Financial and operational challenges still hamper hospitals 2.5 years into the pandemic

• A leading credit-rating agency painted a pessimistic financial picture for not-for-profit hospitals.
• Two new reports highlight the extent to which hospitals still are grappling with deferred care.
• As the challenges linger, federal financial support has waned.

Even as much of society takes steps toward pre-pandemic normalcy, hospitals continue to struggle under the weight of the last two and a half years.

The challenges were encapsulated in Fitch’s mid-year outlook for not-for-profit hospitals and health systems. The sector’s outlook is “deteriorating,” according to the report.

“Fitch expects that sector conditions will remain challenged for the remainder of 2022, as labor pressures and generationally elevated inflation compress margins for most providers,” the report states. “These macro headwinds were noted heading into 2022 and have been more pronounced than expected (compounded by investment losses driven by asset price corrections).”

Hospital medians for 2022 are “deceptively strong,” according to Fitch, with cash-to-adjusted-debt increasing from the prior year by 20% for AA-rated hospitals and 8% for BBB-rated hospitals. Because the relevant data are from 2021, “Fitch expects to see hospital medians reverse course this time next year.”

Operating margins during the remainder of 2022 “will continue to reflect ongoing pressures,” per the report.

Illustrating that point, Kaufman Hall’s latest monthly report found that in June, the hospital sector’s median operating margin improved by 18.8% from May but still was down by 29.9% year over year. Labor costs remained a big factor in the compressed margins, with labor expense per adjusted discharge having increased by 13.4% year to date even as it decreased by 4.8% from May.

“Even if macro inflation cools, labor expenses may be reset at a permanently higher level for the rest of 2022 and likely well beyond,” Kevin Holloran, senior director with Fitch, said in a news release.

A potential consequence is that “many” hospitals will violate debt service coverage covenants, adding to the likelihood of rating downgrades, Fitch said.

“While Fitch does not expect en masse downgrades across the sector, a period in which downgrades and negative outlooks outpace upgrades and positive outlooks is anticipated,” the report states.

Deferred care remains an albatross

As HFMA reported in late 2020 and earlier this year, hospitals also continue to grapple with the fallout from care deferrals stretching back to the start of the pandemic.

The American Hospital Association (AHA) issued a new report quantifying the rise in patient acuity stemming from delayed and avoided care. Drawing on data from Kaufman Hall, the report found that average length of stay (ALOS) was 9.9% higher in 2021 than in 2019.

When looking only at the Medicare fee-for-service population, the report found a 10% increase in ALOS and a 7% increase in case mix index. Those increases were 6% and 5%, respectively, when limiting the sample to patients who were hospitalized for reasons other than COVID-19.

The increased acuity manifested in conditions that could have been caught in routine screenings. Citing data from Strata Decision Technology, the report stated that between 2019 and 2022, CMI increased by:

• 15% for appendectomies
• 11.1% for mastectomies
• 7% for hysterectomies

And condition-specific ALOS increases between 2019 and 2021 included:

• 89% for rheumatoid arthritis
• 65% for neuroblastoma and adrenal cancer
• 16% for prostate cancer
• 11% for hepatitis
• 10% for Hodgkin’s lymphoma

“The rise in patient acuity has been a driver of increases in labor, drug and supply costs for hospitals, creating unsustainable financial challenges,” the report states.

Surgery volumes still lag

A separate report shows that, at least for one hospital, many types of surgical procedures remained below pre-pandemic volumes at the end of 2021.

For a study published in JAMA Network Open, researchers with Massachusetts General Hospital examined trends in their organization’s surgery schedules from 2019 through 2021. At the end of that period, only some subspecialties had recovered to 2019 levels.

“We found insufficient recovery in cardiac surgery [88.8%], general surgery [91.3%], urology [81.8%], orthopedic surgery [93.9%], surgical oncology [84.2%] and thoracic surgery procedures [92.3%],” the researchers wrote.

The shortfalls “could be associated with department-specific differences in barriers to increasing surgery volumes, such as workforce shortages and facility capacities, and operating room turnover times. There may also be a lasting effect from reduced imaging volumes throughout the pandemic.”

Beyond affecting revenue in a relatively high-margin area of operation, the volume shortfall has implications for population health.

“These declines suggest that delays in surgical procedures may result in potentially higher morbidity rates in the future,” the researchers wrote.

For example, they cited data showing that 12% of patients on the waiting list for cardiac surgery experience a myocardial infarction.

“Although the pandemic may subside in the coming months, our data reveal that health delivery systems in the U.S. must prepare for a quickly advancing wave of surgical need,” they wrote.

A plea for help

Increasing costs are an obvious drag on efforts to care for higher-acuity patients, especially as hospitals scramble to fill out their clinical staffs. Thus, the AHA used its report to lobby for federal financial support.

Provider Relief Fund payments ended early this year, with none of the four phases of general-distribution payments allocated to cover losses arising from the COVID-19 surges that have taken place since March 2021.

While any renewal of such funding is unlikely in the current Congress, which earlier this year could not muster the votes merely to continue subsidizing COVID-19 testing and treatment supplies, the AHA hopes steps can be taken to:

• Halt Medicare payment cuts
• Extend or make permanent pandemic-era waivers that have bolstered care efficiency and access
• Hold health plans accountable for “improper business practices, especially those that take caregivers away from the bedside to deal with burdensome administrative hurdles”