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COVID-19 pandemic driving steep volume and revenue declines as margins suffer

While volume and revenues plummeted to historic levels, expenses remained nearly flat, putting pressure on hospitals as the coronavirus spreads.

Jeff Lagasse, Associate Editor

Data compiled for the month of April shows a harrowing impact on U.S. hospitals' finances, with volume and revenue in steep declines as the healthcare industry feels the effects from the first full month of COVID-19's impacts.

Along with stagnant expenses, these declines drove margin performance so low that it broke records, according to Kaufman Hall's April Flash Report.

Despite $50 billion in funding allocated through the CARES Act, operating EBITDA margins fell to -19%. They fell 174%, or 2,791 basis points, compared to the same period last year, and 118% compared to March. This shows a steady and dramatic decline, as EBITDA margins were as high as 6.5% in April.

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Kaufman Hall managing director Jim Blake said that while the CARES Act was certainly beneficial, each hospital and health system treated the influx of cash differently. In terms of pip dollars, for example, most hospitals didn't take that as revenue, but socked it away.

"Of the (initial) $30 billion, only two-thirds was in the list that would have been received by April," said Blake. "Every hospital and health system accounts for it differently. Ours are not health system numbers, but hospital numbers. A lot of places took those dollars and took that money in at the system level. Some didn't take it all in at the same time – they smooth-lined it until the end of the year."

Hospitals in the Midwest felt the greatest impact to their EBITDA margins, falling 327% year-over-year and about 300% below budget expectations. That's in large part because the region had the greatest volume decreases and the highest year-over-year increases in adjusted expenses.

OPERATING MARGINS, VOLUMES

Operating margins fared even worse, plummeting 282% year-over-year and 120% compared to March.

These numbers come on the heels of a challenging March, with the pandemic precipitating volume declines starting around mid-month. Government prohibitions and the desire to stem coronavirus spread meant many hospitals weren't able to resume elective and nonurgent cases in April, translating to year-over-year volume declines more than double those seen in March.

Blake said that the tough second half of March was related to the social distancing and shelter-in-place orders implemented across states. In April, the data was much more correlated to consumer behavior – and was uniform across the country, regardless of how hard any specific regions were hit by COVID-19.

"The impacts correlated not to lockdown orders or to COVID infections, but the financial impacts we're seeing are primarily due to individual consumer and patient behaviors," said Blake. "It does apply to the whole country, independent of what a particular state or governor does."

Volumes were down – way down. Operating room minutes fell 61% compared to the April 2019, which is more than triple the declines seen in March. Discharges fell 30% over that time, while emergency department visits fell 43%. Surgery room volumes saw the biggest declines, which was expected given the halting of elective procedures. Again, the Midwest was the most affected region.

REVENUE, EXPENSES

Unsurprisingly, revenues were down, but the biggest hit was in outpatient services, with revenues falling 50% from April of last year and 51% below budget. Inpatient revenues didn't decline as much, but still saw a substantial 25% dip year-over-year, and were 30% below budget.

Adjusted for the month's record-low volumes, revenue results indicated some moderate gains. Net patient service revenue (NPSR) per adjusted discharge increased 10% year-over-year, 9% month-over-month, and was 7% above budget, while NPSR per adjusted patient day rose 4% compared to both April 2019 and March 2020, and was up 3% to budget.

Yet even with far fewer patients, expenses remained high. Total expense per adjusted discharge rose 59% compared to the same period last year; over that same time, labor expense per adjusted discharge was up 63% and non-labor expense per adjusted discharge climbed 58%.

Total expenses declined slightly, but not nearly enough to make up for the significant volume declines. That means hospital efforts to reduce costs – mass furloughs, executive pay cuts and other measures – haven't been able to compensate for the lost volumes.

Blake said hospitals didn't reduce expenses to the extent they could have, but this was because they needed to implement certain measures to save lives and mitigate the widespread health effects of the virus, which he said was the right move.

"If you're a hospital CEO, you say around March 18, 'Oh my God, this is coming,'" said Blake. "You would prepare. You'd get ready. In order to get ready, you're going to have to spend some money. You don't say, 'This is the time I'm going to cut back on expenses.' You've got to buy PPE. You've got to bring in all your employees.

"Your number one job is to save lives, and that's what hospitals did," he said. "I'm proud of healthcare for doing that. They did the right thing, and that's what we see in the numbers."

Erik Swanson, a senior data scientist and vice president at Kaufman Hall, said the ration metrics demonstrate the nature of hospitals' preparation for the coronavirus.

"As organizations began to understand how they were being impacted, there were some moves," said Swanson. "They were minor in terms of financial impact, but they did aim to reduce some expenses in other areas of their hospital. There were slight reductions in a total expense basis, or a little bit of labor expenses being cut."

Blake said he expects future reports to show more variance in the numbers.

"So far hospitals have reacted really well," he said. "They're handling this well, and now, will patients start to come back? Some will have to. You can only delay life-threatening things so long. But what is the post-COVID world going to look like? Every business is thinking about the post-COVID world, and the ongoing COVID world, and starting to respond to that."
 

Twitter: @JELagasse

Email the writer: jeff.lagasse@himssmedia.com