Public hospitals are compounding COVID-19 budget risks for large urban counties, Moody's finds

Owning a public hospital during the COVID-19 pandemic carries operational risk, and this will compound the fiscal and credit difficulties facing many large urban counties across the U.S., according to a new report from Moody's Investors Service.

Of the 25 largest rated counties by population, 19 have local government-owned public hospitals. The surging costs of tackling the pandemic, coupled with revenue loss caused by the suspension of elective procedures, are straining public hospital budgets, making hospitals more likely to need support from county governments. 

The degree of credit risk for counties will also depend on the amount of Coronavirus Aid, Relief and Economic Security Act and other funding from the federal and state governments, on how fast patient volume and hospital operating revenue recover, and on the magnitude of subsequent outbreaks.

Across the nonprofit sector, hospital revenue declined about 40% in April amid widespread shutdowns. While many hospitals had strong rebounds in patient volume beginning in mid-May or June, most still report patient volume and revenue below the levels of a year earlier. It's unclear if hospitals will be able to maintain the recent volume increases, particularly if patients are reluctant to return to hospitals in areas with outbreaks.

WHAT'S THE IMPACT?

Counties and hospitals are dealing with both revenue and expenditure disruptions from the coronavirus, increasing the risk that large public hospitals will call on county governments to provide increased support just as counties are facing their own budget strains.

Because of the pandemic, large public hospitals are likely to incur greater operating losses than normal, consistent with weaker operating performance in the nonprofit sector. Rising costs associated with dealing with the virus are compounded by hospital operating losses resulting from material declines in revenue as profitable elective procedures are either postponed by hospitals or are slow to recover.

County governments with public hospitals, particularly those in large urban counties, are typically focused on providing charity or indigent care. In these cases, it's very difficult for counties to ignore public hospitals if they need increased support given that the mission of county government often includes the provision of hospital care for residents regardless of their ability to pay.

There are two ways counties can be called on to support poorly performing hospitals: providing direct financial support for hospital operations and supporting debt. Often, counties guarantee hospital debt, which then exposes the county to potential support for both hospital operations and debt.

For many hospital districts, though, general obligation debt is typically supported by taxes levied directly by the district that never pass through the underlying county government, thus insulating the county from potential risks associated with the debt. Yet those counties remain exposed to the potential need to provide financial operating support.

LIQUIDITY

Counties that maintained strong liquidity at the onset and throughout the pandemic, as well as those with broad expenditure flexibility, will have a greater ability to provide public hospitals with increased operating support while also maintaining high credit quality. 

The 19 largest counties with local government-owned hospitals tend to maintain very strong governmental liquidity, well above the median for rated counties nationally. For those counties with weaker liquidity, management's willingness and ability to make revenue and expenditure adjustments in response to hospital needs become critical.

But public hospitals in these counties typically hold lower liquidity than county governments and are often at or below the sector median for not-for-profit hospitals, which totals just over 200 days cash on hand. Lower liquidity positions leave the public hospitals less able to absorb budgetary shocks from the pandemic and more likely to seek funds from their county parent.

The size of hospital operations relative to the county government will be an important driver of the degree of budget strain on the county. When hospital operations are material relative to their parent government budgets, financial strains are larger, particularly when the parent government is directly responsible for hospital operations.

CLOSE GOVERNANCE

While hospital size and liquidity define the potential magnitude of county support for public hospitals, governance ties drive the likelihood of this support and is a key credit consideration. 

The specific governance structure varies greatly for each of these counties, with several variables in these structures. The likelihood of support is generally greater for counties with active management oversight and direct hospital authority, as well as for counties that guarantee hospital debt. Meanwhile, some hospital districts share overlapping taxing and service boundaries with counties but otherwise have independently elected boards and no management relationships with their counties, making direct support unlikely.

Counties fall in the "less likely" category when they exhibit a governance relationship with arms-length management ties, as does King County, Washington. The King County executive appoints a hospital board of trustees that has limited oversight, but contracts day-to-day operations with the University of Washington, which takes on much of the hospital's financial risk. 

By contrast, Cook County, Illinois, is an example of a government with a higher likelihood of providing increased support to the public hospital, given its direct oversight of its health and hospitals system, approving its budget and regularly providing large financial subsidies.

THE LARGER TREND

In September, Moody's predicted hospital revenues for 2020 will likely be better than initially projected, based on second-quarter financial results and the low probability of another nationwide shutdown of elective surgeries.

For the sectors that were highly impacted by COVID-19, including ambulatory surgery centers and dental and optometry offices, Moody's now estimates that 2020 revenues will decrease by 10% or more. The previous prediction from April expected declines of 15% or more.

Moderately impacted sectors like general acute care hospitals, physical therapy and outpatient rehabilitation centers and laboratories can expect revenue declines between 5% and 10%, according to Moody's. In the last report, these sector declines were between 5% and 15%.
 

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