A Kaufman Hall Data Leader on U.S. Hospitals’ Financial Crash in the Midst of COVID-19

As Healthcare Innovationnoted on April 21, the Chicago-based Kaufman Hall consulting firm this month released a report confirming all the worst anecdotal reports that had been emerging regarding the financial status of hospitals during the unfolding COVID-19 pandemic.

The April 2020 “National Hospital Flash Report,” published on April 21 by the Chicago-based Kaufman Hall consulting firm, paints an ominous portrait of a U.S. hospital industry hit extremely hard by the COVID-19 pandemic, based on March financial data, early on in the pandemic’s spread across the U.S.

As the report noted, “Hospitals across the country took a financial beating in March, as the first effects of the COVID-19 pandemic hit the industry, particularly in the second half of the month. Volume and revenue declines, along with flat expenses, resulted in a dramatic fall in margin within a matter of weeks, plunging not-for-profit hospitals, which historically operate on thin margins, deep into the red."

Indeed, “Hospitals’ median Operating EBITDA [earnings before interest, taxes, depreciation, and amortization] Margins fell more than 100 percent in March, dropping a full 13 percentage points relative to last year. This represents a dramatically greater change than seen most months,” the report noted. “For example, the median Operating EBITDA Margin change was up just 1 percent point in March 2019, and down 1 percentage point in February 2020. These margins likely fell even further across broad health systems, which often include substantial physician and ambulatory operations outside of the hospital.”

After the report was released, Jim Blake, a managing director and partner at Kaufman Hall, who leads the firm’s Data Division, spoke with Healthcare Innovation Editor-in-Chief Mark Hagland regarding the report and its implications for the industry.

Blake pointed to a chart that the Data Division has created, which shows what was mentioned in the report: a drop of 1,326 basis points in average operating EBITDA between March 2019 and March 2020, a shift that, as the firm noted, “demonstrates that over 90 percent of organizations had a negative shift in margin, resulting 75 percent of hospitals having an unsustainable operating margin.” Below are excerpts from their interview of last week.

What was your role in the publication of the report that was released a week ago?

We’re a consulting, software, and data firm. We have 10-15 percent of all the delivery side data in the U.S. flowing through our firm every month. And we publish this National Hospital Flash Report, of which I am the publisher. We have a large group of extremely talented data scientists.

What were your first, top-of-mind, impressions of the survey results, at a 40,000-feet-up level?

The first thing I would say, at 40,000 feet, is that while healthcare providers are on the front lines, and we’re at home, they don’t have that luxury, they’re on the front lines saving lives. At the same time, just two weeks of impact have devastated them financially. And, perhaps surprisingly, many people inside healthcare don’t know this, and most people outside HC don’t know it, but people generally assume that Amazon, Netflix, and hospitals are all doing extremely well right now. Amazon and Netflix are having great months, but hospitals just had their worst month ever. The importance of the report is that no one wants to raise their hand and talk about it; it’s not about them individually. And we’ve been publishing this report for 22 months, and last week was when most health systems found out their financials for March. Everyone else who publishes data publishes data that’s nine months to a year old.

This is the only place where we have a composite picture of the whole country; and everyone was affected. The effects for just two weeks were very, very significant. Many on a voluntary basis eliminated electives, and others on a non-voluntary basis; and in other cases, patients were afraid, and rescheduled. So the data shows us an impact of 40 to 50 percent decline on the inpatient side overall, and even worse on the outpatient side.

But it’s not offset by expense management; in fact, the data is telling us the opposite. In fact, while providers are caring for us, there’s devastation taking place on the revenue side. On the expense side, you have supply expenses being higher because of costs of PPE; building of surge capacity in terms of beds and ventilators, etc.; some organizations building field hospitals in parking lots. And preparing for the surge, whether it hits them or not, everyone preparing for the surge. So it’s the opposite of having an offset. They had increased expenses at the same time as an absolute, devastating drop in revenues. And that’s just two weeks.

And in many cases, some hospitals that were poorly resourced to begin with, are now in an even more precarious situation now, correct?

It’s like what’s in the news about the SBA [Small Business Administration] loans, with large restaurant chains getting loans first. Many hospitals, unless direct action is taken, will be forced into a position of layoffs and beyond and be faced with existential questions at the very time they’ll be needed. And we don’t know whether there will be a second surge, as happened with the Spanish flu. And the last thing we need is for hospitals, while, they’re saving lives, to economically die. And the smaller hospitals came into this with 80 days’ cash on hand. Every single hospital system, even the biggest one, can be mauled by the grizzly bear, but the littlest ones will be eaten. Healthcare is 18 percent of GDP [gross domestic product]—so whatever the government does that helps hospitals economically—we get a “two-fer”—we can be better prepared. I’ll make a bet that that hospital in Albany, Georgia is the largest employer there. And what is the only place right now where the government can get a “two-fer”? That’s in helping the hospitals even more. The CARES Act, the Medicare advance payments announcement, the lifting of the sequestration—the mandatory 2-percent Medicare cuts under sequestration—and the last was the 20-percent bump—a Medicare payment bump, are helping, but more needs to be done.

That leads to a key indicator in all of this: the year-over-year-percentage point change in operating EBITDA. This is an absolute measure. This is the purest measure you could have. We took every hospital in our database across 22 months, and created this graph, which shows a 13-percent decrease. All of the devastation happened within just two weeks. But you ask, how did hospitals do in March 2020 compared to March 2019? What happened is that the industry moved 1,300 basis points, or 13 percent, to the left. This is more than a black-swan event; it’s like my walking outside and a meteor kills me. This is so far out of the normal that no one, even if I had told you everything about COVID-19 in February, there’s no way I could have drawn this graph. And what it says is that the vast majority of hospitals have negative cash flow.

So some hospitals are literally on the verge of closing.

Yes. And when we put this data out, everybody had their hair on fire. And this is the only data that we have for the whole country. And what this means is that every organization left of the zero line doesn’t just have negative margins, they have negative cash flow. And what we consider sustainable is having somewhere between 8 and 12 percent EBITDA. The ones who can sustain themselves are a very small percent. And people understand that once you’re below zero, if you’re spending $100 and making $1, you’re not doing well. Let me get the exact number for you, but it’s like 85 percent.

Is there anything that hospitals can do right now?

They immediately need to be watching their liquidity sources and turning to banks and other sources. The AHA [American Hospital Association] and all hospitals have to be—as strong as they’ve been in DC, they’ve got to be stronger. They’ve got to make sure that we’re talking about weeks, and we need to act now. And the hospitals themselves will have to lay off huge numbers of people, as Beaumont Hospital did in Detroit, because they have no choice. So they need to look at their liquidity and their legal covenants. They’re going to be tripping those covenants whether they realize it or not. So they need to be proactively looking at their liquidity and their covenants—and on their advocacy. And they also need to look at the post-COVID world and how they can be better prepared for medical surge capacity and equipment capacity. Everyone went to just-in-time inventories in recent years. And we now realize that warehousing and keeping extra supplies in the local community, absolutely makes sense. And we have to make sure we get total parity for telehealth.

And the insurers have been doing phenomenally, because they haven’t paid for any of these elective procedures, so they’ll have their best March and April ever. And so there’s a broader political and economic issue that society should face, around how we address one set of parties having significantly negative cashflow and the other set of parties having significantly positive cashflow.