Hospitals' operating margins plummeted in March, forecasting an expected prolonged financial decline as providers battle COVID-19, analysts said.
Hospitals' median operating margins fell 150% to negative 8% in March, dropping 14 percentage points relative to last year, according to a new report from Kaufman Hall. A 20% decline in operating room minutes, in part, sunk revenue by 13% as providers postponed elective procedures like non-urgent heart surgeries and joint replacements to free capacity for coronavirus patients.
Hospitals' already-thin margins plunged into the red as volumes and revenue fell and organizations prepared staff, supplies and capacity for a surge of coronavirus patients, said James Blake, author of the report and managing director of Kaufman Hall.
"We anticipate April will be significantly worse, and at this point, no one knows how long hospitals will continue on their current path," he wrote in the report, noting that the volume and revenue declines primarily hit the last two weeks in March, showing just how quickly the pandemic upended the industry.
The Northeast/mid-Atlantic region took the biggest hit as it saw the steepest drops in surgery volumes, exacerbated by higher-than-average expenses. While operating margins dropped further at hospitals with more than 500 beds, the impact will likely be more severe on the resource-constrained smaller hospitals, according to the report.
Beaumont Health, an eight-hospital system based in Southfield, Mich., reported a $278.4 million loss in the first quarter, a $407.5 million decrease in revenue from the first quarter of 2019. Beaumont Health said its $5 billion in annual revenue could drop to $3 billion to $4 billion as it cut most surgeries, imaging and other services.
This has prompted Beaumont and other health systems across the country to furlough employees and cut expenses not related to COVID-19.
"The 20% to 40% drop in our revenue can in no way be absorbed by our 4% operating margin and cash reserves," Beaumont CEO John Fox wrote an op-ed for Modern Healthcare. "That missing revenue is critical cash needed to meet our payroll of 38,000 healthcare employees every two weeks."
Analysts from J.P. Morgan Securities expect the revenue hit to be even more severe, forecasting a 40% to 60% dent in revenue. So much of hospital revenue is tied up in commercially insured elective procedures, said Jeff Goldsmith, founder and president of consultancy Health Futures.
"Cash flow declines will likely be a lot worse than 25% to 40%," he said.
The median occupancy rate was 53% in March, down from 65% in March 2019, according to the Kaufman Hall report. Year-over-year discharges decreased 11%, adjusted discharges fell 13%, adjusted patient days fell 15 and ED visits dropped 15%.
Even though hospitals saw fewer patients, expenses were either flat or up slightly for the month, with total labor expense up 3% year-over-year and total non-labor expense up 1%.
Meanwhile, bad debt and charity care rose 13% year-over-year—increases that likely will accelerate in coming months as people lose coverage due to the economic slowdown, Kaufman Hall analysts said.
For most hospitals, new COVID-19 revenue won't backfill the loss of elective treatment, said Christopher Kerns, vice president of executive insights at Advisory Board, who modeled a moderate COVID-19 scenario for a 1,000-bed system that treats 2,000 COVID-19 patients over three months.
The $31 million in COVID-19-related revenue would only partially offset a $143 million loss in revenue related to canceled elective procedures. Nonelective procedures like flu-related and cardiology interventions are also on the decline, which could lead to higher-intensity care as these procedures are delayed, Advisory Board noted.
"The only scenario we have seen hospitals become cash-flow positive during this crisis is if they see a major outbreak with huge increases in overall admissions and high degrees and high rates of complexity within their facilities. Even then, it barely makes them whole," Kerns said in a webinar Friday. "That is not going to be the case for the vast majority of facilities in the U.S."