Coronavirus wounds run deep for hospital margins, ratings, future prospects

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Not-for-profit hospitals suffered a record-setting blow to margins as their balances sheets bore the full brunt of the COVID-19 pandemic’s impact, according to a report.

Hospital operating margins before interest, taxes, depreciation, and amortization tumbled by 174% over the same period last year and fell 118% from March, hit by the steep drop in elective patient volume that in turn drove record revenue losses.

March numbers offered a grim glimpse into the impact of rising costs to address the pandemic and plummeting revenue as elective procedures ground to a halt so hospitals could prepare for COVID-19 patients by mid-month, Kaufman Hall writes in a report based on information from 800 hospitals.

Kaufman Hall's James Blake authored the financial advisory's firm's look at April hospital margins

The April numbers offer a fuller and bleaker picture than the prior month, as hospitals struggled under the new restraints for a full month. The median hospital operating margin dropped to a negative 29%, as measured by the Kaufman Hall Hospital Operating Margin index. Margins had posted modest monthly gains over the past year. That ended in March. Operating margins in April have now fallen 282% year-over-year, wrote author James Blake, a managing director.

Looking at the numbers on various services that impacted the margins, operating room minutes dropped 61% compared to April 2019. That’s more than triple the decline experienced in March. Discharges fell 30% year-over-year, and emergency department visits dropped 43%. Outpatient revenues fell 50% year-over-year and were 51% below budget, while inpatient revenues declined 25% year-over-year and fell 30% below budget.

Hospitals across the country have begun resuming some elective procedures and surgeries depending on their state’s rules and own internal directives, but that doesn’t solve the sector’s woes. “There is widespread uncertainty as to when patients will return, with the virus’ path still unpredictable and nearly 40% of consumers uncomfortable seeking care at a hospital,” Blake wrote.

As hospitals grapple with the pressures, Blake warned, “in addition to the immediate financial damage, a volume and revenue shock of this magnitude will lead to major changes in healthcare delivery” with recovery plans taking into account “a viewpoint about the post-COVID environment and plans for the roles their organizations should play.”

Plans must be formed on care models that consider the rise in telehealth and the need to manage infectious diseases; cost structures that take into account potentially permanent changes in demand; and how competition among hospitals should impact future decisions on scale and capabilities, the report suggested.

Hospitals, initially in triage mode, focused on liquidity, tapping or establishing new lines of credits and putting off capital expenses. Some have turned to employee furloughs and layoffs. Hospitals received $100 billion in relief from the Coronavirus, Aid, and Economic Security ACT enacted March 27. Hospitals can also bolster liquidity through a measure that allows for the acceleration of six months' worth of expected Medicare reimbursements.

A rough road lay ahead but there’s also potential bright spots on the horizon, S&P Global Ratings said in a report Tuesday. Analysts expect the second quarter, ending June 30, will likely mark the low point of the pandemic-induced disruption in the for-profit and not-for-profit U.S. health care sector and — assuming there’s not a second surge serious enough to cause another major lockdown — should lead to sequential improvement.

"Hospitals and all other health service providers were hit with this disruption with lightning speed, forcing the industry to learn in real time how to handle a situation for which there was no playbook," S&P credit analyst Suzie Desai writes in the report "A Bumpy Recovery Is Ahead For Hospitals And Other Health Providers As Non-Emergent Procedures Restart.”

When S&P evaluates not-for-profit and for-profit healthcare credits it takes into account that many provide essential services, assumes that a primary cause of the disruption was the sudden and total deferral of elective services, and that the disruption may not represent a “change in the long-term credit story.”

Moody’s Investors Service earlier this month warned of ongoing coronavirus-related credit risks into the next year as federal government stimulus and emergency response funding will fall short of fully compensating hospitals.

Swift action by the federal government has delivered cash to hospitals, worth 20 to 30 days of cash on average and that helped avoid a severe liquidity crunch, but hospitals will need to repay the government for advances on Medicare reimbursement, which will cause cash flow stress starting in August or September for most hospitals, Moody’s warned.

Recovery depends on resuming nonemergency or elective services, and the pace and timing of that process will vary significantly by geography. Patient volume will be impacted by hospitals' access to rapid coronavirus testing, supply chains, government policy, potential case surges, job losses, changes in insurance coverage, and consumer sentiments about returning to a hospital.

“The massive revenue hit caused by the postponement and cancellation of nonemergency and elective services will materially weaken financial performance, causing many hospitals to breach financial covenants in fiscal year 2020, yet hospitals are unlikely to miss debt service payments,” said Dan Steingart, a Moody’s vice president.

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