Three-year study of health systems comprising 47% of hospitals shows
two-thirds experienced operating income declines totaling $6.8 billion;
largest reductions in U.S.’s fastest-growing regions
CHICAGO--(BUSINESS WIRE)--Sep. 12, 2018--
A new analysis of 104 health systems comprising 47% of U.S. hospitals
finds broad-based deterioration of operating margins following the
Affordable Care Act (ACA) insurance coverage expansion.
According to the Navigant study of for- and not-for-profit health system
financial disclosures (click
here to access), from 2015 to 2017:
The average operating margin decline for analyzed systems was 38.7%.
Not-for-profit system margins fell 34%, while for-profit margins fell
65% of systems experienced operating income declines totaling $6.8
billion, with the most significant reductions occurring in the U.S.’s
fastest-growing regions: West/Southwest and South Central.
At the root of these declines were multiyear reductions in the rate of
topline operating revenue growth, which fell from 7% (2015 to 2016) to
only 5.5% (2016 to 2017), and a failure to contain expenses in line with
revenue deterioration. The main drivers of topline weakness appear to be:
Weakening demand for such core hospital services as surgery and
inpatient admissions, due in part to rising patient cost exposure from
high-deductible health plans;
Deteriorating collection rates for private accounts in non-ACA
Steady erosion in Medicare payment rates due to the ACA and the 2012
federal budget sequester; and
Failure of health system value-based insurance contracts to deliver
sufficient patient volume to offset steep upfront payer discounts and
significant hospital population health investments.
“While many health systems had major expense reduction initiatives
underway, those efforts did not keep pace with revenue declines,” said
analysis co-author Rulon Stacey, PhD, managing director and leader of
Navigant’s Healthcare Strategy practice. “To reverse this operating
performance trend, system management and boards must take a fresh look
at their strategies based on the markets they serve, and size and target
their offerings to actual market demand.”
According to analysis lead author and Navigant National Advisor Jeff
Goldsmith, PhD, “It’s unusual that these margin pressures are occurring
at the top of an economic cycle, as hospital financial performance
normally deteriorates one to two years after a recession. Any downturn
in the economy will erode investment earnings health systems experienced
last year and increase pressure to contain Medicare expenses.
Organizations that cannot manage their operating performance more
effectively will be damaged financially.”
Steps health systems can take to regain their financial footing include
investing capital in areas of reachable demand based on local market
growth potential; adjusting physical capacity (beds, ambulatory sites)
to actual demand, consolidating or eliminating excess capacity;
improving utilization of clinical capacity via enhanced patient
throughput; and leveraging managed care tools to improve risk contract
performance and reduce Medicare operating losses.
“Reversing this negative operating performance will require health
system leadership to re-examine their portfolio of assets, and demand
measurable improvements in efficiency and value creation for those who
pay for care – particularly their patients,” said analysis co-author and
Navigant Managing Director Alex Hunter.
Navigant Consulting, Inc. (NYSE: NCI) is a specialized, global
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Source: Navigant Consulting, Inc.
Navigant Investor Relations