Executive Summary

INTRODUCTION AND OBJECTIVE

Alvarez & Marsal's (A&M) Healthcare Industry Group (HIG) helps health systems navigate local, state and federal market dynamics. The COVID-19 pandemic, and its accompanying economic and social disruptions, led A&M to investigate the impact of these forces on the healthcare economy. A&M analyzed the financial and operating performance of the top 25 U.S. not-for-profit health systems, with publicly available datasets. Our previous reports told the story through Q4 2021. In this report, we have aggregated the Q1 2022 data and provide a detailed analysis. The timeframe ends with the passing of the first Omicron surge that again overwhelmed hospitals and aggravated staffing issues. This report contains executable insights for healthcare leaders, investors and lenders, as they continue to navigate the changes and evolutions of the COVID-19 healthcare environment.

SUMMARY OF TRENDS

Q1 2022 was a challenging and negative quarter for hospitals when it came to net revenue generated by not-for-profit hospitals in the U.S. Net Patient Revenue (NPR) fell sharply for the first time since the beginning of the COVID-19 pandemic (Q1 2020). While hospitals in the Northeastern states saw less NPR degradation, NPR decreased by almost 25%, on an annualized basis, in Q1 2022.

In Q4 2021, hospitals saw increased expenses particularly due to supply chain shortages, supply price increases and staffing problems. The trend reversed in the subsequent Q1 2022 quarter, mimicking a seasonal pattern we also saw in 2021 but more pronounced. Although expenses in Q1 2022 returned towards Q3 2021 levels, -- still +14% above pre-pandemic levels --, operating income tumbled further because of the sharp dip in NPR. Ultimately, operating Income dropped -4.5 percentage points per unit of Q4 2021 revenue Q1 2022.

Q1 2022 captured a large part of the biggest COVID-19 wave thus far in the pandemic. It was the first wave caused by Omicron, the variant that would replace the Delta variant in many countries, including the U.S. Compared to Delta, Omicron causes less severe COVID-19 disease. Omicron has been found to be much more contagious than Delta due to a plethora of mutations on Omicron's spike protein. This elevated contagiousness explains the significant increase in COVID-19 hospitalizations and deaths in Q1 2022, despite a milder clinical picture. In January 2022, the number of COVID-19 related hospitalizations in the U.S. peaked at 154,500, which is 21,300 more hospitalizations than the same month in 2021. However, the Omicron wave waned relatively quickly, already in February 2022. Even so, in the beginning of Q1 2022, elective surgeries were again postponed throughout the U.S., mainly in the West and Midwest. This, combined with continuous high contract labor and employee turnover, high supply costs and the start of a period of inflation, compromised operating income for not-for-hospitals.

In Q1 2022 surgery volumes declined with an aggregate number of procedures across the U.S. 10% below pre-pandemic levels. Patient discharges were also lower in Q1 2022 than in Q4 2021 (decline of -4.9%), despite the extra volume of COVID-19 patients. Length of stay and the number of patient days both decreased in Q1 2022, although the latter remained +2.4% above pre-pandemic levels. Lastly, because of Omicron and other COVID-19 accelerated movements, including the shift of care outside the hospital walls, total emergency visits declined by -17%, to -40% on an annualized basis, depending on the U.S. region. Overall, in absence of extra CARES Act funds, this all resulted in decreased hospital margins. COVID-19 has put hospitals in a headlock in Q1 2022.

In Q1 2022, the Southeast region of the United States became an outlier in both financial and operational measures. Decreases in Net Patient Revenue and Operating Expenses were most pronounced in the Southeast (annualized decline of 48% and 37% respectively), whereas the number of discharges and patient days increased in that region, reversing the trend in all other U.S. areas. The Southeast region is notably the U.S. region with the lowest COVID-19 vaccination rates, resulting in relatively low immunity to COVID-19 and more people at risk of severe disease ended up in the hospital with Omicron. Indeed, Omicron had a more pronounced effect on states in the Southeast. The 7-day moving average of COVID-19 admissions in the matching Health and Human Services (HHS) region 4 was 4,900 new admissions per day at the Omicron peak, the highest in the U.S. 1. This explains, in part, the stronger decrease in Net Patient Revenue and Operating Income because hospitals do not generate as much profit treating COVID-19 patients as they would performing elective procedures.

The Barometer of the Post-COVID Healthcare Economy | Report Updated Through Q1 2022

Vaccination rates in Northeastern states are among the highest in the United States. In our previous report on Q4 2021, we predicted the curtail of elective surgeries from increases in the number of patient days, notably in the Northeast. Closures must have been short term in this region since the decrease in surgeries, -- albeit not in ED visits --, in the Northeast was relatively low compared to other regions in the United States. Even though patients in the Northeast seem to have more luck finding acute care elsewhere than in an ED, the rebound in surgeries translated in a better-preserved Net Patient Revenue (NPR) in Northeastern hospitals in Q1 2022. However, such regional variations in financial and operational measures are not able to conceal the widespread fear of COVID-19 and the impact on every part of our country. in the early months of 2022.

By the numbers:

  • NET PATIENT REVENUE: increased 14% from 2020 to 2021 and even though it ended 4.9% above pre-pandemic levels* in Q1 2022, net patient revenue was 6.7% lower than in the previous quarter.
  • TOTAL OPERATING EXPENSE: increased 8.9% from 2020 to 2021 and grew 14% above pre-pandemic levels* in Q1 2022.
  • OPERATING INCOME: increased 67% from 2020 to 2021 due to large infusions of CARES Act funds. In Q1 2022, operating income was twofold lower than in pre-pandemic times*.
  • DISCHARGES: increased 3.9% from 2020 to 2021 but were still 10% below pre-pandemic levels* in Q1 2022.
  • PATIENT DAYS: increased 7.4% from 2020 to 2021 and were 2.4% above pre-pandemic levels* in Q1 2022.
  • LENGTH OF STAY: increased 4% from 2020 to 2021 and ended up being almost 75% longer in Q1 2022 than before the " pandemic.
  • SURGERIES: increased 13.8% from 2020 to 2021 but came down to 10% below pre-pandemic levels* in Q1 2022
  • EMERGENCY ROOM VISITS: increased 10% from 2020 to 2021 but remained 12% below pre-pandemic volumes in Q1 2022.

*pre-pandemic level point of comparison: Q4 2019

THE DATA

To better understand the effect of COVID-19 on healthcare providers, A&M created a cross-section of health systems across the country by analyzing the publicly available financial statements of the 25 "largest" not-for-profit health systems in the United States. The initial "sizing" of health systems was defined by the number of hospitals within those health systems. Financial statements were accessed via health system websites and/or websites where bond-related information is reported publicly. The reporting of these financial statements usually occurs between three to six months post quarter-end, creating a lag in the data. However, an alternative data set does not exist in the industry that collectively models all these health systems. The data time-period analyzed begins at the start of calendar year 2019 to establish a pre-pandemic baseline.

DEMOGRAPHICS OF THE TOP 25 "LARGEST" NOT-FOR-PROFIT HEALTH SYSTEMS STUDIED

  • Out of all 6,093 hospitals in the U.S., 49% (2,960) is a non-government, not-for-profit community hospital (1)
  • The top 25 largest not-for-profit health systems included in this analysis jointly own more than 1,000 hospitals, representing roughly a third of all non-profit hospitals.
  • All U.S. health systems together account for more than $1,2T in OpEx (1). This analysis covers roughly one quarter of that.

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Footnote

1. Https://covid.cdc.gov/covid-data-tracker/#new-hospital-admissions

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