Despite more than a month-long suspension in high-margin surgeries due to the pandemic, the country's four largest investor-owned hospital chains managed to increase their cumulative profit 69% during the second quarter to $1.5 billion, surprising analysts and others who follow the industry.
The higher profits were largely due to the combined $2 billion in federal stimulus grants the four companies, HCA Healthcare, Community Health Systems, Tenet Healthcare Corp. and Universal Health Services, recorded during the quarter that ended June 30, money they don't have to repay. If not for those grants, some of the companies may have lost money in the quarter without more significant operating changes.
But there was another big factor that drove profitability: aggressive cost cuts. The four companies slashed expenses to a greater extent and faster than anyone expected, by a total of 16% year-over-year. In an industry known for its high fixed costs, that's a rarity.
"It's a little surprising, the scale to which they were able to lower their expenses," Sarah James, senior research analyst with Piper Sandler, said of the companies' results.
Part of that was from not having to buy big-ticket items like hip or knee implants involved in surgeries, as well as other materials used during procedures. Elective procedures were shut down from mid- to late March until May or even June in some areas. Not only are hospitals not paying for supplies associated with their regular procedures, the government is also reimbursing them for the costs of caring for COVID-19 patients, which creates an inflated margin, said Martin McGahan, a managing director in Alvarez & Marsal's healthcare industry group.
"You're actually getting a little bit of a double lift," he said.