Hospital operating margins down 150% from COVID-19

por John R. Fischer, Senior Reporter | April 23, 2020
Hospitals are facing declining patient volumes and revenue, accompanied by flat to rising expenses during and after the COVID-19 pandemic.
The ongoing COVID-19 pandemic has left hospitals with a 150% year-over-year decline in operating margins.

That is one of the many financial losses listed in the most recent edition of Kaufman Hall’s National Hospital Flash Report. The survey reached out to 800 health systems, all of which reported drops in revenue and volume, accompanied by flat-to-rising expenses. Such impacts have led to large marginal decreases over a span of weeks and left many not-for-profit hospitals previously operating on thin margins in high amounts of debt.

“We expect there to be much variation in how hospitals emerge from this crisis,” Mark Grube, managing director of Kaufman Hall, told HCB News. “Many factors — including health of the local economy, financial position before the crisis, and impact of the need to reduce elective and surgical procedures — will determine how much damage any one hospital suffers. Heavily affected organizations may have to seek a partner or other form of support to stabilize their operations.”

Regulations implemented, while helpful in minimizing the spread of the virus, have decreased strong revenue contributors for hospitals, especially the restriction of elective and surgical operations, which balance losses from many other acute care services. Further financial strains have been incurred through expenses for PPE, which has risen in cost and is plagued by price gouging.

In addition to the drops in operating margins, operating EBITDA margins fell by more than 100% year-over-year. Operating margins also fell 170% below budget for the month, with operating room minutes down 20% year-over-year and ED visits dropping 15%. The median hospital occupancy rate was 53% for the month.

Labor expenses rose 3% year-over-year, and non-labor expenses by 1%. Budgeted inpatient revenue fell 13% in March, as did budgeted outpatient revenue by 17%. Bad debt and charity care, in contrast, rose 13% year-over-year.

President Donald J. Trump recently unveiled a three-phase plan that enables hospitals to resume outpatient elective procedures as part of the first phase, and inpatient operations as part of the second.

Grube says hospitals in surge areas are doing their best, and have to be aware of the short-term impacts incurred from decreased revenues and recessionary pressures. They can then model when and to what extent elective procedures can resume.

“Organizations will have to take a close look at their cost structure, and, in many cases, will have to cancel or postpone initiatives with significant capital needs,” he said. “We hope that parties outside the healthcare landscape have an even clearer understanding of the critical role hospitals play in keeping their communities safe and healthy, and offer whatever support they can to the healthcare professionals who are on the front lines of the effort to contain this pandemic.”

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