Greater liquidity, a stable payer mix and higher-acuity patients helped major hospital chains end 2020 with massive profits despite a financial roller coaster caused by the pandemic.
The latest earnings reports from several for-profit and not-for-profit hospital chains come as patient volumes continue to drift below pre-pandemic levels and as major hospital groups have raised the alarm about financial hardship faced by many hospitals around the country.
And while plenty of health systems around the country are struggling, experts say many of the largest health systems around the nation have remained profitable.
“When I think about the year that hospitals have had, the No. 1 thing that jumps out at me is the liquidity,” said Jonathan Kanarek, vice president and senior credit officer for Moody’s Investor Services, in an interview with Fierce Healthcare.
For-profit hospitals were able to stabilize their cash flow issues that occurred at the start of the pandemic due to federal aid from the CARES Act and other sources such as accelerated payments.
“Clearly, the provider relief fund did what it was supposed to do: Help these facilities keep the doors open, especially in the early phases of this,” said Fred Bentley, managing director for consulting firm Avalere Health.
But federal aid wasn’t the only thing that helped stabilize finances; cost management and dialing back on capital expenses—in some cases by 20% to 30% early in the pandemic—were also factors, Kanarek said.
“Certain companies used cash to reward shareholders with dividends or, in the case of HCA, share buybacks that saved a lot of money that could be used to build liquidity,” he added.
HCA reinstated its quarterly dividend and share buyback from back in February after it generated a $3.75 billion profit in the fourth quarter of 2020.
HCA also returned more than $6 billion it got from the $175 billion relief fund created under the CARES Act.
Some not-for-profit systems also were able to tap into philanthropy in order to plug shortfalls caused by the pandemic.
Mayo Clinic, for example, posted a net operating income of $728 million in 2020 and nearly $14 billion in revenue for the year. The system also returned $156 million in CARES Act funding in December due to its financial performance.
The health system's balance sheet was greatly helped by an infusion of $587 million in donations. Another major boost to Mayo was its quick mobilization of developing and distributing its own COVID-19 test.
“At the very leading edge of the pandemic as first cases began to surface, Mayo Clinic successfully began to launch its own COVID-19 test at a time when diagnostic capacity across the country was extremely limited,” said Michael Abrams, managing partner at consulting firm Numerof & Associates.
Abrams told Fierce Healthcare that Mayo’s lab revenue jumped 70% this year.
A diverse portfolio helped other healthcare systems as well. Not-for-profit system University of Pittsburgh Medical Center (UPMC), for example, announced a $1 billion profit for 2020, a major boost from the $420 million it generated in 2019.
A major reason was its insurance business, which increased its enrollment to 4 million members as of January and generated $11.4 billion in revenue. Insurers generally turned a profit in 2020 thanks to a major drop in healthcare utilization and medical claims.
Higher acuity, stable payer mix help hospitals
Hospitals have faced major drops in their inpatient and outpatient revenue due to a decline in patient volumes that has lingered throughout the year.
Patient volumes dropped precipitously at the start of the pandemic as hospitals were forced to close or postpone elective procedures to preserve capacity to fight the virus. Even though volumes rebounded in the summer, they have remained below pre-pandemic levels.
UPMC, for example, saw its medical and surgical admissions and observation cases decline by 10% in 2020 compared to the year before. Its outpatient revenue per workday also declined 3%.
Emergency room departments showed the biggest drop in volumes and remain down by double digits compared to pre-pandemic levels. It remains unclear when they could recover, though.
“I am convinced once things start to open up again whether it be sporting events and concerts and people going back to work you will see a natural increase in ER volumes," Kanarek said. "Maybe not back all the way to normal but that has been a stubborn metric."
But hospitals were able to make up the volume declines as the number of sicker hospitalized patients increased.
HCA, for instance, saw admissions decline 5%, but its revenue per hospitalized patient increased more than 10%, Abrams said.
“The patients who were admitted were sicker, required longer stays and more intensive care,” he said.
Another major for-profit hospital chain, Tenet Healthcare Corp., announced that its net patient service revenue increased nearly 20% in 2020 compared to 2019 thanks to higher acuity and negotiated rate increases.
Hospitals were also helped by no major changes to their payer mix, easing concerns from the start of the pandemic that commercial revenues would plummet alongside job losses caused by the pandemic. But there hasn’t been a dramatic change to the payer mix as anticipated due to several factors such as people maintaining coverage if they were furloughed or enhanced COBRA support, Bentley said.
“The impact on insurance coverage was not quite as dramatic,” he added. “That buffered them a bit.”
Problems for rural, smaller facilities
While larger systems have been able to rely on a diverse portfolio and extended liquidity and credit to overcome volume declines, smaller facilities such as those in rural communities have faced greater financial instability.
“Large systems have access to multiple sources of capital: banks, government-sponsored bonds, and investment portfolios in 2020 that did shockingly well,” Abrams said. “Smaller and financially weaker institutions don’t have those options and they suffered disproportionately.”
Rural and more independent and smaller facilities already operate on narrower profit margins which have been exacerbated by the pandemic.
These financial headwinds could cause more consolidation among such facilities.
“The larger institutions withstood this storm better,” Abrams said. “The rest may find 2020 and 2021 more limited by depleted finances and many of them may be looking for a large partner that can help them get back on their feet.”