Almost Half of MN Hospitals Reported Negative Operating Margins in 2019
A nighttime shot of the emergency vehicle entrance at St. Paul’s United Hospital Steve Skjold / Shutterstock.com

Almost Half of MN Hospitals Reported Negative Operating Margins in 2019

A new report from the Minnesota Hospital Association shows a steady increase in the percentage of hospitals with negative operating margins over the past two years.

Forty-one percent of Minnesota’s hospitals reported a negative operating margin in 2019, according to a report released by the Minnesota Hospital Association (MHA) on Thursday.

That equates to 31 of the state’s 76 hospitals and health systems. That’s up from 27 hospitals with negative operating margins in 2018, and 26 in 2017. The MHA defines operating margin as “a measure of an organization’s revenues compared with its expenses related to patient care services and activities.”

The report focuses only on fiscal year 2019 data, so it predates the Covid-19 pandemic. So, what drove costs in the pre-pandemic era? The report doesn’t draw out any single factor, but MHA officials noted that uncompensated care costs and labor are among the biggest expenses for health systems. Hospitals take a financial hit when they need to absorb costs from patients who can’t afford to pay for their services. In health system parlance, this is often referred to as “charity care.”

“Uncompensated care costs, in the form of charity care write-offs and bad debt expenses, are a crucial challenge to hospitals and health systems in achieving a positive operating margin,” the report said. “As health insurance companies increasingly enroll people in high-deductible health plans, which place greater financial responsibility on individual patients and their families, hospitals and health systems shoulder more losses from unpaid expenses. Often, patients are unable to pay the deductible amounts they owe under the coverage terms established by their health plans.”

Uninsured patients can drive up hospitals’ expenses, too.

Labor costs also account for more than half of a hospital’s usual expenses, the report said. “In many communities across Minnesota, workforce shortages in key clinical areas further drive up compensation costs,” MHA officials said in the report.

The median operating margin for Minnesota hospitals, meanwhile, fell to 1.4 percent in 2019, down from 1.7 percent in the prior year.

In a statement, MHA president and CEO Dr. Rahul Koranne said the decline in margins signaled a “a financially fragile health system in Minnesota, even before the additional significant challenges presented by the global pandemic in 2020.”

“A positive operating margin is necessary to ensure hospitals’ and health systems’ ongoing ability to serve patients in their community, to maintain strong credit ratings and affordable access to capital, and to recruit and retain the highly educated and skilled workforce necessary to care for patients,” Koranne said.

It’s worth noting, though, that net margins have remained mostly steady over the last five years. Net margins also include revenue and expenses that are unrelated to patient care activities. That could include donations, for instance. In 2019, Minnesota hospitals’ net margins improved to 3.3 percent, up from 2.4 percent in 2018. In the report, MHA officials said that the financial market’s “climb in 2019 may be a factor in why the median net margin has improved.”

But MHA’s annual report generally focuses more on operating margins, which the association says are “the most relevant and comparable measure of financial performance related to patient care services.”