Hospitals Facing Shaky Finances. Outlook: From ‘Neutral’ to ‘Deteriorating’

By George W. Chapman

After slowly climbing back from the devastation caused by the pandemic, July median hospital operating margins plunged a staggering 64% from June operating margins, according to industry consultants Kaufman Hall.

Its survey of 900 hospitals revealed an average year-to-date margin of negative 1%. KH attributes this trend to lower outpatient volumes, more acute and expensive inpatient cases and an end to COVID-19 relief and PPP from the federal government.

Financial services company Fitch Ratings has reduced its hospital outlook from “neutral” to “deteriorating.” Shaky finances are the driving force behind hospital mergers and acquisitions. Not price fixing as skeptics have speculated. To survive and deliver care to their respective communities, hospitals must be allowed to freely explore opportunities to increase fragile operating margins via shared overhead, operating savings, and improved credit without onerous regulatory oversight. At stake, in many cases, is the survival of smaller rural hospitals.

While mergers might save hospitals, there could be a point where there are diminishing returns. For example, the 20-hospital Cleveland Clinic lost just over $1 billion the first half of 2022. While $628 million is attributed to investment losses, the system still lost close to $400 million on operations.

Accountable Care Organizations

Typically, an ACO is a partnership between physicians and one or more hospitals to participate in the Medicare Shared Savings Program (MSSP). The goal is to cooperate in exceeding quality benchmarks and reducing per capita cost benchmarks established in advance by Medicare. ACOs submit their bills, physician and hospital, to Medicare per usual. ACOs that reduce per capita costs will share in the savings with Medicare. If ACO costs per capita go up, the ACO must return money to Medicare. The MSSP is designed to encourage and reward the delivery of care by a cooperative of physicians and hospitals working as a team to exceed common goals. An “every man for himself” model won’t work. And it never has. Medicare has learned that the more primary care physicians in the ACO, the better at reducing per capita costs. This makes sense. Effective primary care delivery can reduce illness, unnecessary referrals to specialists and overall hospitalization. Last year, 99% of ACOs beat quality benchmarks and 58% beat per capita costs. ACOs beat per capita costs benchmarks by $3.6 billion.

Apple Watch Study

In 2018, the FDA approved the Apple watch for EKGs. Who would have thought? Now, the NIH has granted $37 million to researchers at Northwestern and Johns Hopkins (and others) to study it. By monitoring atrial fibrillation, the watch can prevent strokes and reduce the amount of expensive blood thinners patients with Afib are receiving. Afib affects 2.5 million to 5 million of us. That is predicted to be 12 million by 2030. The seven-year study will involve 5,400 people with Afib. Some in the study will continue to receive the standard regimen of continuous expensive blood thinners to prevent strokes. Others will have their Afib monitored by the watch and receive targeted blood thinner therapy only when at risk of a stroke.

No More Free Vax

Congress has discontinued funding the government’s COVID-19 vaccine program effective next year. That means it will no longer purchase the vaccine from manufacturers and distribute it for free. It has turned the keys over to Big Pharma. Pfizer and Moderna must be licking their chops. (Is this what it took for Big Pharma to finally agree to negotiate some drug prices?) The government has already dropped free home testing due to lack of funds. Both drug giants claim that with the feds out of the way, they can be “more competitive” in an open market versus a government-controlled contract market. Both also claim they can now focus on “branded education” which is in their area of expertise. It remains to be seen if Medicare and commercial insurers will charge for the vaccine or make it available for free.

ACA Adds Navigators

The Biden administration and Congress has approved close to $100 million in funding for ACA navigators who help people select an insurance that fits their needs and budget. The increased funding should add 1,500 new navigators. The ACA has been a widely successful program now insuring more than 36 million people. The uninsured rate is at an all-time low below 8%. Open enrollment begins Nov. 1. To hamstring the ACA, the Trump administration slashed navigator funding to $10 million.

Medicare Advantage Plans

Just about half of all Medicare beneficiaries, or 28 million, are now covered by a commercially operated advantage plan. Sixty-six percent of the beneficiaries are individually covered; 18% are insured via employer or union; and 16% are enrolled through special programs. Market shares for the largest carriers are Humana 28%; United 18%; and BCBS  14%. Cigna, Centene and Kaiser combine for 24% market share.

Advantage plans are Part C Medicare. They draw members away from traditional Medicare by offering perks such as dental, vision, OTC drugs, transportation and even meals. Unlike traditional indemnity Medicare, most advantage plans require preauthorization for certain procedures.

George W. Chapman

George W. Chapman is a healthcare business consultant who works exclusively with physicians, hospitals and healthcare organizations. He operates GW Chapman Consulting based in Syracuse. Email him at