpatient footprint, also being very strategic in where they're looking at growing and expanding the services that they offer. ere's both a cost- management component, as well as a growth strategy component. ose that are doing that better from a data-driven perspective, we tend to find, outperform those that do not. Organizations that have resumed some of their capital expenditure, mostly their strategic capital expenditure, tend to slightly outperform those that haven't. is is because what hospitals and organizations look like, sort of pre-pandemic, is not what hospitals and patients look like now. ose that have that capital capacity to make those investments are generally making wise investments, and doing so in ways that are growing their operations. [A]ggressively negotiating with payers is also critical. Ensuring that where their patients are and the types of patients they have, that they're providing that care and service to those patients, but also making sure that they're being reimbursed appropriately for those types of patients. What we're seeing a lot of is this approach of being a little bit more strategic, a little more data-driven, doing the blocking and tackling better is excellent. Particularly for hospitals, one of the key things is throughput of patients. Part of that is for patients that might be observation patients, or not, making sure that they're being classified appropriately, or as early on as from when they enter the organization, is critical to managing some of that throughput. Secondarily, having strong connections with post-acute care providers, if not within their own systems, having post acute care entities by which they can then discharge those patients too, which helps with that continuity of care, decreases length of stay, ensures that patients are being cared for in the right setting, and potentially lower cost settings. at's another way in which we see hospitals benefiting from some of those actions and then driving those margins upwards. Q: The financial performance of health systems has been trending lower than that of hospitals alone. Why is this? ES: ere are all kinds of other entities and areas of business within a larger health system. What we're finding with health systems performing below that of hospitals now is due to a few primary reasons. No. 1 is the medical group. What you'll note in our physician flash report is that there is a growing investment per provider figure. So the amount of dollars that a system effectively subsidizes into the medical group for

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