Study: Hospital Bottom Lines Better Than Depicted During COVID-19

A new study published in JAMA Health Forum reveals hospitals did not fare poorly during the first two years of the COVID-19 public health emergency (PHE) despite claims of financial distress.

Hospitals and health systems have said the COVID-19 pandemic and its aftermath have threatened their financial viability, putting strain not only on their bottom lines but also their clinical capacities, workforces, and supplies and resources.

However, this study of financial data on over 4,400 hospitals represented in the RAND Hospital Data set found approximately three-quarters of the hospitals in the sample had positive operating income across 2020 and 2021.

Meanwhile, only about 16 percent of the hospitals had new financial distress from the PHE.

“In the first years of the pandemic, hospitals asserted they were incurring substantial financial losses as a result of responding to the COVID-19 public health emergency (PHE) and expressed deep concerns about their financial stability,” RAND Corporation’s Risha Gidwani, DrPH, and Cheryl L. Damberg, PhD wrote in the study. “Yet limited empirical evidence exists regarding the net effects of these concurrent changes on the financial performance of hospitals.”

Most hospitals saw financial performance improve during the first two years of the COVID-19 PHE, Gidwani and Damberg found. The within-hospital change in net operating income from pre-2020 to 2020/2021 was $1.9 million and the median 2020/2021 weighted operating margin was also 6.5 percent.

For context, the authors cited a 2023 Medicare Payment Advisory Committee (MedPAC) report showing that the all-time high all-payer hospital operating margins averaged 6.4 percent pre-PHE.

However, a small minority of hospitals — 6.4 percent in the study’s sample—fared substantially worse at the start of the PHE compared to prior performance. These hospitals had new negative net operating income, with a median within-hospital decline in net operating income of $8.9 million.

Still, a larger minority — 17.8 percent — did better during the 2020/2021 period versus pre-2020, as net operating income shifted to the positive from negative. These hospitals had a median within-hospital improvement of $4.1 million in net operating income, according to the study.

COVID-19 relief funding, like the Provider Relief Fund and the 20 percent Medicare Severity Diagnosis-Related Group (MS-DRG) add-on payment for the treatment of COVID-19 patients, mitigated the negative impact of the pandemic on hospital financial performance, Gidwani and Damberg pointed out. However, this was true for only 30 percent of the hospitals in their sample.

Additionally, the proportion of hospitals with new PHE distress only dropped to about 16 percent because researchers accounted for the PHE-related funding. Without the funding, about 46 percent of hospitals had PHE-related financial distress.

Gidwani and Damberg also said that the PHE funding may have helped to boost hospital financial performance (compared to pre-COVID-19) for many hospitals. They reported that over three-quarters of the hospitals that did not experience new PHE distress exclusive of COVID-19 relief funding still received the aid, raising questions about the appropriateness of the relief funding.

Notably, COVID-19 relief funding may have helped about 12 percent of hospitals “dramatically improve” financial performance, according to the study.

The study also found that hospitals serving Hispanic populations were more likely to experience financial distress, even after receiving COVID-19 relief funding. Other hospitals serving underresourced populations were also at higher risk of poor financial performance during the pandemic, while for-profit hospitals and health system-affiliated hospitals were not in financial distress at the time.

“It should be underscored that policy makers were required to act quickly to direct COVID-19 PHE funding; however, based on the COVID-19 lessons, it will be important to consider alternative ways of allocating scarce public dollars to support our nation’s health system in crisis,” wrote Gidwani and Damberg.

“To that end, policy makers should ensure they have the necessary data to estimate the effects and to proactively build models to simulate relief payments and their effects on hospital finances, which could be used to better inform decision-making regarding the allocation of emergency aid,” they concluded.

The American Hospital Association (AHA) criticized the study’s findings in a blog post, contending each hospital and health system started the PHE with their own unique financial situation and the study’s authors only captured a snapshot of financial performance from a long PHE.

Gidwani and Damberg recognized the study’s limitations, especially around timing. But the AHA said they only “half acknowledge this weakness” while implicitly assuming that the policy goal of COVID-19 relief funding should have been negative operating margins across all hospitals.

“Incomplete analyses like this are not reflective of the many immense struggles and challenges the hospital field has faced and continues to face, including a workforce shortage crisis, along with skyrocketing input costs for supplies, equipment, drugs and labor, and persistent inflation. It is in everyone’s interest to keep hospitals strong and our patients healthy,” the AHA stated.