Health System Profits Are Widespread Despite Operating Losses

Business & Financial Planning

As a healthcare finance consultant, people always ask me, “Are hospitals losing money?” or if they’re more pessimistically inclined, “Why are hospitals still losing money?”

That may not make for great cocktail party conversation, but the questions are important, and the answers are … complicated.

In an October blog post, we warned that 88% of large health systems were losing money. That finding was especially worrisome because larger systems are presumed to be stronger and more financially stable. Naturally, many in the industry have been hoping for a dramatic shift in 2023.[1]

Based on financial statements released through June, we have now examined Q1 operating income and net income from 122 of the largest US health systems. Fortunately, the headline today is much more positive than it was last year:

84.4% of large systems reported net income in the first three months of 2023 compared to just 14.8% in the same period last year.

Just below the headline, however, the news isn’t entirely positive. Our analysis revealed that losses persist from core operations while investment income is driving improvements in net income. As a reminder, operating income focuses solely on the hospital’s core operations, whereas net income provides a comprehensive view of the hospital’s profitability after considering all financial activities. The key difference for hospitals is typically the inclusion of investment income or losses in net income.

Operating Losses Persist

Despite the dramatic shift toward net income, large systems remain almost evenly split between profits and losses on the operating side. In fact, compared to the final quarter of last year, slightly fewer systems are seeing an operating profit at the start of 2023. The picture is somewhat better year over year, as shown below.

Widespread operating losses are a cause for worry – especially as many systems continue to experience expense growth that outstrips revenue growth. That’s simply not a sustainable business model for US healthcare delivery, and we’re not seeing any clear trend toward improvement. In fact, for every system that saw operating profit improve compared to the previous quarter, another system saw operating profit worsen.

Our analysis also signals a major worry for publicly owned hospitals, which are limited by statute in their ability to make investments. Of the 900-plus public hospitals in the US, many are safety net hospitals. If the biggest, richest health systems are surviving primarily on investment income, what does that mean for safety net hospitals that lack the same options for investing? It’s a topic we’ll be exploring soon.

Investment Income Drives Net Income

Historically, health systems have utilized investments to boost net income. That trend came to a halt in 2022 as investment gains turned into massive investment losses. This time last year, 94.6% of large systems had an investment loss.

What a difference a year makes. Through the first quarter of 2023, all major stock market indices were up:  0.4% for the Dow, 7.0% for the S&P 500, and 16.8% for the Nasdaq. As a result, many hospital investments are booming, and95.5% of systems presented investment income in Q1. This is the inverse of what we saw one year ago.

Of the systems that had a profit in the last quarter, nearly half had investment income greater than their total net income. Said another way, half of the profitable systems were only profitable as a result of investment income.

More Health System Profits in Q2?

For the current quarter, we expect to see continued positive trends in operating income and net income at large health systems.

According to monthly data released by Syntellis, median hospital operating margins in the United States turned positive in March and have remained there.  These changes are the result of slowing salaries and wages expense along with increased volumes, particularly outpatient. This should translate into better operating income in Q2.

In addition to the positive impact of improving operating income, net income should continue to benefit from investment income. The Dow Jones was up 3.4%, the S&P 500 increased 8.3%, and the Nasdaq increased 12.8%. These increases are similar to Q1 2023 and should result in equally high investment income for Q2.

Conclusion

After years of struggle and turmoil, it appears hospital financial performance is beginning to stabilize in 2023. It’s imperative that hospital leaders use this time to transition from emergent to deliberate strategy. For many of the larger health systems, at least, the key questions are less about survival and more about mission, equity, and even growth.

Now is a great time to reengage in strategic planning to create (or affirm) strategic initiatives and priorities.

Stephen Snyder contributed research for this post.

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[1] Although health systems utilize a variety of fiscal years, our analysis focused on three distinct three-month periods. Q1 2023 refers to January 1 – March 31, 2023. Q1 2022 refers to January 1 March 31, 2022. Q4 2022 refers to October 1 December 31, 2022.