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Operational efficiencies saved hospitals from further earnings decline

Mergers and acquisitions helped grow revenue but it's taking health systems longer to realize expected synergies.

Health system earnings rebounded in 2018 after several down years though the annual average is still lower than it was in 2015, according to a new report.

Average operating margins for health systems rose by 13% in 2018 after declining more than 38% during the previous three years, according to the Navigant study.

Revenue growth exceeded expense growth in 2018 for the first time in three years, growing at more than double the rate of expenses from 2017 to 2018.

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Mergers and acquisition activity in 2018 also factored into revenue growth, though it is taking larger systems longer to achieve claimed synergies from mergers than perhaps their managements realized, according to lead author and Guidehouse National Advisor Jeff Goldsmith.

"These findings highlight obvious challenges for systems that have grown through mergers and acquisitions to actually realize the operational synergies they identified in their pre-merger planning," Goldsmith said.

The study looked at four years of financial disclosures of 103 large health systems that own 44% of the country's hospitals. Almost two thirds of the health systems analyzed improved their margins in 2018, which was a reversal of the previous three years in which the same portion of the market experienced deterioration.

Guidehouse bought Navigant in August for $1.1 billion.

WHY THIS MATTERS

To stem losses, health systems have cut back on operating expenses by exerting more control over core labor and supply chain expenses, corporate overhead and contracted services, according to the study.

Providers learned to better compete with nontraditional providers like retail clinics and e-health providers, increasingly vying for ambulatory market share.

Navigant said they also actively managed their revenue portfolios and showed a willingness to make continual corrections, which helped them rebound.

THE LARGER TREND

Despite the upward swing, operating margins remain an average of 30% below their 2015 margin levels, according to Navigant. Only in New England, which has consistently held the lowest overall profitability of any region in the study, were margins higher than 2015 levels.

Margins continued to decline in the Northeast, Southeast, and Midwest.

Problems faced by health systems from 2015 to 2017 included the proliferation of complex value-based contracts with commercial payers and a steady rise in publicly funded patients as a percentage of total volume.

Rising claims denials and deteriorating collection rates from patients with high level of financial responsibility also contributed to the the down trend, as well as reductions in supplemental payments from public programs Medicare and Medicaid.

The growth was unrelated to clinical volumes, as inpatient admissions continued their stagnation despite an aging population. Inpatient admissions grew by just 1% in 2018, and inpatient usage rates have declined for more than a decade. Outpatient volume trends in 2018, according to Navigant, were essentially identical to 2017, growing in low single digits.
 

FOR THE RECORD

"While 2018 was a turnaround year for health systems, achieving sustainable margins over the longer term will require renewed focus on operational efficiency," said Guidehouse Managing Director John Wiest, an analysis co-author. "Doing so necessitates not only better revenue analytics but active management and rebalancing of systems' revenue portfolios."

Max Sullivan is a freelance writer and reporter who, in addition to writing about healthcare, has covered business stories, municipal government, education and crime. Twitter: @maxsullivanlive maxesullivan@gmail.com.

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