Hospitals face an uncertain financial future

When it comes to keeping Wilmington Health afloat, every option is on the table.

CEO Jeff James said he might eventually need to sell the North Carolina multispecialty practice’s properties and lease them back. Worst-case scenario: He might eventually need to sell the practice.

“We plan on surviving this,” he said. “We just don’t know what it’s going to look like on the other side. We’re going to keep our doors open as long as we possibly can.”

Once they stopped performing elective procedures in mid-March, providers of all types and sizes liken their revenue trajectory to a car going off a cliff. The damage came swiftly, and even their best cost-cutting efforts and billions in government aid weren’t enough to stop the bleeding.

“It’s really stunning and remarkable how quickly the revenue flow dissipated over the course of just several days, frankly,” said Tim Weir, CEO of Olmsted Medical Center, a one-hospital system in Rochester, Minn., that anticipates a $25 million revenue decline over the months of April, May and June.

The sharp revenue decline coupled with the higher costs of labor, supplies and treatment for COVID-19 patients will culminate in hospitals losing a collective $202.6 billion from March 1 to June 30, according to an estimate from the American Hospital Association.

Revenue was more than halved for 40% of health systems that responded to an American Medical Group Association survey conducted in mid-April. Another 55% of respondents had less than six months cash on hand. More than 80% of systems had furloughed employees and three-quarters had cut physician salaries.

Among independent medical groups, like Wilmington Health, things are even more dire. Almost half told the AMGA they’d lost more than half of their monthly revenue in the first quarter, and almost all had cut physician pay. Sixty percent said their cash reserves will run out within two months.

Wilmington Health, North Carolina’s largest multi- specialty physician group, saw revenue drop 53% from the outbreak's onset through mid-April, James said. At that time, the practice had about eight weeks of reserves.

Grant funds that Wilmington Health received from the CARES Act worked out to about $12,000 per physician, which James said doesn’t even come close to covering the cost of overhead.

“Twelve thousand dollars per doctor is literally nothing,” he said.

The full extent of the damage depends on several unknowns. The most important is how long it will take to ramp up elective procedures to their pre-pandemic volumes. Some healthcare providers are banking on a wave of pent-up demand and are rolling out marketing campaigns aimed at ensuring patients it’s safe to come back. Dallas-based Tenet Healthcare Corp., which operates 65 hospitals, is focusing its messaging on the safety of its emergency departments. The for-profit company said as its surgery centers resume procedures, they’re seeing about 40% of their pre-pandemic cases.

Leaders with fellow for-profit hospital chain Community Health Systems said they were similarly encouraged by early volumes as they resume elective procedures.

That’s welcome news, as CHS’ surgeries dropped 70% year-over-year in April.

Still others who watch the industry predict it’ll take some time for appointments to rebound. Reopening healthcare is not like reopening beaches in Florida, said Ash Shehata, KPMG’s national sector leader for healthcare and life sciences. “The fact that we’re going to open our outpatient facilities doesn’t mean we’re going to see people flooding back to outpatient facilities like they flood to the beach,” he said.

Wilmington Health's James also doesn’t expect a flood of patients right away. “I think people will be a little bit timid for a long time,” he said.

As time goes on, though, Shehata thinks the pandemic might result in more reliance on outpatient facilities in the long term.

The industry was already trending that way, but the newfound perception that inpatient care poses a higher risk will likely accelerate the shift. The challenge for providers then becomes how to shift costs from inpatient to outpatient, including redistributing staff to outpatient facilities, Shehata said.

Another unintended consequence of the pandemic was that accountable care organizations and other systems with more risk-based contracts were at a disadvantage, Shehata said. Fifty-six percent of risk-bearing ACOs said in a survey released in April that they were very or somewhat likely to drop out of the Medicare program by the end of May. Providers who have just emerged from recent acquisition cycles were also at a disadvantage, because they had just gone through a major financial transaction, but ended up with few elective procedures. “Essentially the cash went out the door, but you don’t have the productivity on the back end,” Shehata said. “There’s probably a handful of clients in that category as well.”

Other big unknowns include what health systems’ payer mix will look like in the future. With so many people having lost job-based health insurance, hospitals are likely to see higher proportions of patients without insurance or on Medicaid.

Another factor is whether, in the longer term, commercial insurers pay providers more for healthcare services, given the increased cost of care delivery. Shehata predicts that will be the case, but the impact won’t come until next year when those higher rates take effect.

A look at the stocks of the largest publicly traded health insurers and hospital chains shows payers are performing well, while providers have been weakened. The four largest publicly traded hospital chains saw their share value drop 33% between Feb. 3 and May 1. Share value of the four largest publicly traded health insurers, by contrast, dropped by about 2% in that time.

The country’s biggest for-profit hospital chains pulled their previously announced 2020 guidance, while for-profit insurers have either reaffirmed their full-year guidance or raised their revenue outlooks.

“There is an issue longer term as to what happens to value and who bears the responsibility of care risk,” said David Johnson, head of healthcare consultancy 4sight Health. “I think that will be a part of the post-COVID world in a big way.” To that end, some payers have begun prepaying for services to providers, he said.

The pandemic may be stoking lingering resentment between the two healthcare segments, as illustrated by comments from hospital leaders. “The managed-care companies have so much money, we’re hopeful for a rate increase here,” Wayne Smith, CEO of Community Health Systems, said during the company’s first-quarter earnings call.

There are winners and losers in any financial crisis, Mike Allen, chief financial officer of Peoria, Ill.-based OSF HealthCare, told Modern Healthcare in an April 10 interview. Premium money is still flowing to insurance companies, “but our patients are not coming in to see us anymore,” he said. “Suddenly the insurance companies will have all the money and we won’t because we won’t be busy.”

Providers that emerge the strongest from the pandemic will share a couple attributes. Perhaps the most important is high liquidity, which helps them react quickly and aggressively.

“What you are seeing is everybody recognizing cash is king,” Johnson said, “and those with more liquidity are going to be able to navigate this period of turmoil much better than those that don’t.”

Historically the big for-profit systems have operated more efficiently with less cash and more dependence on lines of credit, Johnson said. Moving forward, he said it’ll become more important to build a “war chest” to fund short-term needs like higher supply costs from more expensive personal protective equipment, ventilators and other needs and higher staffing costs as workers fall ill and need to be replaced.

The government is providing what could be the most significant form of liquidity in the form of accelerated Medicare payments under the CARES Act, said Matthew Gillmor, a senior research analyst with Baird. Even though the money will have to be repaid, it could be the biggest cash offset providers will see during the pandemic, he said.

The most important characteristics to help hospitals weather the current crisis are strong balance sheets and being a part of a health system, said Kevin Holloran, a senior director with Fitch Ratings. Systems tend to perform better than stand-alone hospitals because they can control resources better. “If one hospital starts to get overloaded with the surge and another hospital maybe was spared, it can reallocate staff, equipment and ventilators to another hospital very easily—and it all stays in-house,” he said.

Fitch placed 15 hospitals on rating watch negative in April. The biggest factors that landed them on the list were being small and light on liquidity and days cash on hand, Holloran said. Of the 15, more than half had negative outlooks already. Their median days cash on hand was below 90, he said.

“If you’re going to get dislocated for a couple months, you’re going to burn into that,” Holloran said.

In the end, Holloran predicts health systems’ operating margins will fall between 3 to 6 percentage points in 2020, likely closer to 6. In other words, a 3% margin would become a 3% loss margin.

Weir, of Olmsted Medical, said the biggest challenges ahead will be having enough PPE and ensuring a safe clinical environment for patients.

“It’s been impressive all the hard work people have done in incredibly uncertain times,” he said. “In the end we’ll be fine. It’s going to be a bumpy road, but we’ll come through the other end.”