Hospitals feel payer mix shifts as uncompensated care costs grow

All signs point to more hospital financial pressure

Collectively, hospitals have been in a relatively steady state as operating margins have remained above 7% since March. According to the updated data, the Kaufman Hall operating margin index for the year-to-date actually increased to 8.0% without allocations in June, from 7.6% in both May and April.

With allocations, the operating margin index was 2.5%, compared to 2.1% in May and 3.1% in April.

Fuller margins have helped buffer some of the effects of rising bad debt and charity care costs, with hospitals seeing a 3% decrease in these costs as a percentage of gross operating revenue month over month in June.

However, this sign of total uncompensated care was up year-over-year by 3%, and more significantly by 18% year-to-date compared to 2023. Bad debt and charity care per calendar day were also up by a whopping 52% year-to-date compared to 2023, as well as 17% year-over-year.

Additionally, expense inflation persisted into June, draining hospital performance, according to the report. Supply and drug costs increased higher than inflation year-to-date through the start of the summer.

Pressure from uncompensated care is intensifying as hospitals continue to undergo payer mix changes, said Erik Swanson, managing director and data and analytics group leader at Kaufman Hall.

"While performance has remained relatively stable on the surface, there is considerable variation across hospitals, and those with the thinnest margins are often the ones caring for our most vulnerable populations," Swanson, who also authored the report, stated in a press release. "Proactive planning around resource allocation and expense management will be essential as these pressures continue to build."

Medical groups fare better financially

Medical groups are weathering the financial pressures better than hospitals, Kaufman Hall reported in a separate Physician Flash Report, released on Aug. 18.

Based on performance data from more than 200,000 employed physicians and advanced practice providers across 100 specialties, the report found that the investment curve for providers has flattened. Specifically, the investment/subsidy per both provider and physician has stabilized year-over-year, a positive sign for medical groups, according to the report.

APPs are also helping to control costs, the report indicated. The number of APPs continues to grow, with the group now accounting for 41.2% of the total provider full-time equivalents in the report's sample.

The growing reliance on APPs in staffing models could lead to strong returns for medical groups, while improving overall team effectiveness and productivity, the report stated.

Productivity across APPs and physicians also continued to increase over the last quarter, with provider and physician work relative value units per FTE growing by 2% and 3% year-over-year, respectively.

The finding echoed an AMGA analysis released earlier this year, which also found significant increases in provider productivity. However, the analysis showed that productivity drove the majority of compensation growth in the last year, not reimbursement increases. This could lead to burnout, researchers said.

The Kaufman Hall report also revealed challenges around hiring and retaining staff, which has led to employed providers working more.

"Strategic care team design remains essential to sustaining performance while maintaining quality of care and preventing burnout," said report author Matthew Bates, managing director and physician service line leader at Kaufman Hall.

Jacqueline LaPointe is a graduate of Brandeis University and King's College London. She has been writing about healthcare finance and revenue cycle management since 2016.