Not-for-profit hospital margins improved in May; future remains cloudy

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Not-for-profit hospital margins began to recover in May from COVID-19 induced fiscal wounds as balance sheets benefited from federal relief and an infusion of revenue when elective procedures and surgeries resumed.

“Hospitals and health systems across the country began to see signs of financial improvement in May following two brutal months of poor margin, volume, and revenue performance caused by the coronavirus pandemic,” the advisory firm Kaufman Hall wrote in its National Hospital Flash Report Results monthly report, authored by James Blake, a managing director.

Hospitals began to turn a financial corner in May after coronavirus-driven financial dislocation in March and April, the healthcare advisory firm Kaufman Hall reported.

Hospital operating margins finished the month at 4%, a stark improvement from double-digit negative drops seen in March and April but they remained below the May 2019 figures and budgeted levels. The report is compiled from data provided by more than 800 hospitals across the country.

Operating margins rose 100% from April to May, but fell 13% year-over-year and were 6% below budget, according to the report. Margins had plunged 282% in April compared to the same period last year as hospital balance sheets felt a full month’s impact of both the costs associated with personnel and equipment costs at the same time elective procedures and surgeries were put on hold to concentrate resources on COVID-19 patients and a surge in cases.

Total gross revenue was down 14% compared to May 2019, but up 29% month-over-month. Outpatient revenue was down 27% year-over-year, but increased 39% month-over-month. Inpatient revenue fell 12% year-over-year and rose 19% month-over-month.

Volumes rose month-over-month in May, but dropped year-over-year while adjusted discharges were up 30% month-over-month but down 27% year-over-year and 26% below budget. Operating room minutes saw the biggest increase of any volume metric, jumping 92% from April to May, according to the report.

The resumption of surgeries along with the impact of the distribution of $50 billion in the first round of funding for hospitals in the Coronavirus Aid, Relief and Economic Security Act signed March 27 drove the improvement. Absent the federal aid, the median margin would have remained in negative territory at a negative 8%.

“The vast majority of hospitals that received CARES funding recorded the entire amount across April and May — reflecting the short-term nature of the relief, unless Congress issues additional funding,” the report warned.

Total expense fell 6% year-over-year, but was up about 1% month-over-month. Expenses adjusted for volumes — that provide a more accurate picture of COVID-19’s impact — grew significantly with total expense, labor expense, and non-labor expense per adjusted discharge all increasing more than 30% compared to the same period last year. “Cost control efforts were unable to keep pace with lost volumes,” the report said.

While hospitals recorded improvements in May, pressures abound and recoveries will vary from hospital to hospital and region to region with much uncertainty ahead as COVID-19 case tick up nationally.

Those uncertainties were underscored in Texas Wednesday, when Gov. Greg Abbott issued an executive order suspending elective procedures in four of the state's largest counties amid increasing coronavirus cases and hospitalizations.

“This pandemic is far from over, and the road to recovery likely will not be a consistent upward slope, but rather a series of peaks and valleys,” Blake wrote. “Different organizations will move at different speeds along divergent paths depending on numerous factors, such as available resources, fluctuations in coronavirus cases, consumer sentiment, and additional aid.”

Pension funding ratios are another balance sheet measure on rating agency radar with the potential for deterioration for fiscal 2020, S&P Global Ratings warned in a report “Overall Not-For-Profit Health Care Pension Funded Ratios Are Stable — For Now,” published Thursday.

“There continues to be significant investment market volatility in 2020 owing to the recession and COVID-19. We expect lower funded ratios in fiscal 2020, leading to higher contributions rates from plan sponsors, which could pressure budgets and cause some entities to seek relief through deferral of pension obligations," said S&P analyst Wendy Towber.

The CARES Act allows for temporary funding holidays for providers with single employer plans, which also could result in weaker future funded ratios, S&P said. The median funded status of defined benefit plans dipped slightly in fiscal 2019 to 83% from 84%, due to a lower bond rate but is not considered significant.

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