COVID-19 is expected to impact operating margins for the long term, finds Fitch

Although median ratios for U.S. not-for-profit hospitals and health systems improved in its 2020 report, analysts from Fitch Ratings say that financial effects of the coronavirus pandemic will be felt in the future.

In 2020 Median Ratios for Not-for-Profit Hospitals and Healthcare Systems, the credit rating firm found that operating margins and operating EBITDA increased slightly in 2019 to 2.3% and 8.7%, respectively, up from 2.1% and 8.6% the year before.

Median excess margin and EBITDA improved from 4% and 10.4% to 4.5% and 10.6%, respectively.

Days cash on hand also saw stability improvements, increasing about five days (2.3%) from 214.9 to 219.8.

Fitch used audited 2019 data from rated standalone hospitals and health systems to create the report.

It noted that these figures do not yet show the impact of the COVID-19 pandemic, and predicts that next year's median ratios will highlight the direct impact of coronavirus on hospitals.

"Capital spending will generally be reduced in the initial years post-pandemic as organizations scrutinize every dollar of capital spending," said Kevin Holloran, senior director at Fitch Ratings. "However, we expect that providers who emerge from the pandemic as strong as they are now or stronger will ultimately accelerate spending in anticipated merger, acquisition and expansion activity."

WHAT'S THE IMPACT?

Looking ahead, Fitch provided some insights into the factors it believes will play a role in the 2021 medians:

• Added expenses needed to perform the same level of service and revenue declines from a shift in payer mix will lead to softer margins.
• A predicted credit split will likely lead to increased merger and acquisition activity.
• Additional federal assistance, although not at the same level as what has already come out.
• The need for providers to maintain some level of pandemic readiness.
• Decreased capital spending as a result of organizations scrutinizing every dollar spent.
• Organizations moving away from fee-for-service reimbursement models.

THE LARGER TREND

As Fitch predicted, the pandemic has significantly impacted operating margins in 2020.

Operating margins in May showed signs of improvement but were still lower than figures from 2019. The improved margins were mainly attributable to two factors. One was the $50 billion in emergency CARES Act funding that was given out by the federal government. The other was the resumption of elective surgeries and nonurgent procedures, which were halted when hospitals shifted their focus to treating coronavirus patients.

In July, however, margins took a downturn, plunging 96% since the start of 2020, in comparison with the first seven months of 2019, not including assistance from the CARES Act. Even with those funds factored in, operating margins were still down 28% year-to-year.

ON THE RECORD

"Our 2020 medians largely show improvements in operating margins and balance sheet strength for the second year in a row," said Holloran. "For many, this meant that leading into the coronavirus pandemic in 2020, credit strength was at an all-time high, enabling the sector to weather the first half of the year far better than we originally anticipated. The second half of 2020 and more importantly the first half of 2021 will see multiple dynamics at play, including longer-term margin compression due to an expected weaker payor mix, additional expenses that will now become part of the permanent picture, and an emerging credit split between stronger and weaker credit profiles that will likely induce a wave of merger and acquisition activity."

Twitter: @HackettMallory
Email the writer: mhackett@himss.org