Vital Signs December 2023: Healthcare Sector Outlook

Hospital Operating Margins YTD by Month

As healthcare systems took stock of their losses, they developed plans to help reduce further losses in 2023. Firstly, many hospitals began renegotiating their agreements with payers for higher reimbursements that better match up to expected procedures. For their part, payers have begun to pass on these cost increases to purchasers (employers and ultimately their employees) in the form of higher premiums. Simultaneously, these systems have sought other efficiencies, such as shedding unnecessary administrative space or outlying, low-performing clinical space. With these operational modifications, hospitals have begun to regain some positive performance indicators, breaking into the positive operating margin territory in March 2023. Since then, operating margins have been between 0.5% and 1%, which suggests that there remains some level of fragility in the sector.

2%

1%

0%

-1%

-2%

Jul-23

Jan-23

Jun-23

Oct-22

Mar-23

Apr-23

Sep-22

Sep-23

Feb-23

Dec-22

Nov-22

May-23

Aug-23

Source: Kaufman Hall National Hospital Flash Report, American Hospital Association, The Advisory Board

Hospital operating margins have recently been improving, as cost cutting measures and adjustments to revenue strategies take effect.

Revenue & Expense Trends for Medical Office Buildings

0% 1% 2% 3% 4% 5% 6%

2017 Q2

2021 Q2

2018 Q2

2016 Q2

2019 Q2

2017 Q4

2021 Q4

2018 Q4

2016 Q4

2019 Q4

2022 Q2

2023 Q2

2022 Q4

2020 Q2

2020 Q4

NOI Growth

Revenue Growth

Expense Growth

Source: Revista Med, Cushman & Wakefield Research

Since 2021, revenues and expenses have grown dramatically in the healthcare real estate sector. Inflation, rising labor costs and supply chain challenges have all triggered expenses to increase as much as 5.5% as of the third quarter of 2023. Simultaneously, revenues have risen quickly as well, reaching 3.2%. Fortunately, expense growth has begun to level through 2023, falling to 5.1%, while revenue has continued to rise, reaching 3.4% as of the third quarter of 2023. Critically, NOI growth for healthcare remains robust, with growth running between 2.5% and 3% from 2021 through 2023.

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