Press Release

Health System Operating Margins Dropped 39% Post-ACA Coverage Expansion, According to Navigant Analysis

September 12, 2018 at 8:00 AM EDT

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 39%.
  • 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 expansion states;
  • 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.

About Navigant

Navigant Consulting, Inc. (NYSE: NCI) is a specialized, global professional services firm that helps clients take control of their future. Navigant’s professionals apply deep industry knowledge, substantive technical expertise, and an enterprising approach to help clients build, manage, and/or protect their business interests. With a focus on markets and clients facing transformational change and significant regulatory or legal pressures, the firm primarily serves clients in the healthcare, energy, and financial services industries. Across a range of advisory, consulting, outsourcing, and technology/analytics services, Navigant’s practitioners bring sharp insight that pinpoints opportunities and delivers powerful results. More information about Navigant can be found at

Source: Navigant Consulting, Inc.

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