Hospital Operating Margins Down 96% As Volumes Remain Low

Hospital financial performance is starting to recover after hitting historic lows at the start of the COVID-19 pandemic, but the providers still face a bumpy road ahead, according to experts at Kaufman Hall.

The healthcare consulting firm’s more recent hospital financial performance review revealed that operating margins are down by 96 percent or 842 basis points (bps) since the start of 2020 compared to the same seven-month period in 2019. And that is without accounting for one-time payments from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, 2020.

But even after accounting for the emergency relief, hospital operating margins are still down by 28 percent or 90 bps compared to the same period last year, the review showed.

Compared to the previous month, however, hospital operating margins increased 24 percent (217 bps) in July 2020. Although coming in 15 percent above budget without CARES funding.

Operating Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margins also increased by 12 percent (191 bps) month-over-month and were 9 percent above budget without the financial aid despite falling by 5 percent (62 bps) year-over-year, the firm reported.

But hospital CFOs should not get too excited about recent month-over-month gains, warned experts.

“Many unknowns persist surrounding COVID-19 and its impacts in the coming fall and winter months—including a very real possibility of the need for additional lockdowns to stem the virus’s spread. The combination of these factors continues to create significant volatility for hospitals and health systems nationwide, and profound uncertainty about their future viability,” Jim Blake, managing director at Kaufman Hall, wrote in the report.

Hospital volumes are still significantly down year-over-year despite improvements compared to last months.

Specifically, discharges and adjusted discharges fell by 7 percent compared to July 2019. Although the metrics did increase by 6 percent compared to June 2020.

Adjusted patient days followed a similar trend – down by 4 percent year-over-year but up by 7 percent month-over-month.

Notably, both discharges and adjusted patient days were down by 11 percent compared to the same seven-month period in 2019, and adjusted discharges were 13 percent below 2019 performance.

Emergency department (ED) volumes were hit the hardest in July 2020, the report highlighted. Visits to the ED dropped by 17 percent year-to-date compared to the same period a year ago, marking the fifth consecutive month of double-digit year-over-year declines in ED volumes, the report stated.

Meanwhile, surgery volumes improved as hospitals resumed elective and non-urgent procedures.

Operating room minutes increased by 3 percent month-over-month, coming in at 4 percent below budget in July 2020. The metric remained down by 15 percent year-to-date and by 1 percent year-over-year.

The report’s authors pointed out that operating room performance was in contrast with last month’s report, which found that operating room minutes grew year-over-year.

Year-over-year declines in hospital volume metrics could spell trouble for hospitals and health systems, which are also seeing flat year-over-year gross revenue performance and consistently higher per-patient expenses despite lower patient volumes.

Gross operating revenues decreased 8 percent year-to-date, Blake reported, while inpatient and outpatient revenue fell by 5 and 11 percent, respectively, not including federal aid.

At the same time, hospitals saw increases in total expense per adjustment discharge increased by 16 percent, labor expense per adjusted discharge by 18 percent, and non-labor expense per adjustment discharge by 15 percent.

Hospitals typically operate on razor-thin margins, but the economic downturn from the COVID-19 pandemic is likely to create more financial troubles.

Last month, an analysis prepared by Kaufman Hall for the American Hospital Association (AHA) projected half of all US hospitals to operate in the red through the second half of 2020.

Even in the best-case scenario in which there is a slow but steady decrease in COVID-19 cases, the analysis predicted that the average hospital margin would drop to -3 percent.

The projections underscore the need for additional financial assistance from the federal government, the AHA said in response to the analysis. The Association called on Congressional leaders last month to include an additional $100 billion in emergency relief funds for healthcare providers in upcoming COVID-19 relief legislation.

Congress has yet to pass another comprehensive COVID-19 relief package.