Many U.S. hospitals have never faced financial challenges like those posed by the COVID-19 pandemic. For example, hundreds with less than 60 days of cash on hand may be unable to operate for more than a week or two without running into difficulty meeting operating expenses.
Given the grave challenge the COVID-19 pandemic poses for the nation’s hospitals, it is critical that they take full advantage of every aspect of relief provided by the U.S. government, which includes billions of dollars in funding to healthcare organizations to help them deal with the profound financial impact of the crisis.[a] However there is a limited window of time for hospitals and health systems to access this funding to provide relief from the financial impact of the coronavirus. (See the sidebar, “Federal government responds to COVID-19 crisis.”)
Projected financial impact of coronavirus on hospitals
The COVID-19 crisis is driving up hospitals’ labor costs because of overtime, contract/registry workers, additional sick-time, quarantines and increased paid time off (PTO). The problem is exacerbated for many hospital staff members as schools remain closed and children must stay home. Quarantine impositions are taking a toll rarely experienced in modern times. Supply shortages are causing price increases of 400% and more. The surge in demand, use of just-in-time strategies, lack of inventory, and dependence on foreign suppliers all played a role in the increased cost. There also may be an element of price gouging, but it is difficult to which party is responsible, whether it originates with the suppliers of raw materials, the manufacturers or distributors. Supply and demand forces typically influence prices less than 200%.
On the revenue side, hospital activities in higher-margin elective and ambulatory services are declining, with hard-to-discharge patients, such as homeless patients, staying in beds for extended periods with no additional payment. Hospitals also face a less favorable payer mix. Many COVID-19 patients are older and insured by Medicare or Medicaid, and payment rates are proportionately lower for these patients. Moreover, while the crisis continues, hospitals will see a significant drop in their volume of commercially insured patients under age 65 who normally provide higher margins.
Increased costs and lower revenues will contribute to cash flow declines. Although some expenses connected to elective procedures will not be incurred, fixed costs will continue. Hospital earnings will deteriorate
Publicly traded health system shares have plummeted as investors react to the COVID-19 pandemic. As a result, ratings agencies have shifted the outlook for not-for-profit hospitals downward.
How hospitals should respond
The response of U.S. hospitals and health systems to the COVID-19 crisis should include the following steps.
1. Seek regulatory relief. To expedite hospitals’ effective response to the disaster, hospitals and their advocates should collaborate with their states to obtain executive orders, emergency legislation or other changes at the federal level aimed at relaxing or suspending regulatory requirements. Government agencies require such measures because they look to laws and regulations for guidance. Agencies must follow the law; only actions by the legislatures or executive orders can relax or suspend regulatory requirements. In some instances inflexibility around regulatory requirements could impair hospitals ability to meet the pandemic’s unique challenges. Input from hospital industry leaders and healthcare experts will be essential to identify required changes while ensuring appropriate safeguards and quality.
2. Ensure costs and revenue losses are accurately documented. Hospital finance departments should work with all departments to document any increased costs and loss of revenues attributed to the pandemic. In many hospitals, the finance department has tended not to play an integral role in disaster drills. The COVID-19 crisis underscores the importance of finance’s immediate and ongoing active engagement through the crisis and the recovery period. Without comprehensive and accurate documentation, hospitals will miss the opportunity to recover millions of dollars of essential support. Documenting the financial impact of a disaster therefore is essential, requiring appropriate resources to be dedicated to the task.
3. Work collaboratively with regulators. Hospitals, especially finance leadership, should engage with their state hospital associations to work with the government agencies responsible for distributing relief funds. This collaborative effort should be focused on establishing standardized reporting tools and templates, data capture processes and audit trails for COVID-19 costs and revenue losses. Accurate, complete and timely documentation will enable hospitals to obtain their fair share of available funding.
States that have experienced widespread major disasters and associated financial recoveries may have systems they can reactivate. However, even in those states, a long-term pandemic presents unparalleled challenges that do not exist in disasters with limited localities. For other states and their hospital providers that have not experienced major disasters, the process of documenting and qualifying providers for their losses may be entirely new and unfamiliar. States will need to act swiftly to overcome these shortcomings and adopt comprehensive response plans and procedures, and state hospital associations can play important role in helping them with this process.
4. Expedite the effort to obtain relief. Hospitals must gear up and apply for the relief funds that will be available now, because obtaining future aid will be more politically, emotionally and financially challenging. Pressures from the pandemic will subside and memories of the disaster will fade. Just as in past disasters, public response to help victims can be quickly replaced by new priorities and daily responsibilities; the mutual interest that surfaces during a crisis for a short time can all too quickly fade following a disaster.
5. Implement a COVID-19 internal monitoring and reporting protocol. Such a protocol for tracking the additional costs and revenue losses associated with the crisis should be implemented immediately. Hospitals should include a report of the financial impact of the coronavirus pandemic in monthly management reports, and they should create a dashboard that tracks COVID-19 impacts daily, and no less than weekly.
Financial management during this disaster is vital to every hospital’s future, as are the fully committed efforts of all hospital departments. Collaboration and a team effort will make the difference between success and failure for patients and the institutions.
Our nation will successfully overcome this pandemic as we have overcome other major challenges. In the case of COVID-19, hospitals and other health care providers are called upon to serve our communities in unprecedented ways. Our gratitude and thanks extend to the heroes who are on the front lines 24/7, providing care to every patient without regard for their own safety.
[a] At the time this article went to press, U.S. hospitals and health systems were projected to experience a substantial negative financial impact from COVID-19. See, for example, Mulvany, C., “COVID-19 outbreak will negatively impact U.S. hospital finances,” HFMA blog, March 16, 20220.