The damage COVID-19 caused for the not-for-profit hospital sector runs deep, with recovery prospects clouded even with the help of federal aid and a ramping up of vaccinations.
“Hospitals’ financial status likely will remain depressed for the duration of 2021,” Ken Kaufman, chair of the healthcare financial advisory firm Kaufman Hall & Associates LLC writes in an introduction to a
Uncertainty abounds as hospitals transition from a focus on liquidity and managing the acute crisis to a post-pandemic environment in which they may need to rethink policies, practices, services like telehealth, and partnerships and coalitions. The pace of recovery also stands to influence borrowing and mergers and acquisition trends and hospital balance sheets are providing a first view into the pace of recovery.
Overall, hospitals could end the year with margins down 10% to 80% of pre-pandemic levels, Kaufman Hall concludes.
The report considers positive and negative scenarios that take into account prospects for patient volume, vaccine progress, and the pace of COVID-19 case declines. The new report follows the firm’s February analysis that warned revenues could fall between $53 billion and $122 billion as the pandemic’s balance sheet effects linger.
In the positive scenario, about 39% of hospitals would operate in the red with median operating margins down 10.5% from pre-pandemic levels. Under the pessimistic scenario, half of hospitals would continue to operate in the red with margins down 80% from pre-pandemic levels. The numbers are bleaker for rural hospitals.
Before the pandemic, about one-quarter of hospitals reported a negative operating margin. About 50% of hospitals entered 2021 with a negative operating margin. Hospitals headed into the pandemic with little breathing room with average 3.5 % margins.
“Both optimistic and pessimistic scenarios suggest that hospitals’ financial status will remain below pre-pandemic levels for the duration of 2021,” the report says.
The hospital sector's fiscal
The median operating margin dropped to .5% from 2.4% and cash flow margins declined to 6.7% from 8.4% in 2019 as hospitals grappled with the suspension of elective procedures, rising labor costs, and equipment costs, Moody’s said.
“At the same time, Medicare advance payments and other relief led to increased liquidity levels for these hospitals, with median days cash on hand increasing by 44 days to 246.9 days,” said Moody’s analyst Safat Hannan.
Median operating expenses rose 4.7% in fiscal 2020 compared to 3.0% revenue growth, though expense growth was down from 5.7% in fiscal 2019, Moody’s said.
Median unrestricted cash and investments rose by 27.5% in fiscal 2020 as hospitals took steps to squirrel away their cash by deferring capital spending, suspending retirement contributions and took advantage of temporary federal programs like Medicare advance payments.
Labor shortages and higher wages will remain a primary pressure point for curbing hospitals' margins, Moody’s said in an earlier report.
Rescue Plan
The $1.9 trillion American Rescue Plan Act President Biden signed March 11 joins the 2020 CARES Act, Paycheck Protection Program and Health Care Enhancement Act in supporting the sector. More may be needed to fully stabilize the system, the AHA warns.
“The support our field has received so far has been greatly appreciated and has kept many hospitals afloat to provide patients with needed care,” said AHA President Rick Pollack in a statement accompanying the Kaufman Hall report. “However, as this report makes clear, hospitals and health systems will need further relief to meet the health care needs of their patients and communities.”
Some say the lifeline provided by federal aid moves the needle for the sector.
“A number of federal actions, including several elements of ARPA, are very constructive to the sector,” Municipal Market Analytics said of its decision to move its outlook to neutral/positive from negative this month. “There are still risks going forward, in particular for smaller and rural facilities, but the federal side’s commitment to improving health care is clear.”
While some hospitals struggled to meet covenant requirements and posted impairments, the sector did not experience any defaults last year and has not seen any so far this year compared to five in 2019, said Matt Fabian, a partner at MMA.
Consumer spending offers another positive sign.
The $178 billion provider relief fund from CARES divvied out grants that amounted to at least 2% of their previous annual patient revenue covering lost revenue and unreimbursed costs associated with the pandemic,
Hospitals took advantage of accelerated and advance Medicare payments accounting for about 80% of the $100 billion in loans. Congress has pushed off original repayment deadline of August 2020 to one year from receipt of the loan.
Many hospitals qualified for the Paycheck Protection Program, with health care providers accounting for nearly $68 billion of the $520 billion of loans, Kaiser said.
Unlike the CARES Act, the American Rescue Plan doesn’t provide direct aid to hospitals. It does provide revenue and expense help in other ways and sets aside $9 billion for rural health care providers and $7.6 billion for community health centers.
Various Medicaid and Medicare reimbursement provisions and the temporary extension of healthcare coverage subsidies under the Consolidated Omnibus Budget Reconciliation Act, or COBRA, will aid hospitals and states, Fitch Ratings said.
The ARP reduces insurance premium costs for plans offered through the ACA by increasing tax credits along with capping premium contributions at 8.5% of income for mid-level health plans. Those who earn 100% to 150% of the federal poverty level will not pay any premiums.
Coverage for COVID testing and vaccinations is expanded and $50 billion goes to the Disaster Relief Fund, which could be used to help hospitals with personal protective equipment and other supplies.
Ratings and Issuance
"Many of our rated credits weathered the COVID-19 storm reasonably well in 2020 and we expect many to continue to do so in 2021," S&P Global Ratings credit analyst Suzie Desai said in a report earlier this year.
“Credit quality could be tested, particularly for organizations that have a relatively light balance sheet or have already been struggling operationally as we believe some of these credits, given the headwinds, may not be able to generate enough operating cash flow to continue needed investments, further widening the existing credit quality gap,” Desai said.
“Our key focus is really watching the vaccine” rollout versus the spread of variants and "that will really determine how long we have constrained operations or how much faster” hospitals see more recovery later in the year, Fitch Ratings’ healthcare lead Kevin Holloran said during a recent webinar, Healthcare 2021: Potential Credit Implications of the New Normal.
A central lesson hospitals likely will take away from the pandemic is the need to be “nimble” and flexible in responding to crisis and the split between stronger and weaker hospitals could become more pronounced, Holloran said.
Borrowing this year is hard to predict because it will depend on balance sheet needs.
“There was a pause on some strategic and capital investments in 2020 by many of our rated providers,” S&P said. “Low interest rates could facilitate both tax-exempt and taxable debt issuance. Many providers issued taxable and tax-exempt debt in recent months and that trend may continue for other providers.”
Hospital borrowing dropped 14% last year to $25.97 billion, according to data from Refinitiv. Both new money and refunding tumbled. Taxable issuance was up 66% to $6.4 billion across hospital and other healthcare borrowers and market participants believe that will continue, given the growing investor base and ability to bypass tax-law restrictions on use of proceeds.
Many sector participants believe that the years-long mergers and acquisitions trend will accelerate as independent hospitals that struggled through the pandemic seek help and others revisit plans pushed to the backburner during the crisis.
Consolidation could face more antitrust scrutiny under the Biden administration, Holland & Knight said in a legislative outlook piece. “It is anticipated that the U.S. Department of Justice and the Federal Trade Commission will be more aggressive in scrutinizing consolidation and mergers,” the report said.
While antitrust enforcement is not statutorily within the Secretary of Health and Human Services' purview, HHS Secretary nominee Xavier Becerra [now confirmed] will still have an important role to play, Holland & Knight said. Becerra made battling healthcare consolidation a signature issue as California attorney general, where he spearheaded a $575 million settlement with Northern California hospital chain Sutter Health to settle antitrust claims.
Other federal policies will continue to aid hospitals’ fiscal condition.
Moody’s labeled as a positive the Special Affordable Care Act enrollment period and the Biden administration’s extension of a public health emergency through the year that will keep higher Medicaid reimbursement rates in place.
The enrollment period could translate into more unemployed individuals keeping some form of insurance coverage, curbing uncompensated care growth.
Fitch sees Biden’s efforts to expand healthcare coverage under the Affordable Care Act as favorable. Congress is also expected to provide additional relief by continuing to waive the automatic 2% reduction in Medicare payments under sequester rules.
There are uncertainties. Biden enjoys a narrow, non-filibuster proof Democratic Senate majority, which limits his options and a key Supreme Court decision looms mid-year in a constitutional challenge to the ACA in California v. Texas. Many don’t believe the court would dismantle the legislation but say if it did Democrats could enact fixes that keep pieces in place.
About 20 million individuals could lose healthcare coverage without the ACA in place.
“This would generally reduce hospital revenues and could exert downward rating pressure on hospitals, particularly in states that expanded Medicaid coverage under the ACA,” Fitch said.
