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Hospital margins improve significantly in May, but are still below budget and 2019 levels

The CARES Act and the resumption of elective procedures have helped, but they're still baby steps on the road to recovery.

Jeff Lagasse, Associate Editor

Due to the COVID-19 pandemic, hospital margins, volumes and revenue performance have all experienced a brutal couple of months. In May, there were signs of financial improvement – significant, in some cases – but margins are still below 2019 levels, and still below budget, according to the latest Kaufman Hall Flash Report. 

The improved margins are mainly attributable to two factors. One is the $50 billion in emergency CARES Act funding that was given out by the federal government. The temporary relief afforded by this injection of cash pushed May's median operating margin to 4%; without it, Kaufman Hall projects the median margin would have been -8%.

The other factor is the resumption of elective surgeries and nonurgent procedures, which were halted when hospitals shifted their focus to treating coronavirus patients. That cut off health systems from some of their more lucrative service lines, and though many patients are reluctant to walk back through their hospital's doors, the ones that are returning are providing some much-needed revenue.

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WHAT'S THE IMPACT?

In total, the median operating margin rose 100% from April to May, though this is still 13% below 2019 levels and 6% below budget. While true normalcy has yet to be achieved, this represents a significant rebound from the record low numbers posted in April, which saw operating margin down a whopping 282%.

The May results come as hospitals see volumes increase month-over-month, but continue to fall year-over-year and compared to budget. Operating room minutes saw the greatest month-over-month increase, jumping 92% compared to the low levels in April, as hospitals nationwide resumed nonurgent procedures. 

Revenue results for the month weren't great, but showed signs of improvement. They were below 2019 levels, but greater than in April. Expenses declined in May relative to the same period last year due to significant actions taken by many organizations to control costs.

Interestingly, margin performance differed by region, with hospitals in the West, Northeast/Mid-Atlantic, and South continuing to see margins decline year-over-year and compared to budget. Hospitals in the Midwest and Great Plains saw margin increases both year-to-year and compared to budget.

VOLUMES

The increase in operating room minutes was by far the biggest indicator of improving volumes, but adjusted discharges were up 30% from the month previous, another important volume metric. Like margins, though, volumes were down from 2019 and compared to budget.

Adjusted discharges were up 30% month-over-month, but down 27% year-over-year and 26% below budget, while adjusted patient days rose 28% month-over-month, and were down 23% both year-over-year and to budget.

Average Length of Stay remained relatively steady. This metric was essentially flat month-over-month, and up just 3% year-over-year and compared to budget.

REVENUES

Revenues were a mixed bag during May. Actual revenues understandably continued to dip as compared to 2019, but due to low volumes, adjusted revenues actually showed some year-to-year gains. Total gross revenue was down 14% over the past 12 months, but up 29% from April. Outpatient revenue saw a similar pattern, down 27% from last year but up 39% month-over-month. Same with inpatient revenue, which was down 12% year-to-year but up 19% from the month before.

When adjusted to volume levels, net patient service revenue per adjusted discharge was basically flat compared to April, but up 10% from 2019. NPSR per adjusted patient day was down 1% and up 5%, respectively.

Bad debt and charity as a percent of gross rose just 2% year-over-year, but fell 1% month-over-month and 6% below budget expectations.

EXPENSES

Expenses declined from the same month in 2019 owing to many organizations implementing furloughs and other aggressive cost control measures. Year-over-year, total expense decreased 6%, but was up roughly 1% from April. Expenses adjusted for volumes grew quite a bit, but with total labor, labor expense, and nonlabor expense per adjusted discharge all seeing a more than 30% increase compared to May 2019, cost control efforts weren't able to keep up with lost volumes.

Supply expense saw the biggest year-over-year decrease at 23%, but was up 5% month-over-month and 24% below budget.

Hospitals across all regions saw increases both year-over-year and to-budget for five key metrics: total expense per adjusted discharge, labor expense per adjusted discharge, full-time equivalents per adjusted occupied bed, nonlabor expense per adjusted discharge and purchased service expense per adjusted discharge.

THE LARGER TREND

The improvements, while slight in some areas, come as welcome news for hospitals and health systems, particularly on the heels of a month during which financial performance was so poor it broke records

Still, the industry isn't out of the woods and won't be for quite some time – likely until early 2021, according to Lisa Goldstein, associate managing director at Moody's Investors Service.

In a virtual session of the Healthcare Financial Management Association on Wednesday, Goldstein said she anticipates cash flow will remain low into 2021, mostly from the suspension of elective surgeries, rising staffing expenses and uncertainty around securing enough personal protective equipment. Liquidity is still a concern, but is more of a side issue due to Medicare funding providing a Band-Aid of sorts. The CARES act will help to fill some of that gap, but not all of it, she said.

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com