Health System Operating Margins Dropped 39% Post-ACA Coverage Expansion, According to Navigant Analysis
September 12 2018 - 8:00AM
Business Wire
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
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 navigant.com.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20180912005205/en/
Navigant Investor RelationsKyle
Bland312.573.5624kyle.bland@navigant.comorNavigantAlven
Weil704.995.5607alven.weil@navigant.com
Navigant Consulting (NYSE:NCI)
Historical Stock Chart
From Mar 2024 to Apr 2024
Navigant Consulting (NYSE:NCI)
Historical Stock Chart
From Apr 2023 to Apr 2024