The nation’s hospitals are suffering significant financial damage as a result of the COVID-19 pandemic response. Kaufman Hall’s data from more than 800 U.S. hospitals show that volume and revenue declines, along with flat to rising expenses, resulted in a dramatic fall in margin within a matter of weeks, plunging nonprofit hospitals, which historically operate on thin margins, deep into the red.
Looking at earnings before interest, taxes, depreciation and amortization, hospitals’ operating margins fell more than 100% in March, dropping a full 13 percentage points relative to last year. Compared to most months, that’s a much greater change. Operating EBITDA margin was up just 1% in March 2019, for example, and down 1% in February of this year.
These margins likely fell even further across broader health systems, which often include substantial physician and ambulatory operations outside of the hospital, Kaufman Hall found. Overall, operating margins fell 170% below budget for the month.
WHAT’S THE IMPACT
The numbers were rough across the board. Operating room minutes were down 20% year over year, while emergency department visits dropped 15% over that same span. The median hospital occupancy rate was 53% for the month.
Labor expenses were up 3% year over year, while non-labor expenses were up 1%. Budgeted inpatient revenue was down 13% in March, while budgeted outpatient revenue was down 17% during the month. From March 2019 to March 2020, bad debt and charity care rose 13%.
During the month, providers postponed elective procedures to free capacity and equipment for COVID-19 patients, and many patients cancelled appointments for fear of contracting or unwittingly spreading the virus. These factors drove most of the revenue declines, as hospitals rely on income from scheduled procedures — joint replacements and non-emergency heart surgeries, for example — to balance losses from other acute care services.
Expenses were higher despite seeing far fewer patients, suggesting much of those expenses went toward front-line caregivers in anticipation of mounting COVID-19 cases, and toward additional staff to cover caregivers who may become infected. Maintaining and expanding inventories of drugs, supplies, equipment and capacity also contributed to expenses during the month.
Kaufman Hall expects the pandemic to have an even more dramatic impact in the coming months.
THE LARGER TREND
During the first wave of the coronavirus, there was a tremendous amount of turbulence in capital markets. Global markets went haywire during the early stages of the crisis, and hospitals were hit in a number of different ways.
Hospitals tend to carry fairly large investment portfolios, and those took a hit, as did various other financial instruments; debt markets were basically shutting down. It amounted to a total assault on balance sheets.
The Federal Reserve came in and undertook some significant efforts, basically rolling out its playbook for the 2008 financial crisis, with everybody moving out of risk assets and into U.S. treasuries, particularly shorter-duration treasuries.
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