Hospital margins positive in May due to temporary federal boost, report finds

• Hospitals’ median operating margins reached 4% in May.
• Margins are expected to slide again after the influx of federal assistance ends.
• Amid some volume recovery, hospitals scaled back expense cuts.

The influx of federal assistance in the spring was sufficient to push hospitals’ median margins into positive territory in May, a sharp improvement from -13% margins in April.

Hospitals’ median operating margins reached 4% in May with the help of more than $50 billion in funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, according to a monthly tracking report of more than 800 hospitals by Kaufman Hall. The report concludes that hospitals would have had -8% median margins that month without the federal grants.

“It should be noted, however, that the vast majority of hospitals that received CARES funding recorded the entire amount across April and May — reflecting the short-term nature of the relief, unless Congress issues additional funding,” the report states.

Findings on hospital revenue included:

• Total gross revenue increased by 29% from April but decreased 14% from May 2019
• Outpatient revenue increased by 39% during May but decreased by 27% year over year
• Inpatient revenue increased by 19% during May but decreased by 12% year-over-year

The revenue impact of federal assistance also was seen in the for-profit hospitals tracked by Moody’s Investors Services.

“In the US, for-profit hospitals currently have unusually strong liquidity to help them weather the effects of the revenue loss associated with canceled or postponed procedures,” the ratings agency noted in a June 18 report (subscription required). “This is largely due to the CARES Act and other government financial relief programs that have caused hospital cash balances to swell.”

CARES developments includes changes in reporting requirement

Among recent changes in CARES Act guidance was the decision by HHS to suspend requirements for recipients to submit separate quarterly reports, due July 10, to HHS and the Pandemic Response Accountability Committee. Instead, HHS will develop and post a report containing all information necessary for recipients to comply with CARES Act reporting requirements.

However, HHS will require recipients to submit “future reports relating to the recipient’s use” of CARES funding, according to a recent HHS FAQ.

“HHS will notify recipients of the content and due date(s) of such reports in the coming weeks,” the FAQ states.

Providers remain unclear on what will be required in those future reports, said Dave Macke, a shareholder with the VonLehman CPA and advisory firm. HHS’s definitions for expenses and lost revenue related to the coronavirus remain “very broad,” he said in an interview.

Other sources of confusion include the FAQ’s reference to “expense-type items” as an example of “lost revenue,” he said.

Defining lost revenue will require “looking at trend lines, as far as inpatient days and things of that nature, on the hospital side,” Macke said.

Report also details volume, expense trends

The Kaufman Hall tracking report also found volumes increased month-over-month in May but remained far lower on a year-to-year basis and compared to 2020 budgeted levels across most measures. Volume findings included:

• 30% increase in adjusted discharges month-over-month
• 27% decrease in adjusted discharges year-over-year
• 28% increase in adjusted patient days month-over-month
• 23% decrease in adjusted patient days year-over-year

Operating room minutes decreased by 29% from the same period last year and were 32% below budget. Emergency department (ED) visits increased by 22% from April but were 33% lower both year-over-year and compared to budget.

Widely varying volume recovery was seen across the Yale-New Haven Health System, said Christopher O’Connor, executive vice president and COO.

For instance, the health system’s physician group, Northeast Medical Group, has reached only about 75% of its pre-COVID-19 patient volumes, but hospital volumes range from 85% to 96% of pre-pandemic levels.

“We may be at 96% of pre-COVID activity, but we’re not at 96% of pre-COVID revenue, for instance,” O’Connor said in an interview.

The financial challenges include an increasing amount of bad debt stemming from patients who have high-deductible health plans and are unable to pay the out-of-pocket costs.

Kaufman Hall found hospitals have responded to financial losses through expense reductions, including “furloughs and other aggressive cost control actions.”

Expense findings for May included:

• 6% decrease in total expenses year-over-year
• 1% increase in expenses from April
• 3% decrease in total labor expenses year-over-year
• 2% increase in total labor expenses from April
• 7% decrease in total non-labor expenses year-over-year