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US hospitals see 3-month rebound 'dissipate,' prep for further COVID-19 hit


Banking Essentials Newsletter - February Edition


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Six trends shaping the industries and sectors we cover in 2021

Six trends shaping the industries and sectors we cover in 2021

US hospitals see 3-month rebound 'dissipate,' prep for further COVID-19 hit

SNL ImageU.S. hospitals saw declines in August among operating margins, revenue and patient volumes, reversing a three-month rebound from the impact of the coronavirus pandemic in the Spring, according to a report from Kaufman Hall.
Source: Pixels

The U.S. hospital industry's three-month bounce back over the summer stalled in August as volumes dropped and finances took yet another hit.

While the overall industry saw volume and financial declines in March, April and early May due to the widespread cancellation of elective care, the coronavirus pandemic's impact on the industry was more differentiated geographically beginning in June, with volumes climbing back, James Blake, a managing director with the consulting firm Kaufman Hall, said in an interview.

Hospitals' operating margin was down 3% from January to August compared to the same period in 2019, when including federal relief funding, according to a September report from Kaufman Hall. Including federal money, operating margins were down 28% in August, compared to July.

Operating revenues were down 7% so far in 2020 compared to the prior year without including federal funding, with outpatient and inpatient revenue taking a year-over-year hit of 10% and 4%, respectively, according to the report. The industry similarly saw year-over-year volume declines in multiple categories: adjusted discharges dropped by 13%, operating room minutes dropped by 14% and emergency department visits dropped by 16%.

"Almost all of these indicators since April were showing month-over-month improvement up here until August," Erik Swanson, vice president at Kaufman Hall, told S&P Global Market Intelligence. "So, it looks like that's a very tenuous situation for some of these organizations to be in."

The recent volume gains were likely due to pent up demand from canceling elective care earlier in the year, according to Blake. Now, there is a chance volumes remain down as hospitals have worked through the backlog of procedures and patients continue to stay away from hospitals and other providers.

While volumes did stabilize throughout May, June and July and somewhat returned to pre-pandemic levels, recapturing the last 10% of volumes may not happen until the end of June 2021, Rick Gundling, a senior vice president for the Healthcare Financial Management Association, said in an interview.

Benefits of federal aid

Hospitals across the U.S. were significantly impacted by the acceleration of the pandemic over March, April and into May. For-profit companies like HCA Healthcare Inc., Universal Health Services Inc. and Tenet Healthcare Corp. all saw patient and procedure volumes drop, and the U.S. not-for-profit hospital industry experienced similar issues.

The impact was primarily driven by the cancellation of elective care, which was put in place to stop the spread of the virus and conserve resources, but the strategy also cut off a lucrative business line for the industry.

Congress approved $175 billion in emergency relief funds for healthcare providers impacted by the crisis, and these funds have largely propped up the hospital industry. HCA Healthcare, Universal Health and Tenet Healthcare all remained profitable in the second quarter, with federal funding making up a large portion of the companies' second-quarter income.

A congressional Medicare adviser found in a preliminary report a similar result — especially among for-profit hospitals — as did Kaufman Hall.

While operating margins were down 3% year-over-year with federal funding, margins were down 18% when the funding was not included, according to the report.

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Rising per-patient costs

One challenge for the industry will be increasing expenses, Gundling said. Rising costs for personal protective equipment due to increased demand and supply chain pressures are likely to continue, as are the costs of preparing for a rise in COVID-19 patients.

Total expenses per adjusted discharge — which narrows expenses down to a per-patient basis — were up 17% in the first eight months of 2020, according to Kaufman Hall's report. Supply costs per adjusted discharge were up by 11% between January and August, and drug expenses per adjusted discharge were up by 16% over the same period.

While stimulus talks have slowed in Congress, prioritizing further federal aid would help to offset continued volume losses and rising costs as initial emergency money starts drying up, according to Blake and Gundling.

As of Sept. 23, the U.S. Department of Health and Human Services has given out over $104 billion of the $175 billion Congress set aside for healthcare providers, according to HHS.

Both Gundling and Blake said one positive heading into the final months of the year is that hospitals have learned strategies to better treat patients with COVID-19 and manage increasing patient volumes. For example, while elective care was shut down in the early months of the pandemic, states like Texas, Florida and Arizona did not have widespread stoppages of elective care as they became new pandemic hot spots in June and July.

However, as the industry continues to be hit from the crises and braces for a possible COVID-19 resurgence in the fall, hospitals have already experienced long term, and maybe permanent, damage. Some healthcare providers will have to consider joining larger systems, while some may even have to close their doors, Blake said.

"Even if you snapped your finger and tomorrow, suddenly, COVID-19 went away ... the hole for this year is still pretty significant," Blake said.