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Profitability declined in August as volumes begin to soften, says Kaufman Hall

Organizations that can better predict volumes and react to changes will have a competitive advantage in the industry.

Jeff Lagasse, Associate Editor

A snapshot of hospital performance in August shows that profitability declined overall across the U.S., driven primarily by softening volumes. It was only the second month this year in which profitability dipped.

Kaufman Hall's September Flash Report, which examined trends in August, showed that Operating Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin declined 9.4%, and operating margin declined 11.4%.

As was the case in June, hospitals seem unable to effectively adjust expenses when volumes flatten in order to maintain sufficient profitability.

"The general overall trend has been decreasing inpatient volumes for the last 16 months," said Kaufman Hall Managing Director Jim Blake. "And it's just been a slow drip. But overall we've seen entities keeping up with it and reacting to it and doing various things to not let it affect profitability overall."

The first eight months of 2019 have generally been favorable for the nation's hospitals, but what the fall and winter months have in store is unclear. What is clear is that volume and profitability are intimately linked, and organizations that can better predict volumes and react to changes will have a competitive advantage in an industry that is being increasingly disrupted.

WHAT'S THE IMPACT

Softening volumes were pinpointed as the main culprit behind the disappointing profitability numbers in August. Discharges were down 1.5% year over year and 0.3% compared to budget, but fairly flat at 0.6% month over month.

Adjusted discharges were down 1.2% year over year, but up 1.8% month over month and 1% above budget expectations. Average lengths of stay rose 2.1% year over year and were 0.7% above budget, but were down slightly month over month.

Both emergency department visits and operating room minutes declined in August, performing -2.8% and -2.6% compared to budget, respectively. ED Visits saw the greater month-over-month decline of the two measures, at -2.2% compared to a relatively flat -0.2% month over month for operating room minutes.

Year-over-year performance was flipped, however, with operating room minutes seeing the greater decline at -2.6% compared to -1.6% for ED Visits. The data suggests a possible continued increase in either overall outpatient surgery or ambulatory volumes.

"What we've been seeing is this continual march to decreasing inpatient volumes," said Kaufman Hall Vice President Erik Swanson. "Not only are discharges generally down on the inpatient side, but ED visits and operating room minutes, which indicates a few things. It indicates the traditional access points, like the ED, are diminishing, as folks are potentially starting to use other services out in the market to access healthcare, like ambulatory sites. Same thing with surgery. And the combination of those has been driving the decrease in inpatient volume."

On the expense side, total expenses increased slightly more than revenue per discharge, contributing to some of the decrease in profitability on a year over year basis. Labor expense per adjusted discharge has continued to rise over time, though at a decreasing rate, and labor efficiency has had has slight improvement year over year.

Which means hospitals' traditional approach to labor productivity is yielding diminishing returns.

"Hospitals should try to get as far ahead of this as possible," said Blake. "They should be doing a forecast, a five-year plan on steroids, that should take what's coming off of this and deeply study it. Like with drug pricing increases, they should have a plan that says, 'What is the reality, and therefore what is my real gap, and what can I be doing to change that?'

"They've got to have more comprehensive strategic moves to deal with this," he said. "They're going to have to be much more aggressive now that they have the size of the problem in front of them."

THE LARGER TREND

According to Blake, the August numbers indicate certain trends: Non-labor prices will likely continue to rise, and there will probably be a continued decline in inpatient volumes over the next several months -- although flu season can always throw a wrench into things.

"Flu is going to happen, we just don't know what it's going to do," said Blake. "It would be really smart of places to adjust for that."

Kaufman Hall's August 2019 Flash Report found that hospitals' financial performance rebounded in July as compared to June, driven by an increase in inpatient and emergency room volumes.

These improvements, however, don't necessarily translate to sufficient margins -- meaning many hospitals are still struggling. And individual hospital margins don't strictly correlate to the overall financial health of their parent health systems.
 

Twitter: @JELagasse

Email the writer: jeff.lagasse@himssmedia.com