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Negative operating margins likely to haunt 39% of hospitals in 2021

Margins will remain depressed throughout the year, and the percentage of hospitals with negative margins will likely increase.

Jeff Lagasse, Associate Editor

(Photo by Sam Edwards/Getty Images)(Photo by Sam Edwards/Getty Images)

With scores of Americans getting vaccinated by the day, hospitals are slowly allowing themselves to feel optimistic about their financial recovery from the COVID-19 pandemic. But even in the best-case scenario, 39% of hospitals will likely have negative operating margins in 2021, according to a new Kaufman Hall report.

The firm modeled the effects of the coronavirus under two scenarios, one optimistic and one pessimistic, each taking into account a number of factors, including:

  • the pace and degree to which inpatient, outpatient and emergency department volumes return.
  • the availability of vaccines and the speed of distribution.
  • the extent to which COVID-19 cases decline based on social distancing and herd immunity.

The 2021 data that's available so far tend to support the more pessimistic scenario. But in either scenario, hospital margins will remain depressed throughout the year, the percentage of hospitals with negative margins will likely increase, and the financial health of rural hospitals in particular will be greatly affected.

WHAT'S THE IMPACT?

By the end of the year, hospital margins could be 10-80% below pre-pandemic levels, the data showed – a trend that held true under both scenarios. The optimistic scenario shows a recovery occurring primarily between the first and third quarter, but margins leveling off at more than 10% below pre-pandemic levels – a sufficiently depressed level to hamper some hospitals' ability to invest in community services. 

Under the pessimistic scenario, the recovery does not begin until the second quarter, and even then is very slow, culminating in fourth-quarter margins that are 80% less than pre-pandemic norms. That's a devastating level for hospitals still reeling from the Q1 financial effects of COVID-19 in 2020.

Roughly half of all hospitals could have negative margins by the end of 2021, which is far greater than pre-pandemic levels. Prior to the pandemic, about one quarter of hospitals had negative margins. At the beginning of 2021, after almost a year of COVID-19, half of hospitals had negative margins. For those hospitals, 2021 will remain a very challenging year. 

Under the optimistic scenario, an average of 39% of hospitals could have negative margins – still significantly higher than the 25% before the pandemic. Under the pessimistic scenario, the percentage of hospitals with negative margins could be basically unchanged, with almost half of America's hospitals having more expenses than revenue.

With all of that, rural hospitals will likely see no improvement in their margins, as they'll be hit especially hard by the lingering effects.

Even the optimistic scenario shows only a slow improvement in margins during the first quarter and basically a plateau after that, ending the year with margins 38% lower than pre-pandemic levels.

The pessimistic scenario is very bleak for rural hospitals, with no improvement in margin projected during the entire year.

The projections are based on model assumptions combined with current data from about 900 hospitals.

THE LARGER TREND

In February, Kaufman Hall issued a report focusing on hospital revenues, finding that 2021 revenue would be down between $53 and $122 billion due to the lingering effects of the public health crisis.

In 2020, hospitals experienced increases in certain expenses due to COVID-19. These expense pressures could continue into 2021 as the pandemic continues. On a volume-adjusted basis, drug expense, purchased service expense, labor and supply expense had the greatest increases over non-pandemic timeframes.

Whether recovery from the coronavirus this year is relatively rapid or relatively slow, America's hospitals will face another year of struggle to regain their financial health.
 

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