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Apr 2020

Even Healthy Hospitals are not Immune to Covid-19


The COVID-19 pandemic is severely threatening the operational and financial health of our nation’s hospitals. Current estimates are that most hospitals will lose an average of between $1,200 and $2,800 per COVID-19 patient and that some could lose as much as $10,000 per patient depending on payor reimbursement rates. This translates, according to the American Hospitals Association, to hospitals losing up to $1 million a day because of COVID-19.

Unfortunately, as with the patients they are heroically trying to save, many hospitals themselves may not survive the pandemic. Others may come out on the other side greatly weakened and with even more challenges to their balance sheets and operational readiness than they were already facing before the pandemic.

It would be tempting to believe that the industry is “crying wolf,” or that the sector is too big and too important “to fail,” as the banks were determined to be during the 2008 great recession. The stark reality, however, is that many hospitals were already at the tipping point and this pandemic could easily push them over the edge into bankruptcy and closure. This is especially true for smaller, rural hospitals, 19 of which closed during 2019 alone. Some estimates are that the total number of rural hospital closures for the past 15 years could readily approach 200 partly due to the COVID-19 pandemic.

This, of course, could create a domino effect where the surviving providers find themselves strained operationally and financially from trying to absorb the influx of patients who are now without a hospital. It appears now that everyone along the healthcare supply chain may be threatened.

Providers routinely manage around – or through – financial and operational challenges on a daily basis, such as those created by the seasonal flu. But COVID-19 may very well be the tipping point.

How can hospitals be proactive?

To better identify ways providers could “inoculate” themselves to reduce the risk of future pandemics, epidemics or any other demand surge situation which could threaten their viability, it is important to look at a few elements of this perfect storm.

Increased need for supplies and staffing: Demand outstrips supply of medical supplies, PPE, equipment and even additional beds resulting in cost increases of over 1,000 percent reported for certain supplies. And the nation’s shortage of nurses, doctors and other professionals exacerbates the problem creating even more price pressure which, in turn increases expenses and squeezes margins.

Postponement of higher-margin services: Hospitals depend on higher-margin services and procedures such as elective surgeries to help boost their bottom lines. Since most of these have been postponed to free up resources for COVID-19-related treatments, hospitals are seeing a steep reduction in revenue and profits.

Limited liquidity to meet day-to-day expenses: Many hospitals don’t have enough liquidity – cash or readily convertible assets – to cover expenses for more than 60 or 90 days. Beyond that, they will find themselves struggling to cover payroll and other basic expenses to just “keep the lights on.” Add to this the costs of COVID-19 and it is probable that some providers will simply run out of money. This may oblige them to tap into, or expand, credit lines, which could impact their ability to float debt instruments or secure credit in the future.

Lower reimbursement rates for COVID-19 patients: Given the majority of patients presenting with COVID-19 are older and most likely on Medicare, and will need both intensive and lengthy care, providers will have to settle with whatever eventual reimbursement rates the government approves for this care. Since these reimbursements, even with rate increases, will not cover the true cost of care, providers will need to accept these losses. There also will probably be an impact on ACOs, which could create yet another challenge for hospitals.

Steep drop in portfolio returns: Last, but certainly not least, is that the investment portfolios that support hospital operations as well as their endowments have taken a significant hit with the market declines caused by concerns over the impact of COVID-19 on the global economy. According to Fitch Ratings, these drops, and the overall market volatility, have erased some 30 days of operating cash for the median nonprofit hospital.

The good news is that providers can prepare for the next “storm”

Providers’ first priority during a pandemic needs to be, of course, taking care of their communities. But with revenues down an estimated 40 to 60 percent as a result of the COVID-19 pandemic, they do need to be prepared to consider longer-term operational and/or financial management changes to help better insulate them from the next “perfect storm.” Many of these may already be underway as part of a provider’s ongoing contingency modeling, but they would include:

● Evaluating whatever value-based purchasing models are in place and identify ways to have these agreements enhance revenues and viability without sacrificing patient care

● Do a comprehensive investment portfolio revenue and restructure capital if appropriate to help protect and/or rapidly generate liquidity to provide a financial “cushion” when needed and have a plan in place to conserve cash when necessary (such as deferring non-critical capital expenditures)

● Consider partnerships, affiliations or other shared approaches to resource management, such as a smaller rural institution affiliating itself with a regional or national network to increase negotiating and purchasing power as well as possible resource and staff sharing

● Update financial models and include a variety of post-pandemic scenarios for different time horizons to be better able to plan for the increased uncertainty providers will have to anticipate and manage through for the foreseeable future

● Consider alternative, and lower cost, channels to deliver health care to the community, including increased used of home health care, satellite clinics and outpatient services, all of which could reduce fixed expenses

Preventative Healthcare is More Important than Ever

Taking steps to inoculate operations and balance sheets can go far to helping a provider be ready to weather the next pandemic – or any other demand surge for care – storm when it happens. However, there are also steps that providers and the communities they serve can take to reduce the probability that the storm will even form by doing more to keep people healthier to begin with. This type of prevention is especially important given that if only 2 percent of the U.S. population needed hospitalization at the same time, the healthcare system itself could collapse. Given the number and level of comorbidities in the U.S., it would not take much to reach this point.

Since the U.S. healthcare system is based more on “sickness care” instead of on “wellness,” taking a more preventative focus would require a major shift in the nation’s healthcare paradigm and its funding priorities. To give this context, according to Trust for America’s Health, public health represents less than 3 percent of all U.S. healthcare spend. This helps explain why the country spends enormous amounts on, for example, neonatal intensive care but not a corresponding amount on prenatal care.

Another area worth considering is making “wellness” and prevention more profitable, and hence more attractive, for all healthcare players – including pharmaceutical companies. There is no denying that our current healthcare system rewards cures and treatments rather than disease prevention by making the former more profitable. Patents, distribution systems, research grants and even the government itself through the Food and Drug Administration (FDA) all work together to encourage the development of prescription pharmaceuticals designed to treat disease. But what if these same forces came together to also encourage prevention by incentivizing the development, manufacture and marketing of preventive testing, dietary supplements and other preventative measures? Commercially viable preventative and curative screenings and pharmaceuticals can and should co-exist in the marketplace. They are not mutually exclusive.

To learn about how this shift to prevention and wellness could work, I invite you read this blog that SAC developed on how preventative care benefits providers, patients and communities alike.

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