Half of Hospitals to Operate in the Red By Year's End

Hospitals typically operate on thin margins but the COVID-19 pandemic will likely sink those margins, pushing half of all US hospitals in the red through the second half of 2020, according to a new report released by the American Hospital Association (AHA).

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The new analysis prepared by Kaufman, Hall & Associates, LLC showed that hospital margins could drop to -3 percent in the most optimistic scenario in which there is a slow but steady decrease in COVID-19 cases. But margins could sink to as low as -11 percent in a less optimistic situation in which COVID-19 periodically surge. Researchers gave the latter scenario a 60 percent weight in the analysis.

Given the two scenarios, researchers estimated that hospital margins would sink to -7 percent in the second half of 2020 without further government support.

“This is an unsustainable level for America’s hospitals,” authors of the report stated.

Hospitals need a positive margin to serve patients in their communities, the healthcare consulting firm explained.

Positive operating margins are critical for long-term survival for any organization, but for hospitals, positive financial performance is also essential for investing in new facilities, treatments, and technologies to improve patient care.

Additionally, positive hospital operating margins are key to building reserves needed to overcome unexpected expenses or revenue shortfalls such as those seen during the pandemic, the industry experts stated.

Hospital financial performance took a massive hit during the pandemic. According to the consulting firm’s data from April, hospital operating margins dropped by a record of 282 percent as facilities canceled elective procedures and patient confidence in seeking care plummeted.

Hospital visit volumes started to recover by the end of June 2020, with emergency department visits notably down just 25 percent compared to pre-pandemic levels, according to a recent report from TransUnion Healthcare.

However, the AHA still projects hospitals to lose another $120.5 billion from coronavirus-related expenses through the end of the year, bringing total estimated 2020 losses to $323 billion.

For most hospitals, financial losses stemming from the COVID-19 pandemic will be devastating. Prior to COVID-19, the median hospital margin was just 3.5 percent, Kaufman Hall reported. A significant portion of hospitals also already had a negative margin at that time.

About one-third of all hospitals (32 percent) operated in the red at the start of 2019, according to the analysis. That percentage jumped to 49 percent right before and at the start of the COVID-19 pandemic and will continue to slowly rise to 51 percent by the fourth quarter of 2020, the experts predicted.

The data underscores the need for further financial support from the federal government, AHA’s president and CEO Rick Pollack stated.

“As today’s analysis shows, this pandemic is the greatest financial threat in history for hospitals and health systems and is a serious obstacle to keeping the doors open for many,” Pollack said in a statement on the analysis. “While we appreciate the support from the Administration and Congress, we need further help to stay afloat to continue our mission of caring for patients and communities.”

The federal government has already allocated $175 billion to a Provider Relief Fund designed to help offset the expenses and funding shortfalls facing healthcare providers during the pandemic.

Without the funding, hospital margins would have decreased to a low of -15 percent in the second quarter of 2020, the analysis by Kaufman Hall showed.

However, more funding is needed to support the majority of hospitals slated to operate in the red in 2020, even with the funding, AHA maintained.

More recently, the hospital association, alongside the American Medical Association and the American Nurses Association, is calling for at least another $100 billion in funds in the next COVID-19 relief package.

“America’s front line health care personnel continue to battle the COVID-19 pandemic as it continues to spike in numerous states including Texas, Florida, California and Arizona,” the associations wrote in a letter to Senate lawmakers on July 22. “The number of COVID-19 cases continues to increase across the country at rates exceeding those during the Spring of 2020, and we are concerned additional COVID-19 spikes in other states in the near future will continue to stress the entire health care system.”