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U.S. hospitals and health systems face a long road to recovery

Operating margin was -0.6% in January, not including CARES Act funding, while total expenses continue to rise.

Jeff Lagasse, Associate Editor

The first month of the new year proved challenging for hospitals and health systems nationwide as the effects of the pandemic continued to push margins, volumes and outpatient revenues below the performance of the prior year, according to the February issue of Kaufman Hall's National Hospital Flash Report.

National COVID-19 metrics show signs that the virus's impacts may be easing following a devastating winter surge, with key pandemic indicators peaking in early to mid-January but tapering off in the second half of the month. 

U.S. hospitals and health systems, however, face a long road to recovery.
 
The median Kaufman Hall hospital operating margin index was -0.6% in January, not including federal Coronavirus Aid, Relief, and Economic Security Act funding. With the funding, it was -0.1%. The median Operating Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Margin was 4% without CARES and 4.8% with CARES. 

Not including the federal aid, operating margin fell 46.1% and operating EBITDA margin was down 34.1% compared to January 2020.

WHAT'S THE IMPACT?

The declining cases of COVID-19 and hospitalizations are a sign the pandemic may have turned a corner, but the situation for hospitals and health systems is still challenging.

Volumes fell year-over-year across most metrics as many healthcare consumers continued to avoid or delay care. Year-over-year, adjusted discharges fell 17.6%, adjusted patient days declined 8.3%, and operating room minutes fell 16.6%.

Emergency department visits – which have seen double-digit year-over-year declines each month since the start of the pandemic in March 2020 – again had the biggest drop compared to other volume metrics at 24.7%.

Inpatient volumes fell 2.3% year-over-year following two months of increases from rising COVID-19 hospitalizations. Even so, hospitals continue to see higher average length of stay due to higher acuity patients.

Outpatient revenue fell below prior year levels for the ninth time in the past 10 months, down 10.4% compared to January 2020. The lower outpatient revenues pushed gross operating revenue (not including CARES) down 4.8% year-over-year, while total inpatient revenue increased just 1.3% year-over-year.
 
Total expenses continued to rise as hospitals bore the high costs of labor, drugs, personal protective gear and other equipment needed to treat sicker patients, including COVID-19 cases. Total expense per adjusted discharge rose 25.4%, labor expense per adjusted discharge jumped 30.1%, and non-labor expense per adjusted discharge increased 24.4% compared to the same period last year.

THE LARGER TREND

Despite the ongoing pandemic, the 2021 financial outlook for the global healthcare sector is mostly positive, as strong demand for products and services – including those related to COVID-19 – will more than offset lingering pressures from the public health emergency, Moody's Investors Service found in December.

The demand will remain strong largely due to aging populations, the improvement access and the introduction of new and innovative products. The one caveat: Steadily rising healthcare expenditures, which will cause payers to continue to restrict utilization and lower prices.

In October, Moody's found that owning a public hospital during the COVID-19 pandemic carried operational risk, which will compound the fiscal and credit difficulties facing many large urban counties across the U.S.
 

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