“You can’t cut your way to prosperity.” The much-used business adage creates challenges for executive teams in a time of shrinking margins. Essentially, margin improvement and financial sustainability are often only possible with a growing top line.
This adage came to life in the recent report of hospital financial performance, 2025 Outlook: Hospital Finances Show Signs Of Stability, But Rising Costs Will Be A Major Headwind. In October 2024, the mean operating margin for hospitals was 4.4%, up from 2.5% in November 2023 and 2.7% in December 2023. But a closer look at the data shows that the gap between financially successful hospitals and those that are struggling is widening.
Why have hospital margins improved? The most important contributing factor to better margins is more revenue—increased reimbursement rates and more volume. And surprising to me, the type of revenue mattered—hospitals with the best performance had growth in outpatient services. Prior to the pandemic, the metric most closely associated with hospital margins was the number of emergency department visits. Now, it is the revenue from outpatient services. The analysis found that hospitals without an ambulatory footprint have struggled financially.
This trend is reflected in the data. Hospital outpatient revenue per calendar day increased 7% from September to October 2024 and 13% year over year, outpacing inpatient revenue’s growth of 1% and 6%, respectively. The evolving hospital focus on outpatient care is creating new opportunities for community-based provider organizations for strategic partnerships and for mergers/acquisitions. This is one of many growth strategies that those executive teams should consider.
Growth and diversification strategies were top-of-mind topics for executives in the field when you look at what they read in 2024. And it appears that focus will continue in 2025.