Narrow Margins, Low Patient Volumes Beleaguer Hospital Revenue

Narrow margins, high costs, and low patient volumes have contributed to ongoing revenue uncertainty for hospitals and physicians, according to new reports from the healthcare consulting firm Kaufman Hall.

After plateauing in early March, new COVID-19 cases rose 37 percent by the end of the month, even as vaccine doses surpassed 3.5 million per day, according to CDC data. Additionally, new hospital admissions for COVID-19 patients increased 17 percent over the course of the month, from 4,610 on March 1 to 5,396 on March 30.

This increase comes as the spread of the UK COVID-19 variant B.1.1.7 rose to 45 percent of all cases for the last two weeks of March, compared to 12 percent of cases at the end of February.

Meanwhile, healthcare organizations may be facing more financial troubles.

Hospital margins remained narrow with a median operating margin of 1.4 percent on the Kaufman Hall hospital Operating Margin Index for March. With federal Coronavirus Aid, Relief, and Economic Security (CARES) Act funding, median hospital margins came in at 2.0 percent, based on the April 2021 National Hospital Flash Report. 

Volumes decreased across most measures year-to-date. In particular, adjusted discharges were down 7.4 percent and ED visits fell 19.2 percent. Gross operating revenue (not including CARES funding) rose 4.4 percent year-to-date, while outpatient and inpatient revenue rose less than 4 percent.

Total expenses, labor expenses, and non-labor expenses per adjusted discharge all increased about 15 percent compared to the first quarter of 2020. 

“We expect to see additional margin gains in the months ahead, especially in comparison to record-poor performance in the early months of the pandemic,” Jim Blake, managing director for Kaufman Hall, said in a press release.

“Over the course of 2021, however, we project hospital margins could be down as much as 80 percent and revenues down as much as $122 billion compared to pre-pandemic levels as hospitals continue to feel the dire repercussions of COVID-19,” Blake, publisher of the National Hospital Flash Report, continued.

Additionally, the Physician Flash Report found that physician productivity, reimbursement, and revenues for 2020 uniformly fell below 2019 metrics. At the same time, the average investment required to supplement physician revenues rose.

"Healthcare leaders should take a balanced approach with regard to meeting patient demand as they look to grow their physician strategies moving forward," Cynthia Peters Arnold, senior vice president at Kaufman Hall explained.

"This will require rethinking the investment needed to pay physicians, setting clear clinical quality and economic targets, and establishing a physician management system with accountability for both physicians and administrators,” Peters Arnold continued.

After major disruptions at the beginning of COVID-19, physician practices saw some progress toward recovery in the second half of 2020. The median investment/subsidy per physician full-time equivalent (FTE) dropped 26 percent from a high of $289,268 in the second quarter to $213,118 in the fourth quarter.

The median investment/subsidy per physician FTE in 2020 increased by 6.8 percent from 2019 to $239,656. This is mostly due to low patient volumes as COVID-19 prevented many patients from seeking in-person care at the beginning of the year.

As many health systems froze compensation levels during COVID-19, physician compensation per FTE decreased 1.6 percent from 2019 to 2020. Overall physician productivity was also down for the year, with physician work relative value units per FTE falling 8.4 percent from 2019 to 2020.

Revenue per physician FTE dropped 6.3 percent from 2019 to 2020, and total direct expense per physician FTE (including advanced practice providers) fell 4.9 percent (more than $40,200) from 2019 to $782,518 in 2020.

The report noted that contributing factors for these declines include patient volume decreases, which led to lower overall expenses, and reductions in staff availability (particularly among women physicians and APPs) due to childcare responsibilities from school closures.