COVID-19 surges put pressure on nonprofit hospital margins

Photo: John Fedele/Getty Images

Due primarily to the Delta variant, the COVID-19 virus is resurgent in many areas of the country, and these surges are once more resulting in operational pressure for nonprofit hospitals in the U.S., which will likely affect margins in the near term, according to new analysis from Fitch Ratings.

Operations and resources in these new coronavirus hotspots are being stretched more than at any prior time during the pandemic, according to the ratings agency, with hospitalization rates exceeding prior peaks and ICU beds at full capacity in some states.

And while some areas are worse than others, there are no regions that are unaffected: Hospitalizations are trending upward in all states, with the 14-day increase in the double digits for all but a few. 

The top-10 states with the highest hospitalizations per 100,000 people are Florida, Alabama, Louisiana, Mississippi, Georgia, Arkansas, Texas, Nevada, Kentucky and Missouri, according to the U.S. Department of Health and Human Services. Other than Florida, all of these states have less than half of their population fully vaccinated.

WHAT'S THE IMPACT?

What this means for hospitals, and nonprofits in particular, is that additional staffing and supplies will be needed to handle the new influx of COVID-19 patients. The greater number of patients is resulting in a self-induced postponement of non-emergent surgical cases, resulting in lower hospital revenues.

Additionally, hospitals and skilled nursing facilities are competing for a limited supply of nurses, including more expensive contract nursing staff.

If coronavirus strains such as the Delta variant prove difficult to contain – as appears to be the case at this stage – providers may be required to maintain some level of pandemic capacity in the coming weeks and months. 

This will result in hardships: Staff shortages are expected to continue into 2022 and beyond. Elective volumes, which until recently were expected to continue to slowly return to pre-pandemic levels and boost margins, are once again an uncertainty, and will likely negatively affect operating margins in 2021 – especially with no additional federal stimulus or support to offset incremental operating expenses or lost revenue.

With full ICUs, lower-rated, typically smaller hospitals will likely have more difficulty managing rising expenses, and will be less able to absorb declining reimbursement at their current rating levels, particularly with the extra added expense of treating labor-intensive COVID-19 patients, according to Fitch. Highly rated hospitals should have enough financial cushion to absorb an increase in operating costs and a shift in volume type without meaningfully affecting credit.

Operating margins for Fitch-rated nonprofit hospitals fell in 2020 because staffing and supply costs, as well as elective surgery delays, disrupted revenues. But liquidity remains at or near all-time highs because of strong liquidity positions heading into the pandemic. Thanks to federal aid in the form of stimulus – namely CARES Act funding and Medicare Advance payments – hospitals have healthy balance sheets heading into the newest surge.

Longer-term rating concerns relate to the pandemic's negative economic effects on local economies and jobs recovery, which in turn could lead to a weakened payer mix. This is particularly a risk for smaller, less diverse economies and hospital districts that depend on tax revenues.

THE LARGER TREND

It bears noting that of the top-10 states with the highest hospitalizations per 100,000 people, all but three – Louisiana, Nevada and Kentucky – are led by Republican governors.

The Kaiser Family Foundation in July published a report that the vaccine divide between Republican and Democrats is growing.

Cost pressures for nonprofit hospitals will likely be ameliorated somewhat by the American Rescue Plan. In March, Fitch found that the ARP – which, unlike CARES, only provides direct aid to rural providers – will help support hospital patient revenues by reducing the number of those who are uninsured, which is a credit positive for hospitals.

The Senate passed the $1.9 trillion ARP in March, though it doesn't include relief funding for hospitals or loan forgiveness. Those provisions weren't in the House bill, but were requested by the American Hospital Association.

The AHA wanted more relief funding to help offset losses sustained during the pandemic, such as the $100 billion earmarked for hospitals in the CARES Act.

The legislation does include provisions to help hospitals and health systems provide care to their patients and communities, including measures to increase access to health coverage for those who lose insurance or are uninsured. It also makes investments to bolster the nation's COVID-19 response, with resources for vaccines, treatment, testing, contact tracing, personal protective equipment and workforce development.
 

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com