Kaufman Hall Reports: Pandemic Continues to Destabilize Margins, Raise Costs

The COVID-19 pandemic continues to create a difficult, uncertain operating environment for the nation’s hospitals, health systems, and physicians practices, according to two new Kaufman Hall reports from the Chicago-based Kaufman Hall consulting firm—the organization’s October National Hospital Flash Report and its new, quarterly Physician Flash Report—both published on Oct. 27.

According to a press release published on Tuesday, “The Kaufman Hall median hospital Operating Margin Index stands well below 2019 performance at 2.7 percent year to date (YTD) through September with federal Coronavirus Aid, Relief, and Economic Security (CARES) Act funding, and -1.9 percent without CARES funding. The Kaufman Hall Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Margin Index stands at 7.5 percent YTD with CARES funding and 3.2 percent without CARES, also well below 2019 YTD levels, according to the National Hospital Flash Report.” Meanwhile, physician practices saw a significant increase in the level of investment needed to subsidize inadequate professional revenue.

The report noted that “Higher revenues were offset by a rise in Total Expense, which increased 1.8 percent YTD and 3.5 percent year over year (YOY). Total Non-Labor Expense was up 5.1 percent YOY, while Non-Labor Expense per Adjusted Discharge rose 14.4 percent as both lengths of stay and outpatient activity increased, and hospitals continued to purchase personal protective equipment and other supplies for safe operations. Total Labor Expense increased 1.2% YOY and Full-Time Equivalents (FTEs) per Adjusted Occupied Bed (AOB) rose 0.9 percent YOY as many hospitals began to bring back furloughed workers.”

Significantly, “Operating Room Minutes showed some recovery, rising 3.6 percent YOY as hospitals continued to push through a backlog of cases. Even so, Operating Room Minutes were down 12 percent YTD, reflecting the impact of COVID-related delays or cancellations of care. Consumers continued to avoid emergency departments, with Emergency Department Visits falling 19.1 percent YOY and 16.4 percent YTD in September.”

As for physician practices, the new Physician Flash report finds that “The costs associated with operating employed physician practices — and the level of investment needed to subsidize inadequate professional revenue — remain significant concerns for health system executives nationwide in the wake of the pandemic.” The report finds that median Subsidy (Loss) per Physician by health systems jumped 14.1 percent from January to August compared with the same period last year, resulting in a median subsidy, or loss, of $227,000 per physician across all specialties.”

The procedural specialties have been heavily affected by operating cost increases, the physician report finds, noting that “Five of six specialty cohorts saw increases in median Subsidy (Loss) per Physician FTE from 2018 to 2020. Surgeons had the highest associated costs, with a median subsidy of $347,000 per physician in 2020. Psychiatry was an outlier as the only cohort to see subsidies decrease this year by $38,000 per physician. Subsidy (Loss) per Physician FTE also rose in four of five regions nationwide. The Midwest has consistently had the lowest overall per-physician costs, while the West had the highest for two of three years, reaching a high of $308,000 in 2020. The South is an outlier, as practices in the region saw a 5 percent decrease to a subsidy of $202,724 per physician in 2020.”

“The first seven months of the pandemic have created a tenuous situation for our nation’s hospitals, with year-to-date performance falling significantly below 2019 levels,” said Jim Blake, a managing director at Kaufman Hall, said in a statement contained in the organization’s press release.

For hospitals, September margins increased year-over-year (YOY) compared to September 2019 as volatility continued, despite a seventh consecutive month of volume declines. Operating Margin rose 8.1 percent YOY and 7.8 percent above budget without CARES relief. With CARES relief, Operating Margin rose 15 percent YOY and 12.2 percent above budget.

The Kaufman Hall hospital report noted that several factors contributed to margin increases amid suppressed volumes, with Discharges down 9.9 percent YTD and 5.6 percent YOY. Organizations benefitted from the 20 percent Medicare COVID-19 add-on, suspension of the -2 percent sequestration adjustment, an increase in Average Length of Stay, and lower bad debt—all of which helped to drive increases in payment per case. Net Patient Service Revenue (NPSR) per Adjusted Discharge rose 5.8 percent YTD and NPSR per Adjusted Patient Day increased 4.1 percent YTD.

On the physician side, from 2019 to 2020, physician enterprises saw a 7.6 percent decrease in work Relative Value Unit (wRVU) per physician Full-time Equivalent (FTE) due to COVID-19 related volume declines, coupled with a 1.7 percent increase in Physician Compensation per FTE. Expanded coverage of virtual visits by healthcare payers contributed to a 2.5 percent increase in Net Revenue per Physician wRVU.

The “National Hospital Flash Report: October 2020” can be accessed here. The “Physician Flash Report: October 2020” can be accessed here.