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Analysis

Moody's For-Profit Hospital Forecast Holds Negative into 2021

By John Commins  
   September 17, 2020

The bond rating agency credited the for-profit hospital sector for its "rapid and aggressive responses to the pandemic" that included cost cuts to labor and supplies to limit cash burn.

For-profit hospital margins will continue to strain over the next 18 months as federal aid wanes, higher unemployment hurts the payer mix, and volume instability and cost management remain a challenge, Moody's Investors Service says.

The bond rating agency credited the for-profit hospital sector for its "rapid and aggressive responses to the pandemic" that included cost cuts to labor and supplies to limit cash burn and emerge from Q2 with much of funding provided by the Coronavirus Aid, Relief, and Economic Security Act.

"Some hospitals have said that for every lost dollar of revenue, they were able to cut about 50 cents in costs," Moody's said, but warned that "these levels of cost cuts are not sustainable."

Median same hospital revenue in Q2 for Moody's-rated for-profit hospitals fell 10%, but Earnings Before Interest, Taxes, Depreciation, and Amortization increased 18%. However, without the federal aid, EBITDA declined by 37.5%.

The bottom-line benefits of the $175 billion in CARES Act relief will dwindle in Q3, Moody's said, even as COVID-related costs persist.

"These include operating COVID and non-COVID areas; buying expensive personal protective equipment (PPE); and educating communities on hospital safety and the risks of deferring care," Moody's said.

"As a result, hospitals will operate less efficiently in the wake of the pandemic, although their early experiences in treating COVID-19 patients will enable them to provide care more efficiently than in the early days of the pandemic," Moody's said.

That newfound efficiency should help hospitals free up bed capacity and avoid widespread shutdown for profitable elective surgeries. 

Volume Uncertainty

Barring a second wave of the COVID-19 pandemic, Moody's expects patient volumes in Q4 to exceed 90% of pre-pandemic levels, with the remaining 10% to return gradually in 2021. Those volumes could come back faster if a vaccine becomes widely available.

Inpatient surgeries fell 35%-45% in April but recovered somewhat in May and June. Emergency room and other urgent care volumes also fell by 50%-70% because of shelter-at-home orders. They are still down 15%-20% because of patient apprehension.

The pent-up demand for elective surgeries, and the patient apprehension about hospital safety pushed many procedures to outpatient venues, Moody's said, which will also weaken earnings, particularly for hospitals that don’t have a sizeable outpatient presence.

Further, CMS's proposal to eliminate 300 musculoskeletal-related services from its "in-patient only list" will send money making orthopedic surgeries to outpatient settings.

Median same facility revenue per adjusted admission grew by 9.3% during the Q2 largely due to medically necessary and costly surgeries. However, hospitals are also expected to see a drop in those higher-acuity surgeries, while seeing more of the lower-acuity and less-costly procedures that were deferred in the first months of the pandemic, Moody's said.

"As patients suffering from lower acuity issues regain comfort in going to hospital emergency rooms in the quarters ahead, we expect revenue per adjusted admission to return to a low-single digit growth rate," Moody's said. "It is unclear whether the upcoming flu season, in concert with the coronavirus, will result in significantly higher rates of acuity."

Widespread efforts to curtail the spread of COVID-19, including masks and social distancing, could hurt hospitals' earnings by diminishing the severity of the flu season, Moody's said.

Weaker Payer Mix

The pandemic-related recession has put millions of people out of work, many of whom have consequently lost their employer-sponsored health insurance.

Moody's notes that some of the newly jobless will be able to buy coverage on Affordable Care Act exchanges, while others will transition to Medicaid and the Children's Health Insurance Program.

"This will hinder hospitals' earnings growth over the next 12-18 months. Employer-provided health insurance pays significantly higher reimbursement rates than government-based programs, like Medicaid and Medicare," Moody's said.

Positive Offsets

It's not all bad news for the for-profit hospital sector.

Moody's notes that while federal grants will peter out in Q3, hospitals will still receive a 20% add on for treating Medicare COVID-19 patients. The CARES Act also suspends sequestration cuts through the end of 2020, and provides other benefits that will improve liquidity, including accelerated Medicare payments, and the deferral of the employer portion of the Social Security payroll tax.

In addition, CMS has proposed a 2.6% increase in Medicare outpatient rates for 2021, and final in-patient rates for 2021 will include a 2.9% increase for acute care hospitals in the quality reporting program that are "meaningful users" of electronic health records.

“Some hospitals have said that for every lost dollar of revenue, they were able to cut about 50 cents in costs. However, we believe that these levels of cost cuts are not sustainable.”

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

Photo credit: Jarretera / Shutterstock: Website of Moody's Corp., a business and financial services company.


KEY TAKEAWAYS

The bottom-line benefits of the $175 billion in CARES Act relief will dwindle in Q3, even as COVID-related costs persist.

Median same hospital revenue in Q2 fell 10%, but EBITDA increased 18%. However, without the federal aid, EBITDA declined by 37.5%.

Moody's expects patient volumes in Q4 to exceed 90% of pre-pandemic levels, with the remaining 10% to return gradually in 2021. 


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