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Steady Stability: Key Lessons From 2024’s Hospital Finances

Analysis  |  By Marie DeFreitas  
   January 02, 2025

Financial stabilization is finally here, for some.

Hospitals and providers struggled through some of the roughest times in healthcare history during the pandemic. But a new report is painting a better post-pandemic picture.

A report released by Kaufman Hall illustrates that hospitals' finances are rebounding and even stabilizing. And while this is an optimistic note on which to end 2024, providers should be careful to examine what worked during the past year to make sure this stability continues.

The Breakdown

The report, examining financial data from more than 1,300 hospitals through October, showed that hospitals’ year-to-date operating margin index was 4.4%, a slight increase from 4.3% in September.

“There’s been a slight underperformance relative to pre-pandemic levels,” said Erik Swanson, senior vice president at Kaufman Hall.

 “However, seeing the median operating margins being consistently positive throughout the course of 2024 is a good sign,”

Swanson noted that improvements in patient volume are a big reason for hospitals’ financial stability this year. With slightly shorter lengths-of-stay, many health systems were able to regain some stability.

Swanson also pointed out that many hospitals have improved their care transition processes. Making sure patients are discharged or transferred to a post-acute site of care in an efficient manner plays an important role in managing the length of stay.

The fact that patients are staying in the hospital for a shorter amount of time leads to lower utilization of goods and supplies, he added.

Additionally, the report highlighted that patient volume levels have fluctuated less than they have in recent years, making it easier for hospitals to plan and deploy resources effectively to meet that demand in 2024.

Lastly, the report showed that contract labor was a major source of spending for 2024 and 2023. As we examined earlier this year, several health systems have cut costs by minimizing or eliminating contract labor.

The Big Picture

Overall, hospital finances are stabilizing. The upside is stronger operating margins, easier-to-predict patient volumes, (accompanied by shorter lengths of stay,), improved outpatient revenue, and a decrease in some general expenses.

But a few concerns remain, including for non-profit health systems that may still incur higher costs. Cybersecurity also remains a major challenge, and cyberattacks are becoming even more sophisticated and widespread.

 There is also, still, a growing gap between strong and struggling hospitals. Some experts say the industry is becoming more divided between financially healthy and unhealthy organizations. Fitch expects not-for-profit hospitals to have improved margins in 2024, but S&P Ratings has a negative outlook on 25% of hospitals. Underperforming hospitals may need to examine new strategies to keep up with their peers.

On the payer side, it may be worth noting that Moody's expects lower profitability for health insurers due to reduced Medicare Advantage reimbursement rates. This might mean payers will start looking to reap profits in other areas.

Lastly, with a new administration, the healthcare policy landscape is unpredictable.

The Key Lessons for CFOs

While some health systems will be celebrating a successful financial year, others will need to create a more effective strategic plan for 2025. CFOs will need to examine what a path to stabilization or optimization will look like for their organization.

One strategy that has worked for some is creating more partnerships and expanding outpatient services. Health systems can find savings in lower- cost care sites. CFOs should also examine the cost of care transition processes and see what can be improved to help lower costs.

CFOs can also examine contract labor. If health systems can create a strong work force for 2025, that will build a solid foundation and put them in a position to cut contract labor.

Lastly, (and we know CFOs are tired of hearing this by now), look carefully at value-based care model strategies. VBC models and an emphasis on preventative care can feel like too big of an undertaking to be impactful, but the key is taking baby steps. If more health systems focus on playing an active role in preventative care in their communities, this works toward better planning for patient volumes and utilization costs and can even help lower emergency department visits. Several health systems have seen the benefits of taking a step in the direction of VBC models.

Marie DeFreitas is the CFO editor for HealthLeaders.


KEY TAKEAWAYS

A Kaufman Hall report details the state of hospital finances in 2024, noting some stabilization.

Other challenges remain persistent such as the growing gap between the best and worst performing hospitals.

CFOs will need to examine what will work for their health system in 2025 to not only remain stable, but also competitive.


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