An analysis of 2023 hospital operating numbers shows that 40 percent of hospitals are in the red as we move into the later part of 2024. While high-performing hospitals are “effectively pulling away from the pack,” as Kaufman Hall states, the stronger financial state of the hospital sector compared to 2022 and early 2023 disguises some troubling numbers that could hurt any given facility’s bottom line. Kaufman Hall offers “congratulations” to the hospital sector for being in a “much stronger financial state.” Yet, the not-so-fortunate chance that any hospital is still losing money in 2024 certainly tempers the good news.

A recent blog post from the healthcare consulting firm taken-to-tasks reiterated the trends my monthly market reports have painted for the sector: overall operating margins improved and broadly turned positive last March; they progressed to 2.3% in December. That is still not what I would call healthy (certainly not what I would call 4% or above, which was sustained “through the worst of the 2021 COVID period”). That margin count is also in line with what Fitch Ratings has reported; they previewed this week their read on their rated nonprofit hospitals and, like me, they see late-2023 improvements in labor expenses and other indicators that suggest “full-year 2023 median results will improve but remain well below pre-pandemic levels.”

Analysis of the latest reports from major health systems like Cleveland Clinic, Ascension, and CommonSpirit Health indicates that demand is up, revenue is strong, and operating margins have either returned to or are on a path toward positivity. At the same time, expenses remain high, and the day’s cash on hand has decreased for many systems. This points to several unresolved financial uncertainties, including the effects of recent labor contract negotiations and the impact of inflation. Kaufman Hall’s analysis also expressed doubts about sector stability and noted that around 40% of the hospitals in their dataset will be operating at a loss in 2024. In contrast, the analysts pointed to a subset of “high-performing” hospitals doing even better post-COVID. They seem to be pulling away from the pack, with some hitting revenue numbers not seen since pre-COVID times. Kaufman Hall wrote, “The data shows that throughout the pandemic, hospitals with good financial results improved those results, but conversely, hospitals with poor financial performance saw that performance worsen.”

The firm closely examined the two sides of the inverted bell curve and discovered that the more profitable hospitals have characteristics that make them different and better. These have high and rapidly increasing outpatient revenue, a hypersensitivity to the patient experience that borders on obsession, and an intense focus on reducing contract labor costs, which often means reducing the number of hours worked by the expensive part-time staff that far too many American hospitals rely on. In other words, the hospitals at the profit pier of the bell curve have figured out how to staff to keep labor costs from rising and, much more importantly, keep contract labor usage down. According to Kaufman Hall, the operating margins of rural and urban hospitals are statistically the same. The author said “the damage is being done” among the worst rural hospitals—the bottom 20%. Kaufman Hall highlighted that the operating margins of these “rural underperformers” place them well below their urban counterparts and the “safe” threshold for Medicare reimbursement. If the operating margins of the bottom 20% of rural hospitals are likely to push them toward closure, what does that mean for the communities these hospitals serve?

The obstetrics and delivery services offered by hospitals, which are among the biggest financial losers for hospitals, are disappearing with troubling frequency from rural facilities. That’s “a health policy issue of major and growing consequence,” says the Chartis Center for Rural Health. The report’s lead author, Michael Topchik, said the obstetric services issue is symbolic because these services are key to the business model of a hospital, even though they are not profitable. The hospitals that are going away cannot serve their communities in any capacity, which is what happens when a community loses a rural hospital. “Rural hospital closures could lead to a downward spiral,” Topchik said.