Hospital Margins Climb as Outpatient Revenues Surge

Hospitals posted stronger margins in June, but rising bad debt and non-labor expenses continue to challenge bottom lines.

Hospital operating margins are on the rise, but maintaining financial stability remains a balancing act.

While revenue improved in June, rising bad debt and non-labor expenses are pressuring margins, even as hospitals work to leverage outpatient services and diversify their revenue streams, according to Kaufman Hall’s latest National Hospital Flash Report.

Through the first six months, the median year-to-date operating margin for hospitals, inclusive of all allocations for the cost of shared services that they receive from their health system, was 3%, compared to 2.4% in May. For the month, the operating margin was 3.7%, marking a significant increase from the 1.6% recorded in May.

Kaufman Hall found that revenue increased in June, with net operating revenue per calendar day up 1% month-over-month and 9% year-over-year. Outpatient revenue in particular is showing strong growth, increasing 1% from May and 12% from June 2024 on a per calendar day basis.

"Higher performing hospitals are nimbler on both the revenue and expense sides," Erik Swanson, managing director and data and analytics group leader with Kaufman Hall, said in a statement. "They may be expanding their outpatient footprint, diversifying services, or managing expenses like purchased services by centralizing some functions. They are also more likely to have value-based care or bundled care arrangements in place."

June also brought a concerning increase in bad debt, outpacing growth rates seen in previous months. Bad debt and charity per calendar day rose 4% compared to May, with Kaufman Hall noting that this trend may reflect shifts in insurance enrollment, especially with programs like Medicaid. Rising bad debt could offset some of the gains from higher volumes and revenue, making it an area worth watching.

Though revenue is trending positively, hospitals are also facing rising costs. Non-labor expenses remain key drivers of overall expense growth, increasing 3% month-to-month on a per adjusted discharge basis. Meanwhile, supply expenses and purchased service expenses were up 3% and 4% month-to-month on a per adjusted discharge basis, respectively.

These costs are swelling alongside revenue, underscoring the need for hospitals to manage expenses as diligently as they pursue growth.