Latest financial metrics indicate continuing challenges for hospitals

As COVID-19 hospitalizations increased, some volumes took a hit and margins remained tight.

Newly released data illustrate the potentially adverse impact of the latest COVID-19 resurgence on hospital finances.

“Steep increases in COVID-19 cases and hospitalizations spurred by rapid spread of the highly contagious delta variant drove setbacks for U.S. hospitals and health systems in July,” Kaufman Hall wrote in its most recent Hospital Flash Report.

Margins and volumes continued to trail 2019 levels, the report finds, while higher revenues were negated by mounting expenses. And those trends are likely to continue: “The data suggest that some healthcare consumers once again are postponing elective procedures and other outpatient care due to concerns of possible exposure to the virus,” the report states.

Indications of more volume impacts

Amid positive trends seen in June, there were questions about whether the upswing could last during another COVID-19 surge. The delta variant of the coronavirus has caused caseloads to skyrocket in some parts of the country, with the seven-day rolling average of COVID-19 hospitalizations nationwide rising by 256% from the beginning to the end of July.

As it has since the beginning, the pandemic affected hospitals’ overall case mix. Inpatient discharges for the year to date (YTD) were 9.2% lower than for the comparable period in 2019, according to the report. Adjusted discharges were down 3.9%.

However, a dramatic impact wasn’t necessarily seen in changes from June to July. For example, adjusted discharges stayed flat, while adjusted patient days rose by 0.5% and ED visits by 4.1%. A big drop-off from June was seen in surgeries, with OR minutes falling by 5.9%.

Margins tight thanks to high expenses

YTD operating margin — when excluding revenue from CARES Act distributions such as the Provider Relief Fund and Medicare advance payments — rose from 2.8% in June to 3.2% in July, while YTD operating EBIDTA margin rose from 7.4% to 7.7%.

But recovery to pre-pandemic levels seems a ways off. On a YTD basis, the metrics show declines of 7% in operating margin and 8.3% in operating EBITDA margin compared with 2019. An underlying factor is “rising expenses for higher-acuity cases, including COVID-19 patients,” the report states. YTD operating margin did rise by 1% compared with 2019 when CARES Act distributions were factored in, while operating EBITDA margin was 2% lower.

“Hospitals in the South experienced the greatest year-over-year drop in margins, driven by high rates of the delta variant in the region,” the report states. “The Midwest had the second-largest drop in margins as the delta variant and patient confidence declines spread through the country’s heartland.”

Gross operating revenue when discounting CARES Act allocations remained flat from June to July. Inpatient revenue rose by 4.2%, but outpatient revenue fell by 1.9%. “The drop signals a break in growth trends seen in outpatient care in recent months, potentially reflecting the initial impacts of patients delaying elective care due to the delta variant,” the report states.

On the expense side, labor costs increased by 2.8% compared with June and were up by 7.5% YTD — and by 9.3% compared with the first seven months of 2019. Nonlabor expenses fell by 1.3% from June but were up by 8.3% both YTD and relative to January-July 2019. The report cites higher drug costs as a key factor.

Challenges likely to linger

Best projections suggest hospitals should prepare for a continued downturn in financials, according to the report: “Looking ahead to the coming months, hospitals likely will face additional setbacks with ongoing spread of the delta variant as schools reopen and cooler weather drives more activities indoors in the fall.”