KHA Perspective

July 2018

Kaufman Hall Perspective

Kaufman Hall Perspective

Hospital sector profitability remained favorable in June, with overall industry performance beating both budget and 2017 performance. Both median operating margin and operating EBITDA margin were up more than 200 basis points (bps) ahead of budget, while median operating margin improved 53 bps and median operating EBITDA margin improved by 15 bps over 2017. This is despite volume being below expectations indicating good expense management, favorable acuity mix and/or favorable payor mix.

IP/OP factor changes were fairly clustered in June, with all regions and hospital sizes continuing to see favorable performance against budget. While outpatient volumes and revenues typically translate to a positive financial return for health systems, hospitals can be vulnerable to significant drops in outpatient revenue and profitability when new competition moves into a market.

Strong performance was consistent nationwide, with hospitals of all sizes and across all regions performing above budget. This trend indicates that healthcare leaders were conservative in projecting organizational performance expectations, due to continued widespread uncertainty in the industry. Profitability performance may be reflective of one-time adjustments for many organizations for which June was the last month of the fiscal year.

Hospital discharges generally underperformed significantly relative to budget and month over month in June. Emergency department visits and operating room minutes showed similar declines. Volume statistics were largely in line with 2017, indicating that projected year-over-year increases have not materialized.

Year-over-year performance of both day and discharge indicators varied widely. About half of organizations saw volume increases and half saw decreases, underscoring the difficulties of the current healthcare environment, and the importance of reducing costs and maintaining focus on near- and long-term performance initiatives.

Hospitals and health systems nationwide experienced favorable expense control in June, with total expense per adjusted discharge on par with last year and under budget. Other expense metrics also were under budget and decreased compared to 2017, with the exception of drug spend, which increased year over year.

While the year-over-year improvements likely reflect tighter cost controls, some of the monthly uptick in expenses may be due to spending of unused budget at the end of the fiscal year for many organizations.

Financial markets remained stable in June, with U.S. unemployment rising to 4 percent for the first time since August 2017. Monthly hiring data also was strong, with a net increase of 213,000 in payroll. U.S. stock markets were essentially flat. The S&P 500 rose 0.5 percent, accompanied by a return of the volatility seen earlier in the year, due to the announcement of new international trade tariffs.

World stock markets were weak, with the MSCI World Index down 0.2 percent and the MSCI Emerging Markets Index down by 4.6 percent. U.S. Treasury and tax-exempt yields were largely unchanged for the month.

Revenues generally have declined year over year and hospitals are struggling to achieve Net Patient Service Revenue (NPSR) budgets. Leaders will need to closely analyze changes in payer and service mix that are key drivers to overall organizational operating margins. Having the ability to better forecast and budget for revenue swings is imperative in the current healthcare environment.

July performance is expected to be weaker than June, but there is a fair amount of spread in budget expectations. Future profitability predictions are generally positive, with only the smallest hospitals expecting a decrease. The median EBITDA improvement expected next month is around 200 bps nationally.

Contributors

James Blake

Publisher

James Blake

Data Science and Analytics

Scott Engel

Erik Swanson

Will Newton

Samantha Schwind

Shelly Ewerz

Technology

Scott Engel

John Hughes

Data Operations

Jared Murray

Brian Buchholtz

Profitability, Dan Majka

Subject Matter Specialists

Profitability, Kristopher Goetz

Volume, Todd Fitz

Revenue, Jason Sussman

Revenue, Kimberly Neese

Expense, Therese A. Fitzpatrick

Expense, Hardik Dalal

Non-Operating, Matt Robbins

Non-Operating, Ilan Weisberg

Expense, Brian Cole

Spotlight Contributors

Paul Crnkovich

Dan Clarin

Matt Romano

Rob Fromberg

Editorial

Carolyne Krupa

Todd Fitz

Brian Cole

Marketing

Rob Kunzler

John Howlett

Hillary Ervin

Kristina Wright

Interns

Cole Morgan

George Dyre

Daniel Davis

Ian Crane

Special thanks to our digital publishing partner: Readz

Please direct all questions or comments to

flashreports@kaufmanhall.com

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©2018 Kaufman, Hall & Associates, LLC

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