Increased patient volumes stabilize hospitals' financial performance

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Hospitals across the U.S. are seeing steady financial performance, driven by increased patient volumes, even as high expenses remain a persistent challenge, according to Kaufman Hall's January 2025 National Hospital Flash Report.

The report, based on data from more than 1,300 hospitals, provides a snapshot of hospital revenue, expenses and margins at the start of the year.

Despite a continued rise in drug and supply costs, inpatient revenue grew at a faster rate than outpatient revenue, signaling a shift in hospital utilization patterns.

"The growth in volumes and inpatient revenue in January may be related in part to seasonal factors from the flu and other respiratory illnesses," Erik Swanson, managing director and group leader of data and analytics at Kaufman Hall, told HealthcareFinanceNews.

Cost growth slows, expenses remain high

One of the key findings of the report is that cost growth has slowed compared to previous years, offering some financial relief to hospitals. However, expenses, particularly in labor and pharmaceuticals, remain elevated relative to pre-pandemic levels.

"Hospitals are seeing some relief from extreme cost spikes, but drug and supply chain expenses continue to be a major concern," Swanson said. "Many organizations are joining group purchasing organizations, seeking generic substitutions, or exploring biosimilar drugs to control spending."

Hospitals are also optimizing their workforce to reduce costs while maintaining quality care.

"Some health systems have developed in-house staffing agencies to meet changes in patient demand without relying on third-party agencies," Swanson said.

He added other organizations are focusing on workforce optimization techniques to better align staffing levels with patient demand.

Uncompensated care rises amid Medicaid disenrollments

A growing concern for hospitals is the increase in uncompensated care, which includes bad debt and charity care. The report noted the recent uptick may be linked to Medicaid disenrollments in 2023 and 2024.
 
"Recent increases in bad debt and charity care may be related in part to Medicaid disenrollments," Swanson said. "Hospitals need to prepare for potential further increases depending on changes in Medicaid policy."

Hospitals that manage all their departments close to financial performance benchmarks tend to fare better.

"High-performing hospitals tend to manage their departments efficiently, suggesting that focusing on departmental performance and simplifying administrative processes can help mitigate financial risks," Swanson explained.

Strategies to improve hospital margins

With hospitals still facing tight margins, shared services allocations are becoming an area of focus.

Managing these costs is challenging for hospitals of all sizes, with wide variations in how systems allocate expenses.

"The total spend for shared services functions is substantial and growing, and hospitals must take a proactive approach to cost control," Swanson said.

Hospitals are also working on improving clinical documentation to ensure accurate coding and reimbursement.

"Organizations are investing in clinical documentation improvement programs to make sure they are coding patients appropriately and getting reimbursed correctly," Swanson said.

As hospitals move forward, balancing cost containment with the need to expand services will be critical.

While inpatient revenue growth is encouraging, high labor costs, supply expenses, and rising uncompensated care remain key challenges.

"Hospitals must continue to refine their financial strategies," Swanson said. "Managing labor efficiently, leveraging group purchasing, and optimizing shared services will be crucial in maintaining financial stability."