U.S. Hospitals See 120% Operating Margin Drop Since March As COVID Thrives

06/23/2020
CODIV-19 US Hospitals

The coronavirus continues to be deadly for hospital margins as the medical field feels the effect of the first full month of the pandemic’s impact on the economy. According to a Kaufman Hall report published on Thursday, May 21, 2020, hospitals in the United States saw their operating EBITDA margins drop 174% from April of 2019 and 118% from March of this year. The report was based on April data from more than 800 hospitals that continue to suffer from a drastic decline in surgeries, outpatient appointments, and emergency room visits as medical centers focus on treating COVID-19 patients. The report also indicated that operating margins dropped 282% from last year and 120% when compared to March. The Kaufman Hall Hospital Operating Margin index indicated that the median hospital operating margins fell to -29%.

Key findings:

  • Median operating margin and operating EBITDA margin dropped to -19% and -19% respectively for April
  • Operating EBITDA margins dropped 174% compared to last year and 118% compared to March while operating margins dropped  282% from last year and 120% compared to March
  • Median national hospital operating EBITDA margin dropped from 6.5% in February to -5% in March and -19% in April
  • Many hospitals are unable to resume elective procedures in April after being shut down in March due to the COVID pandemic, causing yearly volumes to decline more than double
  • Operating room minutes dropped 61% compared to April 2019, discharges dropped 30% from last year, and emergency department visits decreased by 43% while outpatient revenues dropped 50% and 51% below budget and inpatient revenue declines 25% yearly and 30% below budget
  • Larger hospitals with up to 499 beds saw the greatest decline with 230% since last year and a 227% budget decline due to having the steepest amount of volume declines among higher expenses. Hospitals with up to 99 beds had the greatest real decline in operating EBITDA margins compared to last year while hospitals with beds of 500 or more had a decrease of about 147% from last year

April’s drastic drop comes after a challenging March when hospitals first started to see the effects of the pandemic. It was right around mid-March when volumes started to decline across the board. According to the report, operating room minutes dropped 61% compared to April of 2019, which was more than triple the amount of decline that hospitals saw the month before. Additionally, discharges dropped 30% since last year and emergency department visits declined 43%. Outpatient revenues decreased 50% year-over-year and dropped 51% below budget. Meanwhile, inpatient revenues dropped 25% from last year and dropped 30% below budget.

The steep losses that occurred in April were due to aggressive efforts among hospitals trying to cut costs. Even though hospitals are looking to resume their non-urgent procedures, they are unsure when this will happen as COVID-19 is still spreading fast across the United States. The report found that almost 40% of patients feel uncomfortable seeking treatment at hospitals as the virus remains unpredictable. In addition to the financial drop, experts predict that a revenue and volume shock this large will cause major changes in how healthcare is provided in the future. Healthcare experts are working on sophisticated plans to aid financial recovery and deal with the pandemic’s financial repercussions. However, they must also figure out how to manage post-COVID care and what role healthcare organizations need to play. The following is a list of challenges hospitals and healthcare organizations must address due to the COVID pandemic:

  • Competitive dynamics, including how organizations of different capabilities and scales must position themselves for post-COVID treatment
  • Cost structure, including how organizations should seek to regain financial stability despite huge revenue losses and possible permanent changes in the healthcare field
  • Cost models, including how to deal with the rise in telehealth and meeting other new needs in the treatment of infectious diseases

April’s devastating results clarify the complex situation that hospitals are in. It also shows the potential magnitude of what changes are needed going forward. It will be important to look at data in the upcoming months to shape these decisions and understand the challenges ahead. Hospitals in the Midwest were the hardest hit with operating EBITDA margins down by 327% since last year. This area was 300% below budget expectations. The Kaufman report indicated that these changes were due to volume decreases among discharges, adjusted patient days, adjusted discharges, and the highest year-over-year increases seen among all measures. Yearly results for the other regions in the United States declined from ranges of about 101% to 174%.


Hospitals Face New Challenges As They Prepare To Return To Normal

With outpatient revenue down 50% and inpatient revenues down 25%, and expenses remaining incredibly high, hospitals are not able to catch a break. According to the Kaufman report, total expenses per adjusted discharge rose 60% from last year. A reportthat was put out by Guidehouse found that hospital executives have a long, challenging road ahead of them to recovery from the COVID pandemic. According to the report, half of the 174 executives surveyed stated that they think it will take at least through the end of the year until pre-pandemic procedures and levels will return. The report also found that only one in five executives believe that their organizations will return to primary onsite work.

These results come after disastrous effects of the pandemic continue to challenge hospital finances in the United States. First quarter reports from both nonprofit and for-profit systems indicated major declines in revenue and volume. Kaufman’s report indicated that hospitals may face even worse numbers during the second quarter as the metrics fell even further in April. According to the report’s authors, there may be a domino effect on the nation’s economy if these trends continue and the impact on the general healthcare system could be catastrophic. Some hospitals are putting their return procedures on hold as they make space for COVID-19 patients. However, the report also indicates that some patients are still scared of going to a hospital for non-emergency care due to the risk of catching COVID-19. The number of operating minutes in April was down more than 60% and adjusted patient dates and discharges decreased by approximately 40%.

Is Telemedicine The Future Of Healthcare?

Many healthcare providers have turned to providing telemedicine appointments. This trend could continue to flourish even as the pandemic becomes less pronounced. According to the Guidehouse report, approximately 67% of healthcare executives stated that their facilities may use telehealth at least five times as much as they did before the pandemic. However, approximately one-third of executives stated that they do not have the equipment they need to provide telemedicine as a service to their patients. So far, Congress has approved $175 billion to healthcare organizations to help deal with costs associated with the COVID spread. However, additional help seems to be postponed, at least for now, as hospitals and medical centers insist that more funds are needed.

Approximately 70% of the healthcare leaders surveyed in the Guidehouse report stated that federal funding doesn’t cover the additional costs acquired from the COVID-19’s impact, but it helps a little bit. Another 20% of executives stated that federal funding covers most of the new financial needs and 11% stated that it will be enough. Approximately 70% of executives stated that the pandemic does not change their plans going forward. As far as cost reduction strategies, executives reported that they were most likely to cut capital expenditures followed by labor and purchasing services. Digital and service line strategies topped the list of revenue growth opportunities.

Recovery Rates Are Slower Than Expected, Due To The US Economy

Hospitals and medical centers are having a hard time bouncing back from the pandemic because expenses have remained so high when compared to the lower number of patients they have seen. The total expense per adjusted discharge increased 59% from last year while labor expense per adjusted discharge was up 63% and non-labor expense per adjusted discharge increased 58%. However, total expenses declined slightly, and these decreases were nowhere near close to keeping up with the steep decreases in volume. This suggests that although hospitals are trying to reduce their costs by mass furloughs, pay cuts for executives, and other measures, these efforts have not been able to make up for lost volumes.

According to the Kaufman report, in regards to non-operating performance, the market saw a quick recovery in April. This brought hopes that COVID-19’s impact would not be as severe as originally thought after a historic decline in March. However, the United States economy continued to decline with more than 30 million unemployment claims filed in early May. Many businesses remained closed throughout the pandemic and decided not to reopen. In April, nearly $4 billion in municipal funds were distributed to continue March’s withdrawal streak. According to the ISM purchasing manager index, which represents economic indicators of manufacturing and sector services, there was a 41.5% increase in April. This represents a steep contraction as economic uncertainties remain. According to Fed Chairman Jerome Powell, the recovery will likely come at a slower rate than healthcare professionals would like.

You can access the full impact of COVID-19 on hospitals in April of 2020 by viewing the National Hospital Flash Report here.