Hospital margins and volumes continue to fall as COVID-19 rises

The COVID-19 pandemic continues to be a source of instability for the hospitals, and a peek at October performance shows the extent to which the industry is struggling. Kaufman Hall’s November Flash Report, which examined October performance, shows margins and volumes fell, revenues flattened and expenses rose as coronavirus numbers continued to climb and states moved to reinstate more rigorous social distancing guidelines.

As of October 31, the number of daily U.S. COVID-19 cases reached a high of more than 90,500 and related hospitalizations surpassed 47,400.

Margins have been down consistently since the beginning of the pandemic, though there’s been fluctuation month-to-month. With COVID-19 cases expected to continue to rise throughout the colder months, October’s downturn is expected to continue, emergency approval of a vaccine notwithstanding. 

The pandemic is now intersecting with the seasonal uptick in flu cases, driving many state and local governments, and individuals, to recommit to stricter preventive measures – meaning hospital and health system leaders are bracing for difficult months ahead. Many are delaying nonurgent procedures and outpatient care, which is likely exacerbating volume declines and contributing to the continued destabilization of hospital finances, with future losses expected to rival those seen in March and April.

WHAT’S THE IMPACT?

Eight months into the pandemic, median hospital operating margin remained below 2019 performance, at 2.4{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date through October with CARES Act funding, and -1.6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} without CARES, according to the report. Hospital EBITDA margin Index was 7.3{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date, with the federal aid, and 3.8{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} without.

Compared to 2019, October margins were down but above budget. Operating margins fell almost 70{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date and 9.2{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over-year, but were 5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} above budget, not including CARES funding. Operating EBITDA margin fell 41.6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} and 9.8{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date and year-over-year respectively, but was still 3.1{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} above budget without CARES.

With the federal aid, operating margin fell 18.7{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date and 8.5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over-year, but rose 6.8{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} above margin, while operating EBITDA margin declined 12.8{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} and 8.1{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date and year-over-year, respectively, but was 4.2{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} above budget when factoring in the aid.

Contributing to October’s poor margin performance were rising expenses and an eighth consecutive month of shrinking volumes. Adjusted discharges fell 11.2{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date, 9.3{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over-year and 5.5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} below budget. Adjusted patient days, meanwhile, dipped 7.7{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date and 2.9{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over-year, but were up 1.4{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} above budget, while operating room minutes fell 11.7{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date and 5.6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over-year as patients continued to delay nonurgent procedures.

The area hardest hit was emergency department visits, which fell 16{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, both year-to-date and year-over-year. Hospitals did see month-over-month increases in both ED visits and inpatient volumes, due in part to rising COVID-19 cases. ED visits rose 1.9{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} month-over-month, while discharges were up 7.6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}. Hospital leaders should be prepared to see mounting increases as cases escalate in the months ahead.

Gross operating revenue – not including CARES – also fell 4.8{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date and 1.4{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} below budget, but was flat compared to October 2019 levels – a discouraging sign following year-over-year increases for three of the last four months. Declining outpatient visits were a major contributor, driving outpatient revenue down 6.6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date and 2.6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over-year for the month. Meanwhile, inpatient revenue declined 2.4{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date, but rose 2.6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over-year.

Expenses continued to rise as hospitals replenished staffing levels in light of rising coronavirus cases, and incurred the costs of drugs, personal protective equipment and other supplies needed to ensure safe care. Such increases will put hospitals in a tenuous situation if volumes plummet. Total expense per adjusted discharge rose 13.5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date and 12.2{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over- year in October. Labor expense per adjusted discharge rose 15.2{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-to-date and 10.8{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over-year, as organizations continued to bring back furloughed employees.

Non-labor expense per adjusted discharge rose 13{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, both year-to-date and year-over-year, with purchased service expense per adjusted discharge seeing the biggest increase at 16.9{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} and 18.6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, respectively. Drugs and supplies expense per adjusted discharge continued to rise rapidly at 15.1{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} and 8.9{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over-year, respectively. These expenses will increase further as the severity of patients rises, a trend reflected by the 3.8{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} year-over-year increase in average length of stay.

THE LARGER TREND

The U.S. economy showed some gains in October, with gross domestic product up 7.4{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} from the second to third quarters, following a 9{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} decline between the first and second quarters, Kaufman Hall found. The U.S. unemployment rate dropped to 6.9{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, its lowest level since March. The Federal Reserve kept monetary policy steady with no changes to its bond purchases, promising continued aid to the economy. 

But the failure of Congress to pass another stimulus package is causing many observers to question the economic recovery. U.S. Treasury rates increased in volatility prior to election day, with 30-year rates hitting their highest levels since March, up 0.20{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} month-over-month.
 

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