Study: Health system margins dropped 40% after ACA

In a post-Affordable Care Act (ACA) insurance world, health systems have seen their operating margins deteriorate, according to a new study from Navigant Consulting—and the associated increases in scale haven't helped.

Among 104 health systems in the analysis, which represented 47 percent of U.S. hospitals, average operating margins dropped 38 percent from 2015 to 2017. Not-for-profit margins fell 34 percent, while for-profit margins declined 39 percent.

The findings underscore that the changes in the ACA, which provided healthcare coverage to 21 million more people, have been ongoing issues for health systems and hospitals struggling to improve topline revenue growth and contain expenses—the two main drivers of reductions in operating margins.

“The deterioration in health system operating earnings is striking not only because of its sudden onset in 2016, but also because it is occurring at the top of an economic cycle, with the general economy at or below 4 [percent] unemployment,” the study reads.

Health systems with scale and/or market dominance weren’t immune to the trend, as three of the six largest declines in operating income came from some of the largest for-profit systems. The smallest of these systems had more than $15 billion in operating revenues in 2017.

“This finding flies in the face of the incessant chorus of advocacy for scale and market dominance among prominent strategy firms and their colleagues in investment banking,” the study reads. “Scale was of no help in system operating performance during this difficult period.”

Two-thirds of health systems saw operating income decline over the three-year period, while one-third saw income rise. Among the losers, 22 health systems had declines of more than $100 million each over the three years, while the total erosion for the systems with declines was $6.8 billion, a drop of 44 percent from 2015-2017, according to Navigant.

Decline of topline revenue was fueled by weakening demand for core hospital services, reductions in Medicare payment updates, deterioration in collection rates for private accounts in non-ACA expansion states and insufficient patient volume in value-based health insurance contracts, according to the study.

“Rising losses from the regular Medicare program may have played a disproportionate role in the sharp downturn in operating earnings as well,” the study reads.

Hospital losses from Medicare patients rose to $48.8 billion in 2016, from $20.1 billion in 2010, an American Hospital Association analysis found. Compounding those losses, hospitals also saw a huge increase on the expense side in the years following the implementation of the ACA, including new technology investments, compliance with reform initiatives, value-based insurance contracts and the formation of physician groups and clinically integrated networks. Additionally, labor shortages contributed to higher patient care expenses.

While hospitals have dealt with the downturn in margins, they should expect the challenges to continue, particularly if the economy has its own downturn. To improve margins, systems should take a hard look at their investment portfolios and work on operational and clinical excellence, the study concluded.

Hospitals should prune their system-owned assets; confront duplicative capacity and services; improve contracting strategy; and leverage managed care tools, including care coordination and IT infrastructure.

Looking ahead, health systems will need to continue addressing industry headwinds.

“The past two years of deteriorating operating performance should compel health system management teams and boards to re-examine their assumptions about the future direction of their markets and organizations,” the study reads. “In addition, the present economic expansion will not continue indefinitely. When it is over, those who pay for care will place renewed pressure on the care system by pressuring rates and shifting more of the cost onto consumers, many of whom are unable to pay the patient share.”

Navigant Consulting obtained audited financial reports for 104 health systems from their filings in the Municipal Securities Rulemaking Board Electronic Municipal Market Access (EMMA) database.