How the pandemic hit hospitals' bottom lines

Experts predict many hospitals will not have the reserves needed to cover their losses.

As much as the COVID-19 pandemic was an unprecedented medical challenge for hospitals, it was also an economic one. In response to COVID-19, many hospitals closed outpatient departments and postponed or canceled elective visits and procedures, which impacted their financial viability.

“In the absence of robust and sustained governmental support, almost all hospitals will experience financial difficulties,” said a Viewpoint by population health sciences experts from Weill Cornell Medical College in New York City that was published last May in JAMA. “But hospitals that are smaller, independent, rural, and have critical access status are particularly at risk.”

Coauthors Dhruv Khullar, MD, MPP, Amelia M. Bond, PhD, and William L. Schpero, PhD, recently shared additional insights on hospital financial health in an email interview with ACP Hospitalist.

Q: In general, what have been the top financial challenges for hospitals during the pandemic?

Dr Bond
Dr. Bond

A: Hospitals in the United States have been forced to contend with two simultaneous shocks during this public health emergency. First, they must invest in the resources and infrastructure needed to effectively respond to the pandemic, including extra beds, staff, and personal protective equipment. Second, they are struggling with decreased revenue as demand for other services has fallen; many hospitals have also had to curtail or cease nonemergent and elective care at various points in recent months.

While some hospitals can absorb the financial shock of the pandemic, not all have the resources to do so. As we noted in our Viewpoint, financial performance varies considerably across U.S. hospitals. In 2018, hospitals in the 25th percentile had an operating margin of −4.4%; those in the 75th percentile had an operating margin of 8.4%. Our sense is that rural and smaller hospitals, as well as those that primarily treat Medicaid beneficiaries, are likely to be most at risk financially.

Q: You wrote the Viewpoint in May. What has happened since?

A: While many hospitals remain financially vulnerable, we know there was a significant rebound in health care service volume over the summer. By the end of the third quarter, admissions had recovered to about 95% of baseline and year-to-date hospital revenue was down only 1.7%. Nevertheless, it will take some hospitals an extended period of time to recover from the large shock endured at the beginning of the pandemic. At the moment (in late December), there is little evidence on how hospitals are faring during this fall wave, but it seems likely that hospital revenues took another hit in the fourth quarter.

Q: How have the financial effects varied across hospitals?

Dr Khullar
Dr. Khullar

A: We hypothesized that smaller, rural, and safety-net hospitals would be the most at risk financially during the pandemic because of their underlying vulnerabilities. At this point, we have limited empirical evidence on whether this hypothesis has borne out. What we do know is that even though hospital revenues exhibited a significant rebound overall in the third quarter, that rebound was not distributed uniformly—there will still be many hospitals that will experience negative margins for 2020 and will not have the reserves needed to cover their losses.

Q: What might happen as a result?

A: Hospitals that face significant financial challenges as a result of the pandemic may have no choice but to merge with another hospital (in order to gain access to additional resources) or to cease operations and close. Both have the potential for negative health and economic effects. The evidence is clear that hospital mergers lead to higher commercial prices, which can increase premiums and overall spending, compounding the health care affordability crisis in the United States. Closures—particularly among rural hospitals—can have a substantial, negative impact on patient outcomes [according to a 2019 National Bureau of Economic Research working paper]. For example, Caitlin Carroll, PhD, a health economist at the University of Minnesota, [in a 2019 working paper] found that such closures increased mortality for Medicare beneficiaries with time-sensitive health conditions.

Q: How have policies and legislation addressed this issue to date?

Dr Schpero
Dr. Schpero

A: Hospitals have benefited from several federal assistance programs during the pandemic. The CARES Act and subsequent legislation allocated $175 billion to a provider relief fund. The plurality of those funds—about $50 billion—were distributed on the basis of 2018 net patient revenue to providers who bill Medicare. Additional disbursements have targeted hospitals highly impacted by the pandemic ($22 billion), Medicaid providers ($18 billion), safety-net hospitals ($14.7 billion), and rural providers ($11.3 billion). Other federal efforts relevant to hospitals have included loan programs and changes to Medicare reimbursement policies, including a 20% add-on payment for COVID-related admissions and increased coverage of telehealth services.

Our sense is that most relief funds have not been efficiently targeted to those hospitals most in need. As a result, many well-resourced hospitals received significant federal support. Researchers recently reported in JAMA that relief fund disbursements—at least through June—were generally unrelated to area-level health or hospital financial vulnerabilities. In addition, there were significant structural inequities in the disbursements, such that Black communities receiving the same support as White communities had much higher levels of need.

Q: What else can be done in response?

A: There is always a balance between speed and accuracy in efficient targeting for public policies. With the disbursement of CARES Act provider funds, speed predominated. Our hope is that additional federal support is more efficiently directed to the hospitals and communities most in need. Some recent relief fund allocations have moved in this direction. In December, the federal government began distributing $24.5 billion to providers, explicitly considering “financial losses and changes in operating expenses caused by the coronavirus.”

Going forward, the pandemic may provide an important opportunity for state and federal policymakers, as well as private payers, to rethink hospital reimbursement in the 21st century. Several states—including Maryland and Pennsylvania—are experimenting with global budget schemes in which hospitals are guaranteed a fixed amount of revenue in a given year. This approach protects against unexpected fluctuations in demand for medical care—as we've seen during the pandemic—while also moving away from classic fee-for-service incentives to increase volume.