Hospital Operating Margins Dropped As COVID-19 Started to Spread

April 28, 2020 - US hospitals are suffering from financial damage as a result of the COVID-19 pandemic, according to a new report from healthcare consulting firm Kaufman Hall.

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The report on the financial performance of more than 800 hospitals in March 2020 showed that hospital operating margins declined by 150 percent year-over-year, falling 170 percent below budget for the month.

Earnings before interest, taxes, and amortization (EBITA) operating margins also fell by more than 100 percent year-over-year as patient volumes and revenues across the board significantly declined in a matter of two to three weeks.

At the same time, hospitals incurred expenses of building staff, supplies, and capacity, which caused labor and non-labor expenses to increase by three and one percent year-over-year, respectively.

“The data paints a dire picture for US hospitals,” stated Jim Blake, managing director at Kaufman Hall. “While the nation is relying heavily on our healthcare system, the COVID-19 response actions are having a devastating financial impact on these organizations. These initial numbers only reflect the first two weeks of the COVID-19 response and likely indicate more negative results in the future.”

The US has had confirmed cases of COVID-19 since January, but March was the month when the number of cases started to rise exponentially each day. According to data from the CDC, there were 30 cases of COVID-19 in the US on March 1. That number rose to 163,539 cases by March 30.

Hospitals had to prepare for the sudden spike in COVID-19 cases, including canceling elective, non-emergent procedures and freeing up capacity for patients with the novel coronavirus. But these preparations came with a price, according to financial performance data.

Nearly half of the nation’s hospital beds sat empty in March, Kaufman Hall reported. The median occupancy rate was 53 percent, down from 65 percent in March 2019.

In March 2020, hospitals also saw decreases in year-over-year discharges by 11 percent, adjusted discharges by 13 percent, and adjusted patient days by 15 percent. Emergency department visits also declined by 15 percent year-over-year as people stayed home or avoided care to reduce the risks of exposure, the report stated.

Lower volumes resulted in significant revenue blows. March revenues fell by 13 percent compared to the same period last year and were substantially below budget expectations, with inpatient revenue falling 13 percent below budget and outpatient revenue being 17 percent below budget.

At the same time, bad debt and charity increased by 13 percent year-over-year as unemployment rates skyrocketed by the end of the month.

Hospital expenses also significantly increased despite lower patient volumes.

“This stark imbalance illustrates that hospitals were unable to reduce expenses as they maintained front-line caregivers in anticipation of mounting COVID-19 cases, and retained additional staff to cover caregivers who may become infected,” the report stated.

“Organizations also incurred added expenses to maintain and expand inventories of drugs, supplies, equipment, and capacity in preparation for a surge,” the authors wrote.

Some hospitals have struggled to maintain balance, with many furloughing staff and cutting provider compensation to remain open. The number of hospitals taking these measures is likely to rise, financial performance data indicated.

“This is just the beginning,” authors at Kaufman Hall wrote. “For many hospitals, the volume and revenue impacts primarily hit the last two weeks of March – showing just how quickly the pandemic is upending the industry.”

They anticipate even more dramatic change in the coming months, as hospitals encounter the effects of COVID-19 over extended periods.