The financial crunch of the pandemic is unlikely to subside anytime soon for hospitals

• A leading credit-rating agency says the not-for-profit hospital sector will continue to face significant headwinds for the rest of this year and beyond.
• Strong balance sheets are serving as a bulwark against further deterioration of providers’ financial positions.
• Medicare revenue is being adversely impacted.
• With no additional federal stimulus money on the horizon, hospitals are losing a key source of support.

New analyses suggest the COVID-19 pandemic’s financial and operational toll on the hospital sector won’t soon be alleviated.

A recent special report from Fitch Ratings noted the “mounting operating stress” facing not-for-profit (NFP) hospitals and health systems, especially in the likely event that COVID-19 spikes continue periodically.

“High staffing [and] supply costs and pauses in elective procedures during coronavirus surges are expected to be the sector’s ‘new normal,’” the report states.

Some of those concerns were manifested in Kaufman Hall’s latest monthly report on hospital finances. The median hospital margin for April was -3.09%, according to the firm’s index, marking the fourth consecutive month that margins were in the red.

“The first four months of 2022 have been challenging for the nation’s hospitals and health systems, which has been borne out in the losses many providers have reported so far this year. Even if margins return to pre-pandemic levels, many hospitals may likely end the year with substantially depressed margins,” Erik Swanson, senior vice president for data and analytics with Kaufman Hall, said in a news release.

Strong balance sheets but daunting challenges

The anticipated concerns for the remainder of 2022 and beyond stem in part from the absence of federal stimulus funding now that the Provider Relief Fund (PRF) is out of money.

“The entire burden of any business interruption and negative margin impact is now borne fully by providers,” Fitch wrote. “NFP healthcare is a low-margin sector, and Fitch Ratings expects operating margins will weaken in 2022.”

Acknowledging the strong balance sheets of many providers, Fitch said it doesn’t anticipate “any significant deterioration of rated healthcare providers’ financial positions at this time.” The agency is maintaining a sector outlook of neutral.

However, “another omicron-like surge this fall/winter may see this cushion materially eroded and signal the beginning of downward rating momentum across the sector.”

Along with the absence of relief funding, hospitals also are coping with reductions in Medicare revenue through:

• The reinstatement of the sequester, which has been shaving 1% off all providers’ Medicare payments since April 1 and will increase to 2% on July 1
• The repayment of Medicare loans, with recoupment having increased to 50% of Medicare payments for providers that received advance payments near the beginning of the pandemic and have yet to pay them back

The pivotal role of the PRF

The importance of federal relief funding was illustrated by a newly published study that examined the pandemic’s early impact on hospital financial viability.

Reporting in JAMA Health Forum, researchers with Johns Hopkins found that in 2020, mean operating margin declined from -1% to -7.4% for hospitals with fiscal years beginning in January. However, profits remained stable compared with prior years.

These results suggest that “the COVID-19 relief fund effectively offset the financial losses for hospitals,” the researchers wrote.

In addition, “Government, rural and smaller hospitals, which were supported by some targeted fund allocations, generated higher overall profit margins during 2020 than in prior years.” For example, profit margins increased from 1.9% in 2019 to 7.5% in 2020 for rural hospitals and from 3.5% to 6.7% for smaller hospitals, according to the study.

However, hospitals have not had the same type of help during the more recent stages of the pandemic. The latest — and apparently final — distribution from the $178 billion PRF was associated with pandemic-related expenses and revenue losses that were incurred from mid-2020 through March 2021. Thus, hospitals have not received financial assistance in response to at least two major waves of infection that have hit since then.

“The lack of PRF dollars to address issues wrought by these surges has left many hospitals facing overwhelming financial and operational challenges,” the American Hospital Association wrote in a March letter to congressional leaders.

What’s more, hospitals that received PRF payments during the first half of 2021 have until only June 30, 2022, to use those funds. Any unspent money must be returned to the federal government.

Hospital advocacy groups have implored Congress to apportion additional funds, but that request is unlikely to be heeded. Even a $10 billion package that would bolster the country’s supplies of COVID-19 vaccines, therapeutics and tests has been stalled since March amid political wrangling over immigration-related issues.