In its December Hospital Flash Report, Kaufman Hall identified and reviewed the continued, negative impact of COVID-19 on hospital operating margins. After a dramatic drop in hospital margins during the height of the pandemic in 2020 and early 2021, hospitals experienced a fluctuation of decreasing and increasing margins in the latter-half of the year. Overall, hospital margins remain significantly narrower than they were in 2019, before the pandemic. As a result, the industry may see an increase in hospital transactions in 2022 to offset the operational and financial hardships that continue to burden the health care system, as described in greater detail below.
2021 Hospital Margin and Operational Overview
In general, minor year-end improvements in 2021 hospital margins are overshadowed by the overall decrease compared to hospital margins in 2019.
The Hospital News Flash Report indicates an increase in the median change in Operating Margin, not including federal CARES Act funding, of 8.1% between October and November 2021, following two months of month-over-month percent decreases. While the short-term margin increase is a welcome change for hospitals, hospital margins remain depressed compared to the pre-pandemic levels in 2019. Not including CARES Act funding, the median change in Operating Margin dropped 22.1% from November 2019 to the end of 2021.
Additionally, while hospitals experienced a decrease in the volume of discharges, patient days, and emergency room visits from October to November 2021, the average length of stay during this time period increased, corresponding to a possible increase in case severity. This change likely correlates to increased vaccination rates and the Delta variant (i.e. fewer unvaccinated patients to end up in the hospital, but very sick patients when they do).
Reasons for Decreasing Hospital Margins
The decrease in hospital margins since 2019 is almost certainly attributable to the COVID-19 pandemic. Several factors worked together to cause the downward trend.
First, the pandemic led to an influx of high acuity patients requiring a higher level of care, as hospital emergency rooms filled with COVID-19 patients. Simultaneously, a decrease in outpatient visits as a result of individuals postponing or foregoing elective care caused hospitals to lose out on potential revenue from profitable procedures. The imbalance of high-acuity inpatient visits to more lucrative outpatient visits resulted in greater expenses compared to revenue and an overall higher cost of patient care, as evidenced by the 24.7% increase in Total Expense per Adjusted Discharge since November 2019. Additionally, as mentioned above, an increase in average length of stay between October 2021 and November 2021 indicates that hospitals were still seeing sicker patients, likely as a result of the Delta variant.
Further, employment and staffing issues served as another blow to hospitals. The strain of the pandemic on doctors, nurses, and other hospital staff led to employee retention issues as many hospital employees became sick or decided to find jobs in other settings. These retention issues exacerbated what was already a workforce shortage as hospital staff became overwhelmed with COVID-19 cases.
Hospitals continue to face both of these headwinds, among others, as new strains of COVID-19 develop.
A Potential Solution
The financial and operational burden that COVID-19 placed on hospitals may lead to an increase in hospital mergers and acquisitions in 2022. Historically, hospital transactions have saved many financially distressed hospitals from closure or otherwise provided them with the capital and support to expand access and improve quality of care. For example, in a report issued by the American Hospital Association entitled, "Hospital Merger Benefits: An Econometric Analysis Revisited," indicates that recently-acquired hospitals experience a reduction in annual operating expenses and overall cost savings. As such, hospitals may consider mergers, acquisitions, and other transactions to promote operational efficiency and patient care, and prepare for additional unpredicted impacts of the pandemic.
Notably, the figures referenced in this post do not reflect the new Omicron variant. As hospitalization rates again climb due to the high transmissibility of this variant, it is possible that hospital margins will experience another downturn. Undoubtedly, the potential fluctuations in hospital margins and the impact on hospital transactions will continue to be a topic of issue throughout this year.
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