Hospitals Barely Weather Covid-19 With Federal Grants, Cost Cuts

The U.S. hospital industry may not have fared as poorly as feared during the early months of the Covid-10 pandemic, according to new data from an influential Medicare advisory panel.

The hospital industry counters that its members are still operating at thin margins and anticipate further losses without more federal help.

The Medicare Payment Advisory Commission estimates that federal CARES Act grants and facility cost reductions limited hospital industry profit losses to between $20 billion and $30 billion in April. That’s lower than the estimated $50.7 billion monthly loss figure from March through June that the American Hospital Association touted.

The commission took issue with the hospital association’s assumption that some $50 billion in monthly revenue losses would continue through June, when patient volume steadily increased after elective procedures resumed, said Jeff Stensland, a commission principal policy analyst.

“Whether a hospital experienced losses or profits in the second quarter of 2020 will, in part, be determined by how far they adjusted their costs as patient volumes declined,” Stensland said Thursday at the panel’s September meeting.

Still Assessing Losses

In a separate statement, Aaron Wesolowski, the AHA’s vice president for policy research, analytics, and strategy, said the commission data wrongly implied that the AHA assumed steady losses of $50 billion per month from March to June.

“Those figures are clearly identified as averages, with the highest losses clustered in late March and April, and declining gradually through the end of the year,” Wesolowski’s said. “The impact from canceled services are also clearly identified as revenue losses, not net losses, because it was and remains difficult to assess the full impact on costs.”

The AHA said in July that median margins would drop 3% in the second quarter of 2020. Without CARES Act funding, the losses would be at 15%.

But MedPAC research showed some large for-profit hospital systems actually profited in the second quarter due to cost-cutting and generous federal grants. MedPAC estimates federal grants and payment increases will steer nearly $92 billion to hospitals this year.

On average, the grants covered about three to five months of April-level losses, Stensland said. However, because patient volume partially rebounded since April, the $92 billion in “grant funds alone should cover more than four months of most hospitals’ Covid losses”

Stensland said hospitals received about half the $92 billion as second-quarter income, and another 25% isn’t yet logged on income statements. About 25% has yet to be distributed.

Weathering the Pandemic

A sample of three large nonprofit hospital systems and four large for-profit systems that collectively represent about 10% of all U.S. acute care hospital revenue shows how hospitals are weathering the pandemic.

For the nonprofit systems, in aggregate, their 2020 second-quarter patient revenue—excluding grant funding—was about $1.5 billion lower than in 2019, or a 17% decline. Their aggregate expenses during this time declined by $13 million, which offset only 1% of their lost revenue, Stensland said. But they logged $782 million in federal Covid-19 grants in the second quarter, which offset 50% of their lost revenue.

“In total, operating income for the three nonprofit systems declined by $621 million compared to 2019. After CARES Act grants were accounted for, the operating profit margins of the three systems ranged from negative 13% for the quarter to a positive 5%.”

For-Profit Hospitals Come Out Ahead

The four for-profit systems had a $3.5 billion reduction in patient care revenue for the second quarter compared with 2019. That’s about a 15% decline, Stensland said. But these systems reduced expenses by $2.3 billion, which offset 65% of their lost revenue in the second quarter. They also logged grants totaling roughly $2 billion, or 56% of their lost revenue.

“Because the combination of expense reductions and grants offset more than 100% of the lost revenue, all four systems saw an increase in profits relative to the prior year. In aggregate, their operating profits increased by $634 million,” Stensland said.

The actual profit margins varied among the systems from a low of 1% to a high of 14%. All four systems still have remaining grant funds available for the third quarter, he added.

“The big difference in the two groups of hospitals was not in the reduction of revenue, or in the federal grants. The big difference was in how much they reduced costs in response to the decline in revenue,” he said.

Due to the variability in cost reductions across the systems and incomplete data, “there’s still some uncertainty as to the hospital industry’s overall financial condition in that second quarter.”

Skewed Conclusions?

AHA’s Wesolowski countered that data from a few large health systems isn’t representative of the entire industry.

“There are many different hospital types that operate in this country, all of which have different resource and financial capacities,” he said. “Overall, relying on a small non-representative sample leads to skewed conclusions.”

Many of the cost-cutting measures that have helped hospitals keep afloat to date “are simply not sustainable,” said MedPAC member Jonathan Perlin, president of clinical services and chief medical officer at HCA Healthcare, which operates more than 180 hospitals in 21 states and the U.K.

Perlin said patient volume at HCA hospitals were so reduced that 130,000 staff remained on the payroll while not working. “Essentially mothballing those assets for that period of time is obviously not sustainable,” Perlin said.

The severity of Covid-19’s impact on hospitals varies by region and facility, he added. “Coming out of this, many facilities will be very financially damaged and unstable.”

And while federal relief efforts were “extraordinary emergency measures” that “may have missed the target, to some degree,” Perlin said. Early distributions were based on Medicare and didn’t reflect Covid-19 surges in some areas and lower caseloads in others.

“We have the opportunity now to use a scalpel and not a sword moving forward,” he said.