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

Three-year study of health systems comprising 47% of hospitals shows two-thirds experienced operating income declines totaling $6.8 billion

CHICAGO – 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:

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:

“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 health systems financial 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.

 
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