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Three Important Areas of Focus for Underperforming Hospitals

February 15, 2023

Hospitals throughout the country are facing unprecedented economic challenges. As essential businesses, hospitals had to stay open and even expand care during the COVID-19 pandemic. A recently released academic study1 found that average operating margins dropped 130% from 2019 to 2020. Hospitals were squeezed when patient revenue declined 3.2% while operating expenses increased 1.5%. Facilities that had fragile margins pre-pandemic may not have recovered since significant increases in labor costs continue. Also, unlike other sectors, hospitals face some unique supply chain issues and ongoing changes in service delivery protocols driven by COVID-19. The unpredictability and volatility of the economy, combined with constant changes in the operational aspects of healthcare delivery and rising labor costs, are causing many healthcare providers to underperform when compared to their pre-pandemic margins and numbers.

When faced with declining and negative operating margins, the instinct is to focus on where these institutions can cut costs, but there are some areas that can often provide improved revenue numbers in the current environment. While each institution has unique challenges and needs that should be carefully evaluated, the following three areas should be explored.

Physician Network Opportunities

The compensation arrangements between hospitals and their physician networks often haven’t been updated to reflect changes in reimbursement models that have come about since the pandemic. Organizations must evaluate physician contracts to ensure that productivity and compensation are in line with national benchmarks while also structuring the arrangements to include incentives around efficiency and quality of care.

Service Line Opportunities

Many hospitals that are currently struggling aren’t looking closely enough at how the services they provide align with the community’s needs. New opportunities can often be identified by reviewing operational, financial, and market data for each service line, and a portfolio can be constructed.

Typical service line portfolio analysis outcomes include:

  • Identification of services with growth potential
  • Comparison of current financial performance with market needs
  • Validation of mission-critical services supporting vulnerable populations
  • Profitability analysis to guide discussions on potential divestiture of services that are not mission critical
  • Review of physician supply and demand by service line to determine which services are best positioned for growth
  • Assessment of market share in concert with competitor movements to help focus service line activity
  • Review of expense outcome data to identify improvement opportunities for cost savings

Analyses like these can provide executives with insights on how to realign services to better meet the community’s needs, capitalize on growth opportunities, and optimize profitability.

New Revenue Opportunities

The final area of analysis can also suggest new types of revenue opportunities that can support a healthcare provider’s mission. Underperforming hospitals can take a variety of steps to find new sources of revenue, including the following examples:

  • Examining the revenue cycle to identify opportunities for additional revenue realization
  • Evaluating managed care contracts to ensure that reimbursement is in line with market trends
  • Exploring opportunities under the federal 340B Drug Pricing Program
  • Considering federal provider-based reimbursement programs such as Rural Health Clinics and Federally Qualified Health Center Look-Alikes

The key to finding new revenue sources is looking for opportunities where the community’s needs align with new models of healthcare delivery.

Looking Ahead

It remains to be seen whether 2023 turns out to be the year where hospitals rebound and turn the corner. But another year of expanded losses could also lead some hospitals to the precipice of insolvency. Change is constant. These approaches, in concert with judicious but thoughtful expense management, can help hospitals and other healthcare institutions find new revenue opportunities in a new environment in order to restore financial performance.

1 The Early Impact of the COVID-19 Pandemic on Hospital Finances. Rhoades, Santos, Young. Journal of Healthcare Management. Volume 68, Number 1

George Batalis Partner, Healthcare Consulting
Kevin Newingham Director, Healthcare Consulting

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