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Hospital operating margins down 96% since start of 2020

by John R. Fischer, Senior Reporter | August 25, 2020
Business Affairs
Hospital margins improved month-over-month but continued to decline year-over-year.
Hospital operating margins have dropped 96% since the beginning of 2020 compared to the first seven months of 2019, according to a Kaufman Hall’s National Hospital Flash Report.

The impact of the ongoing COVID-19 pandemic has left operating margins far below their 2019 figures. Even when factoring in the Coronavirus Aid, Relief and Economic Security (CARES) Act, they are still 28% below their January-July 2019 numbers on a year-to-date (YTD) basis.

"Hospitals across the U.S. have responded heroically to COVID-19, with a laser focus on treating infected patients and keeping their staff and communities safe," Jim Blake, managing director of Kaufman Hall and author of the August Hospital Flash Report, told HCB News. "As we learn more about the revenue shock that hospitals are experiencing, it's apparent that recovering from that shock will also require a rethinking of hospital operations."

Margins fell 2% year-over-year (YOY) in July without the CARES Act relief. Hospitals experienced flat YOY gross revenue performance, continued high per-patient expenses, and had a fifth consecutive month of volumes falling below 2019 performance and below budget.

While July volumes continued falling year-over-year, some signs of improvement were seen month-over-month (MOM) Hospital operating margins rose by 24% from June to July, likely due to a backlog in demand derived from the shutdown of many non-urgent services in the early months of the pandemic. Adjusted discharges were down 7% compared to July 2019, but went up 6% from June. In addition, adjusted patient days were down 4% YOY, but up 7% MOM.

Adjusted discharges were down 13% and adjusted patient days were also down 11% since the start of 2020, compared to the first seven months of 2019. The hardest hit area for hospitals was the ED, where volumes fell 17% YTD compared to the same time in 2019, and were down 17% YOY and 13% below budget in July. While some gains were seen in surgery volumes due to the continued resumption of non-urgent procedures pushing operating room minutes up 3% MOM and 4% above budget in July, they still remained down 15% YTD.

Gross Operating revenues were essentially flat YOY and 2% below budget for the month when not excluding CARES Act relief. They have fallen 8% YTD compared to the same time in 2019. Inpatient revenue has dropped 5% YTD and 3% below budget in July. It did, however, increase 1% YOY. Outpatient revenue is down 11% YTD, 1% YOY, and 2% below budget.

Hospitals across the country also continue to see higher per-patient expenses despite having fewer patients. Total Expense per Adjusted Discharge jumped 16% YTD, compared to the same seven-month period in 2019, and grew 9% YOY and 5% above budget in July. Labor Expense per Adjusted Discharge also went up 18% YTD and rose 9% YOY and 5% above budget for the month. Non-Labor Expense per Adjusted Discharge went up 15% in the first seven months of 2020 and jumped 11% YOY and 5% above budget for the month.

Blake says the findings here show that hospital leaders must proactively identify and act on lessons learned from their initial clinical responses as they face an uncertain fall and winter pandemic outlook. This may mean standardizing effective processes, and reconfiguring facilities for greater safety to realign services and meet consumer demand. It could also mean for some hospitals looking into options such as mergers and acquisitions to prevent closures brought on by financial hardship.

"The financial fallout that hospitals have experienced in recent months appears anecdotally to be increasing M&A activity," said Blake. "If anything, the pandemic has demonstrated advantages of scale, coordination, and innovation that are likely to strengthen the strategic rationale for future partnerships. On the other end of the spectrum, we expect an increasing number of restructuring, distressed, and bankrupt hospitals. As a result, we do anticipate a significant uptick in M&A activity to be just ahead of us."

The National Hospital Flash Report is based on data supplied by more than 800 hospitals.

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