Health Systems Losing Money on Employed Physicians During COVID-19

The ongoing COVID-19 pandemic is creating a perfect storm for health systems, which appear to be taking hits on both the hospital and physician practice sides of their business.

The latest National Hospital Flash Report from consulting firm Kaufman Hall found that the median hospital operating margin index is well below 2019 performance at 2.7 percent year-to-date through September even with federal aid from the Coronavirus Aid, Relief, and Economic Security (CARES) Act funding. Without CARES Act funding, the median hospital operating margin index is -1.9 percent.

Additionally, the Kaufman Hall earnings before interest, taxes, depreciation and amortization (EBITDA) margin index was well below 2019 performance, standing at 7.5 percent year-to-date with CARES Act funding and 3.2 percent without funding from the CARES Act.

Meanwhile, the first of the new quarterly Physician Flash Report showed that the median subsidy – or loss – per employed physician increased by 14.1 percent from January to August compared with the same period the previous year.

Overall, the median loss was $227,000 per physician across all specialties.

“Health system leaders must keep a pulse on physician practice performance as they continue to navigate COVID-19 and plan for a post-pandemic era,” Jim Pizzo, a managing director at Kaufman Hall and leader of the firm's physician advisory practice, said in a press release.

This is especially true as health systems navigate the coming months in which the ongoing COVID-19 pandemic will collide with the seasonal flu and consumers continue to avoid the hospital.

Hospitals continued to face lower volumes for the seventh consecutive month in September 2020, the consulting firm learned from its data on more than 900 hospitals. The facilities reported declines in adjusted charges of 12 percent, operating room minutes of 12 percent, and emergency departments visits by 16 percent.

Average length of stay, however, continued to increase in September, rising by about 2.3 percent year-to-date and year-over-year. This increase contributed to an increase in payment per case as demonstrated by an increase in net patient service revenue per adjusted discharge by 5.8 percent year-to-date and 10.7 percent year-over-year.

The 20 percent add-on payment from Medicare for COVID-19 hospitalizations, the moratorium of the 2 percent Medicare sequester cut, and lower bad debt also contributed to higher revenue last month, the firm reported.

But hospitals are still facing higher expenses, which increased by 1.8 percent year-to-date and 3.5 percent year-over-year in September.

Overall, these factors resulted in a rise in September hospital margins year-over-year despite lower volumes. Operating margins rose by 8.1 percent and was just 7.8 percent below budget without CARES Act funding, according to the National Hospital Flash Report.

Hospital performance was an improvement compared to August, which the consulting firm called a setback for hospitals. However, performance continues to be volatile and losses related to operating physician practices are exacerbating the challenge.

In addition to higher losses per physician, Kaufman Hall also discovered that physician enterprises saw a 7.6 percent decrease in work Relative Value Unit (wRVU) per physician full-time equivalent (FTE) from 2019 to 2020 due to COVID-19 related volume declines. The enterprises also observed a 1.7 percent increase in physician compensation per FTE.

Additionally, the report found a 2.5 percent increase in net revenue per physician wRVU largely because of expanded coverage of virtual visits.

Kaufman Hall advised health systems to prioritize telehealth advancements and patient engagement to ensure optimal value in the post-pandemic era. The firm also recommended that health systems align physician compensation with patient needs and leverage technology, especially to streamline patient access to specialists.