April was the worst month ever for hospital operating margins

Hospitals' operating margins continued to plummet in April as COVID-19 sunk revenues, new data show.

Hospitals' median operating margin fell to negative 29% in April, dropping 282% relative to last year, according to Kaufman Hall's analysis of around 800 hospitals.

As hospitals delayed non-urgent procedures to manage COVID-19 cases, operating room minutes decreased 61%—more than triple the decline seen in March. That contributed to a 30% decline in total gross revenue, with outpatient revenues taking the biggest hit, falling 50% year over year.

"To have a negative 29% operating margin is the lowest ever by a huge margin," said James Blake, author of the report and managing director of Kaufman Hall.

Discharges fell 30% relative to last year while emergency department visits dropped 43%, stoking providers' concerns that patients, particularly those with serious and chronic conditions, are putting off essential treatment. Estimates range from around 1 in 3 patients to up to 41% who have delayed care during the pandemic.

"As consumer behavior has changed, that has dramatically driven down ED visits as well as any admission through the ED or traditional channels. That combined with all of the outpatient activities that have fallen precipitously has been a double whammy from a revenue basis," said Erik Swanson, vice president at Kaufman Hall.

Those who delay care are worried about contracting the virus or taxing the already stretched healthcare system, or can't afford it. Millions have lost their employer-sponsored coverage as the unemployment rate hovers around 15%, some of whom will qualify for Medicaid.

The lack of consumer confidence, decrease in ED admissions and related downstream procedures in addition to the payer-mix shift will have a cascading impact on the healthcare system, said Jeff Goldsmith, founder and president of consultancy Health Futures.

"There is going to be 40% less revenue per unit of service rendered for Medicaid patients compared to when they were commercially insured," he said. "There is no way on Earth that the additional 6.2 percentage-point increase in federal Medicaid matching funds is going to offset the $100 billion of state revenues that have gone away. There is a Medicaid funding crisis on the back end of this that people need to look out for."

There will be a cumulative budget gap of $765 billion for state governments through the next three fiscal years, the Center on Budget and Policy Priorities, a left-leaning think tank, projects.

The pandemic's economic ripple effect will be wide, experts said. Bad debt and charity care as a percentage of gross revenue increased 4.2% relative to last year, Kaufman data show, which is likely an indicator of consumers' economic instability. There was a secondary economic fallout following the Great Recession that hit when premium subsidies under the Consolidated Omnibus Budget Reconciliation Act's, commonly known as COBRA, premium subsidies expired, Blake noted.

Much of the country's recovery will depend on the $3.6 trillion healthcare economy that accounts for about 18% of the U.S. gross domestic product. Hospitals make up about a third of the healthcare economy.

"Regaining the confidence of the public so they know they are safe coming into the ER, a primary-care office or hospital clinic is a really complex challenge," said Goldsmith, adding that will largely depend on how safe the hospital workforce feels. "If 60% to 70% of admissions come through the emergency department, a 30% decline in ED visits is a huge offset in related admissions. I would bet the recovery of ED volume will take longer than what people think—many months—and that will have a lag effect on admissions."

While total expenses declined 7% in April relative to last year, those decreases did not come close to keeping up with the steep volume declines, according to Kaufman Hall. The total expense per adjusted patient discharge surged 59% over that span.

If hospitals went into this crisis with a fairly meager balance sheet and days cash on hand, they could be fighting two battles—debt covenant violations related to liquidity on top of the COVID-19 crunch, Blake said.

"Some parties will need to take action very quickly and may need to seek partners," he said. "The impacts of reconfiguring the healthcare delivery system will be profound."