Hospital financial turnarounds aren't waiting for the pandemic to end

Even as COVID-19 rages on, many health systems have strengthened their financial footing this year.

The combination of patients returning for medical care and continued government support have boosted some operating margins past 10%, a significant shift after what had been a challenging 2020. And while the ongoing COVID-19 surge has hit some states particularly hard, others aren't seeing the same caseloads, which makes it easier for hospitals in those areas to resume normal operations.

"Some of that pent-up demand because of the uncertainties back in 2020 is coming forward in 2021 and we're seeing that return of volumes," said Rick Kes, a partner and healthcare senior analyst with RSM. "Obviously, that's been good financially for the healthcare providers in 2021."

Many of the strong performers this year so far are concentrated in the Midwest and Northeast, where COVID-19 cases are relatively less common. Rochester, Minnesota-based powerhouse Mayo Clinic posted an 11.3% operating margin in the quarter ended June 30, having generated $451 million in operating income on almost $4 billion in revenue. The Mayo Clinic's operating margin was 3% during the same period last year.

Not a subscriber? Sign up today for $1.

The Mayo Clinic's volumes in the first half of 2021 have surged from the same period in 2020, which isn't surprising as that stretch includes the pandemic's first wave and mandated procedure suspensions. Surgeries are up 3.4% in the first half over the same period in 2019, indicating that the company is chipping away at pent-up demand. Admissions and outpatient visits are still down from 2019, however.

The Mayo Clinic's strong performance is the result of long-term, strategic investments in patient care, research and education, Chief Financial Officer Dennis Dahlen, said in a statement. The health system is spending $387 million on capital improvements in the first half of the year to increase its capacity to serve patients, he said.

The Cleveland Clinic in Ohio was another strong performer in the first half of the year, having posted a 10.5% operating margin in the quarter ended June 30. The not-for-profit system lost money in the comparable 2020 period, posting a negative 8.6% margin.

Cleveland Clinic has multiple initiatives aimed at luring patients back for care, Chief Financial Officer Steven Glass said in a statement. The system is also holding on discretionary expenses, he said.

Indiana University Health posted an 11.3% operating margin in the quarter ended June 30, compared with a 7.5% margin in the prior-year period. Surgeries were up 35% at the Indianapolis-based health system in the first half of 2021 compared to the same period in 2020, and discharges were up 10.7% in that time.

The University of Pittsburgh Medical Center posted a 5% operating margin in the first half. While not as high as its peers, that's a big jump for the Pennsylvania not-for-profit system, which had experienced margins hovering at break even in recent years. The performance also beat UPMC's 1.5% operating margin in the first half of last year.

A major factor is simply patients coming back, said Ed Karlovich, UPMC's chief financial officer. Surgeries and ambulatory visits are up from 2020, as are emergency room volumes. Pennsylvania saw a major COVID-19 surge in November and December 2020, but the situation improved during the first half of this year, which makes patients feel more comfortable seeking hospital care, Karlovich said.In addition to higher patient demand, providers continue to benefit from federal government stimulus grants through the Provider Relief Fund, a $178 billion program established by Congress to help healthcare providers stay afloat during the public health crisis.

While hospitals spent most of that money in 2020, a good chunk of it has been sitting on balance sheets in the form of deferred revenue, Kes said.

Initially, providers weren't sure how much of the federal money they would be allowed to keep, in accordance with shifting rules. The government's final guidance makes it easier to get clearance to use the grants than hospitals expected, which means some have finally spent money they were holding onto from 2020, Kes said.

In UPMC's case, the system recorded $380 million in relief funding through the end of 2020, plus another $213 million in the first six months of 2021. Clearer guidance from regulators enabled UPMC to keep more of the money than it had originally anticipated, Karlovich said.

Cleveland Clinic recorded $423 million in Provider Relief Fund grants in 2020, plus another $162 million in the quarter ended June 30.

The federal government handed out additional Provider Relief Fund grants this year in a third round of distributions, but that represents a small portion of health systems' grant totals, Kes said.

An exception is Advocate Aurora Health, which saw a dramatic operating improvement in 2021 unrelated to Provider Relief Fund grants. The health system recorded just $8 million in grants during the first half, a small fraction of the system's almost $214 million in operating income, said Dominic Nakis, Advocate Aurora's chief financial officer. The company collected $787 million in Provider Relief Fund grants last year.

Advocate Aurora, a not-for-profit system with dual headquarters in Milwaukee and Downers Grove, Illinois, posted a 6.1% operating margin in the quarter ended June 30, up from a 7.4% loss margin in the prior-year period. The biggest factor is that volumes are coming back, Nakis said. Outpatient visits are up almost 23% in the first half compared with the same period in 2020, even though discharges are effectively flat.

The system was also able to cut some expenses in recent months, such as programs related to COVID-19 pay boosts, Nakis said.

The pandemic continues to cast a shadow over hospital finances, however. The highly contagious coronavirus delta variant that struck Southern and Southeastern states in the second quarter now seems to be making its way to the Midwest. Advocate Aurora had 150 COVID-19 positive patients across its system about a month ago, but that's up to 450 today, Nakis said. "It's been a little more of a surge in the delta variant over the past three to four weeks," he said. "We've started to see some increases."