News | Coronavirus

Wall Street is upbeat about the financial outlook for hospitals coming out of the COVID-19 pandemic, but many challenges remain

News | Coronavirus

Wall Street is upbeat about the financial outlook for hospitals coming out of the COVID-19 pandemic, but many challenges remain

  • Wall Street thinks hospitals have a good chance to stabilize their finances in the coming year, according to a recent presentation.
  • Cash-flow issues remain a factor, especially for not-for-profit hospitals, but the situation is trending more positively than it was late last year.
  • A new report issued by the American Hospital Association is far less sanguine, saying the revenue impact of the pandemic in 2021 is likely to exceed $50 billion and could surpass $100 billion.

Wall Street’s outlook for healthcare providers over the coming year offers reasons for optimism, according to a recent presentation, even though the future course of the COVID-19 pandemic could alter the forecast.

Illustrating the difficulty of drawing firm conclusions, a new report from Kaufman Hall and the American Hospital Association (AHA) highlights a much different set of expectations.

That report projects that hospital revenue losses stemming from the pandemic will amount to between $53 billion and $122 billion in 2021.

Such losses could hamper the ability of hospitals to administer the COVID-19 vaccine, AHA stated in a news release. The impact also could increase the strain on the clinical workforce and reduce access to care in some markets.

“When we talk about the historic financial challenges hospitals face, it’s about more than dollars and cents, it’s really about making sure hospitals and health systems have the resources needed to provide essential services for their patients and communities,” Rick Pollack, president and CEO of AHA, said in the news release.

Wall Street is more optimistic than the credit-rating agencies

Credit-rating agencies have said the outlook for the not-for-profit (NFP) hospital sector in 2021 is stable to negative, Christopher Kerns, vice president for executive insights with Advisory Board, noted during a presentation Feb. 18. Meanwhile, Wall Street analysts, who look more closely at the for-profit segment, say the outlook on that side is stable, Kerns reported.

The divergence between the two forecasts isn’t surprising, Kerns said.

“The credit-rating agencies are going to be looking much more at cash flow and the ability to pay near-term interest payments,” he said.

One of the big challenges the rating agencies see is “the sluggish return of overall volume growth and the ways in which the pandemic can contribute to that,” he added. As 2021 progresses, “We could see improved cash flow as volumes return, or we could continue to see sluggish cash flow.”

Kerns, echoing the assessment of Wall Street analysts, is cautiously optimistic.

“We are trending generally in a more positive direction than I would have said two months ago,” he said.

A change in the current situation would be welcome news. Profits at NFP hospitals are down 56% relative to pre-pandemic levels without accounting for CARES Act funding, Kerns reported.

Even factoring in those payments, profits are down 17%, “which essentially would leave them barely profitable,” Kerns said. “In the long term these are unsustainable trends, but most Wall Street analysts tend to be banking on improved volume performance across the next year.”

The future course of the pandemic will be decisive

Kerns said the pandemic could take one of three general turns, according to forecasts:

  1. Infection rates steadily decline over time and no large epicenters emerge.
  2. Local outbreaks occur on an unpredictable basis.
  3. The spread of the virus is uncontrolled.

Advisory Board projections “are trending more in favor of Scenario 1, or at least somewhere between Scenario 1 and Scenario 2,” Kerns said.

Wall Street appears to agree, he said. Analysts foresee increased demand for services and electives — based on both volume recovery coming out of the pandemic and an aging population — and same-facility EBITDA growth in the single digits.

But even in some of the best-case scenarios, certain factors could be a drag on hospital performance.

“The big thing that tempers a lot of this is care shifts and case-mix impacts,” Kerns said. “Are we going to see more services move to an outpatient setting outside of the hospital setting, and has the pandemic accelerated that?”

AHA report paints a gloomy picture

According to the report prepared by Kaufman Hall on behalf of the AHA, revenue in 2021 would be down $53 billion compared with pre-pandemic levels even if “hospitals experience a consistent, complete recovery of patient volumes, vaccine distribution and administration go smoothly, and the country sustains a continued ramp-down of COVID cases.”

That number represents about 4% of total pre-pandemic hospital revenue. However, it does not account for the possibility of additional government payments, which helped shore up hospitals in 2020.

The projected breakdown of the $53 billion includes:

  • $27 billion in lost outpatient revenue
  • $17 billion in lost inpatient revenue
  • $9 billion in lost emergency department revenue

In the event of shakier recoveries in volume, slower progress in vaccine administration and cyclical COVID-19 surges, the revenue impact could reach $122 billion, or 10% of pre-pandemic revenue.

Losses over the coming year will be piled on top of massive 2020 revenue losses, which an AHA advance estimate last summer placed at $323 billion. Among health systems, 28% had negative operating margins as of last September, according to a Bloomberg Law report using data compiled by Strata.

“Before COVID-19, America’s hospitals were experiencing downward revenue pressure from both government and commercial payers, resulting in a very thin 2.5 percent median margin in 2019,” Kaufman Hall writes in the new report. “At the same time, hospitals have been challenged to invest heavily in digital health and other forward-looking capabilities, which emerged as critical when COVID-19 struck.”

AHA is drawing on the findings to push for continued financial assistance for hospitals.

“Hospitals need additional support to continue to provide access to care” and to efficiently administer the vaccine, Pollack said.

About the Author

Nick Hut

is a senior editor with HFMA, Westchester, Ill. (nhut@hfma.org).

Sign up for a free guest account and get access to five free articles every month.

Advertisements

Related Articles | Coronavirus

News | Payment Trends

Healthcare News of Note: Healthcare insurers owe hospitals billions of dollars in payments and are putting more patients in a bind with retroactive claim denials, says Kaiser Health News

Healthcare News of Note for healthcare finance professionals is a roundup of recent news articles: Insurers are behind in billions of dollars in payments to hospitals, the strain on clinicians and staff grows amid the pandemic, and CFO duties involve more digital activities and investor relations.

News | Strategic Partnerships Mergers and Acquisitions

Healthcare M&A activity for Q3 remains low in volume but high in impact, firms report

The number of M&A transactions involving hospitals and health systems remained at historically low levels, but the average revenue involved was far higher than in recent years.

Column | Coronavirus

Time for another extension of the COVID-19 public health emergency?

Hospitals and other healthcare providers are starting to ask whether it would be prudent and appropriate for the government-declared public health emergency (PHE) to be extended once again.

News | Coronavirus

Q&A: What healthcare professionals can do to stay safe while traveling and attending live events

Mayo Clinic’s Sean C. Dowdy shares best practices healthcare professionals can use to stay safe while traveling and attending live events, and he discusses what Mayo Clinic’s COVID-19 modeling shows for Olmsted County in Minnesota.