Productivity growth may define hospitals’ financial future

How much hospitals can improve their productivity in the next decade may be the key to keeping profit margins positive, according to an analysis from the Congressional Budget Office (CBO).

The CBO report sought to address the “significant effects on hospitals’ finances” mostly stemming from the Affordable Care Act, such as cuts in Medicare payments coupled with growth in the number of people with health insurance. While cautioning that the study isn’t “a projection of actual outcomes,” it did offer several scenarios on where profit margins could stand based on productivity.

The study began with a 2011 estimate that the average profit margin of included hospitals was 6 percent, with 27 percent of hospitals losing money.

The best-case scenario offered by the CBO is if hospitals’ productivity growth keeps pace with the overall economy at 0.8 percent per year through 2025. The average profit margin would fall to 3.3 percent, while the share of unprofitable hospitals would jump up to 41 percent.

The results were worse with lower productivity growth. Assuming under 0.4 percent annual improvement in productivity, the average profit margin fell to 1.6 percent, and more than half of hospitals would have negative margins. If productivity didn’t grow at all, and assuming hospital didn’t reduce cost growth in some other way, the average profit margin would be negative 0.2 percent, and 61 percent of hospitals would lose money.

“To hold their aggregate profit margins in 2025 at about the 2011 level of 6 percent, the hospitals we examined would have to increase total revenues (without increasing costs), reduce total costs (without reducing revenues) or achieve a combination of revenue increases and cost reductions,” the report said.

A major limitation to the study is it doesn’t account for how hospitals have responded to new financial pressures, noting that hospitals’ profit margins have continued to increase between 2011 and 2014. The CBO report said there is “insufficient evidence” on how hospitals can or should respond, so it recommended several areas which future research should explore, such as:

• How well are hospitals’ profit margins measured? The researchers found it “somewhat surprising” many hospitals remain open despite losing money for several years in a row. Their recommendation was to explore whether the current available cost data is “complete and accurate.”
• How much can hospitals limit cost growth by improving productivity? “The main challenge that arises in measuring past productivity for the hospital industry (and for the health care sector more broadly) is accounting for any improvements in the quality of care.”
• What effects would other responses have? Researchers suggested studies focus on potential solutions like increasing revenue, reducing costs or adopting new payment models.