Average operating margins rose by 13% in 2018 after a decline of more than 38% from 2015 to 2017.
Sixty-four percent of systems improved their margins in 2018, a marked contrast to 2015 to 2017 when two-thirds experienced margin deterioration.
The most significant margin improvements from 2017 to 2018 were in the New England and South Central regions.
However, more than half of the sample remains below their 2015 operating margin levels by an average of 30%. Only in New England, which has consistently had the lowest overall profitability of any region in the study, were margins higher than 2015 levels, and margins continued to decline in the Northeast, Southeast, and Midwest.
Health system margin improvement was driven by vigilance in expense control combined with a notable revenue turnaround. Revenue growth exceeded expense growth in 2018 for the first time in three years, with revenues growing at more than double the rate of expenses from 2017 to 2018. The main reasons for the revenue increases were merger and acquisition activity, improvement in commercial revenue yield, and enhanced revenue cycle management and electronic health record optimization. Though expenses rose faster than in the past two years, margin improvements were the result of more effective expense control, particularly with labor expenses and corporate overhead reduction.
“While 2018 was a turnaround year for health systems, achieving sustainable margins over the longer term will require renewed focus on operational efficiency,” said Guidehouse Managing Director John Wiest, an analysis co-author. “Doing so necessitates not only better revenue analytics but active management and rebalancing of systems’ revenue portfolios."
Health system scale as measured by 2018 total patient revenue was found to be a negative predictor of operating performance over the preceding four-year period. Smaller health systems had better financial performance from 2015 to 2018 as measured by change in operating profit, compared to larger organizations.
“These findings highlight obvious challenges for systems that have grown through mergers and acquisitions to actually realize the operational synergies they identified in their premerger planning,” said analysis lead author and Guidehouse National Advisor Jeff Goldsmith, PhD. “It is taking larger systems longer to achieve claimed synergies from mergers than perhaps their managements realized.”
To maintain operational improvements, analysis authors suggest health systems need to focus on:
Better controlling labor, supply, and contracted services (e.g., clinical, support services, IT, finance) expense.
Achieving return on investment on physician employment and clinical IT, including using data analytics to identify and correct variation in clinician resource use.
Service line rationalization to reduce programmatic duplication in neighboring facilities and eliminate programs with marginal volumes and/or substandard quality.
Active surveillance and management of revenue portfolios, and the willingness to make continual corrections in expense trends if revenue problems materialize.
More aggressively competing with nontraditional providers, such as retail clinics and eHealth providers, which are increasingly vying for ambulatory market share.
“Our analysis reinforces our belief that rigorous control over staffing, improved clinical effectiveness, and better resource use are vitally important to the short- and long-term financial health of hospitals and health systems,” said analysis co-author and Guidehouse Managing Director Alex Hunter.
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