5 traits of companies succeeding during COVID

The COVID-19 pandemic pummeled the finances of companies across every industry. There were, however, some healthcare companies that remained financially strong despite the crisis, and they share a handful of attributes. Not surprisingly, insurers and providers varied greatly in the traits that helped them stay afloat.

For providers, federal aid ranked as the best boost to bottom and top lines.

Tenet Healthcare, for example, recognized $523 million in federal grant aid during the second quarter, almost six times its $88 million in profit. Community Health Systems recognized $448 million in grants during Q2, far surpassing its $70 million in profit. Providers also derived significant liquidity from the government's advanced Medicare payments, which they have to start repaying this month.

But there are other attributes that helped buoy finances.

Providers with a higher proportion of revenue tied to value-based contracts have, by and large, performed well during the pandemic. That's because the money kept flowing even as volumes dried up.

"We think (providers that are paid for value) they're better positioned for both the new pandemic normal and we think they're also better positioned for the future of American healthcare," said David Morlock, a managing director with Cain Brothers.

Patients of not-for-profit Kaiser Permanente, for example, pay membership fees every month. When California's stay-at-home order took effect May 19, Oakland-based Kaiser didn't see a dip in revenue even after procedures were put on hold, Corporate Treasurer Tom Meier told Modern Healthcare. Kaiser hasn't yet released its second quarter earnings.

That same is true for providers that own insurance plans because even as claims expenses dropped, premium revenue kept flowing.

Electronic health records companies, too, saw dips in revenue from services tied to patient visits. Cerner Corp., Allscripts Healthcare Solutions and NextGen Healthcare all attributed some of their year-over-year revenue declines this quarter to low patient volumes, which affected revenue from some of their subscription- and transaction-based services.

Protecting a company's margin when revenue dries up means slashing expenses, and for-profit hospital chains tend to be better at cutting costs. HCA Healthcare, for example, shrunk its expenses by almost 17% in the second quarter. HCA's profit spiked a remarkable 38% in the quarter even amid the toughest quarter of the pandemic.

Tenet Healthcare cut expenses 11.3% year-over-year in the second quarter, and executives say the changes are permanent. Part of the reason is they use sophisticated analytics into their capacity system-wide to flex staffing up and down as needed and to manage their buying patterns for masks, gowns and other supplies.

A big part of cutting costs has been paring back employee hours, which doesn't necessarily have to involve furloughs or layoffs, said Glenn Melnick, a health economist with University of Southern California. For example, an emergency room physician might go from working five days a week to two, he said. Tenet, for example, said Tuesday it flexed down hours for its ambulatory surgery center physicians by about 65% when the pandemic hit, and is now using algorithms to ramp up staffing as needed.

NextGen Healthcare, a provider of EHR and revenue cycle management software for ambulatory practices, took a few cost-cutting measures amid the pandemic, including temporary voluntary executive salary cuts and suspended matching for 401(k) contributions. The company's revenue was down 0.7% year-over-year.

Successful companies didn't just cut costs; they did so quickly and in a way that was consistent with their forecasted revenue, said Kevin Locke, managing principal with DHG Healthcare. Providers that acted fast to ramp down operationally and clinically to prepare for the pandemic and then back up when procedures reopened fared better, he said. The pandemic is obviously unpredictable, but some providers still modeled several scenarios to prepare.

The larger the company, the better access to capital during the pandemic. Health systems and physician groups that have emerged stronger financially were able to increase their capital and access new capital, Morlock said, and scale enables that.

"We've seen a number of hospitals and health systems that are functionally locked out of access to capital or struggling to deal with debt covenants and receiving pressure from banks, bondholders, lenders," he said.

More broadly, scale with respect to geography and covered lives is important for the shift to population health and delivering care through digital platforms in the coming years, he added. Scale also helps when buying supplies like PPE.

Every provider is going to look to make up their losses next year, and those with more market power will more likely get the big rate increases from commercial insurers they'll undoubtedly ask for, Melnick said. The fact that many providers are seeing more Medicaid and charity care will make treating commercially insured patients even more important, he said.

Providers across the country shut down elective procedures in mid- to late March, regardless of whether they were treating coronavirus patients. Then in May and June, some returned. But if a region saw a spike in cases in July, patients returning for surgeries likely would once again stay home, especially if there was a government mandated shutdown.

As of early August, hospitals in West Virginia, Alaska, and Virginia, for example, were back at 100% of their pre-COVID inpatient volumes, according to an analysis using data from Collective Medical, whereas their counterparts in Oregon, Washington state and California were still running at 90%.

Health insurers with membership concentrated in COVID-19 hotspots were more likely to incur large coronavirus-related medical claims that could counteract less utilization of other types of healthcare services during the shutdown. However, insurers with a national footprint have been better able to absorb large medical claims, offsetting those expenses by lower COVID-related claims and reduced health utilization in other parts of the country.

The economic downturn is expected to reduce health insurers' commercial membership, as laid off workers lose their job-based health insurance. Commercial insurers that also hold managed Medicaid contracts in a number of states, or that participate on the Affordable Care Act exchanges, will be better positioned to capture those jobless members as they transition to Medicaid or marketplace coverage. In some cases, health insurers could make even more revenue from Medicaid members than they do from those formerly enrolled in self-funded employer plans, which pay fees to insurers to administer their benefits.

In others, "the shift in business mix will hurt margins for some insurers since Medicaid margins are generally lower than the commercial/group business," according to a July S&P Global report.