Hospital financial and revenue cycle benchmarks paint a complicated picture heading into the new year

The tail end of 2024 has brought promising news regarding hospital financial metrics, even as revenue cycle indicators suggest continuing strain.

Margin data are showing moderate improvement, and one of the three credit-rating agencies has upgraded its 2025 sector outlook for not-for-profit (NFP) hospitals and health systems.

Fitch Ratings announced this week it was revising its outlook to neutral more than two years after having designated the sector as deteriorating. The new outlook mirrors those of Moody’s and S&P Global (stable in both cases).

“While operating headwinds remain, the sector has shown steady improvement following considerable margin compression in 2022-23,” Fitch wrote in a Dec. 9 report (login required).

Factors in the improved forecast include mitigated increases in labor costs, an easing of general inflation and balance sheets fortified by strong cash flow and equity-market returns.

“To address high labor costs, healthcare management teams have worked to enhance productivity and drive down ECL [external contract labor] use, and are deploying new workforce care models,” the report states. “Nevertheless, the labor recovery is not uniform, and Fitch expects a number of providers to continue to lag significantly, while many will face new operational challenges such as pronounced drug expense growth, shifting payer mixes and stronger competition.”

Margins ticking up

Fitch anticipates seeing slowly but steadily improving hospital margins in 2025, with a median operating margin of between 1% and 2%. That’s based on a mark of 0.8% among hospitals with Dec. 31 fiscal year-ends, up from 0.4% when looking at all of the agency’s rated credits.

However, even margins on the high end of the projected range would trail pre-pandemic margins, including a 2.3% median mark in 2019.

The most recent margin metrics appear favorable, according to data reported by Strata Decision Technology. In October, the median margin rose by 1.7 percentage points both year-over-year and month-over-month. Yet hospitals continue to grapple with non-labor expenses, as seen in year-over-year increases of 15.2% in drug costs, 13.2% in supply expenses and 11.7% in purchased-service expenses.

The latest edition of Kaufman Hall’s National Hospital Flash Report, which uses Strata’s data, notes that expenses at least are decreasing on a volume-adjusted basis.

Amid “overall financial and operational stability,” Erik Swanson, senior vice president with Kaufman Hall, said in a written comment, “supplies and drug expenses continue to put pressure on hospitals, and cost containment should be a priority.”

The cost jumps were partially offset by year-over-year increases of 12.7% in outpatient revenue, 5.9% in inpatient revenue and 11.2% in gross operating revenue. The revenue gains were noteworthy month-over-month as well, at 10.3%, 4.5% and 8.1%, respectively.

Increased volumes seemingly are the primary driver of those gains, meaning hospitals are not reaping the same sort of improvement per adjusted discharge. On that basis, net patient service revenue (NPSR) increased by 0.1% year-over-year and fell by 2.3% relative to September.

Nonetheless, improved efficiency was indicated in the moderate increases seen in NPSR per adjusted patient day.

Revenue cycle challenges abound

Drilling down into revenue cycle trends, Kodiak Solutions reported a mixed bag of metrics. Point-of-service cash collections as a share of total patient payments rose by 13.1% year-over-year in October. But true accounts receivable days increased by 2.2% year-over-year and by 5.4% year-to-date when compared with the first 10 months of 2023.

The issues stemmed from increases of 17% in request-for-information denial rates and 7% in initial-denial rates for inpatient commercial claims, Kodiak stated in its latest benchmarking report.

“Organizations should ensure that their clinical teams are documenting the services they provided accurately and quickly,” the company wrote. “That will help their denials management teams streamline their processes to get payers the appropriate information and medical records as needed.

“Organizations must follow up with their payers on these claims on a regular cadence to push for a resolution, whether that’s getting paid or getting a more descriptive denial to address any actual issues with the claims.”

Denial trends present reason for concern not only in frequency, but also when looking at amounts. In an annual benchmark report (registration required), the billing technology company MDaudit noted that denied amounts increased by 6.9% for inpatient claims and 4.8% for outpatient claims in 2024, compared with 2023.

Amounts per denied inpatient claim actually dropped by 54% among commercial insurers but increased by 30.2% in Medicare Part A.

“It’s not a surprise that Medicare is zeroing in on services in inpatient settings due to the complexity of care associated with the Medicare population,” the report states.

Dollars increased significantly across payers for denials based on medical necessity or lack of information regarding the service. Those amounts increased by 148% for inpatient care and 84% for outpatient care, driven by a 122% spike among commercial insurers.

On the horizon

Fitch stated that the outlook for NFP hospitals could revert to deteriorating if macroeconomic disruptions affect payer mix, patient volumes or investment returns. Analysts also are keeping an eye on policy shifts that would lower the insured rate, such as by terminating enhanced subsidies for buying insurance in the Affordable Care Act marketplaces going into 2026.

Beyond monitoring external factors, hospitals should continue to bolster their operations wherever possible.

“The sector has made steady progress in revamping the delivery of healthcare, including delivering tools to enhance labor productivity and effectiveness, including at the bedside,” Fitch wrote in its report. “While these efforts have contributed to a notable rebound in sector operating margins, continuous improvements will be required for sector margins to return to the levels seen prior to the pandemic.”