Nonprofit hospitals face mounting financial pressures: 4 things to know

Not-for-profit hospitals and healthcare systems continue to face significant operating challenges as they attempt to keep revenues on pace with escalating operating expenses fueled by inflation, according to a June 27 report from S&P.

Highlights from the report:

  • The first quarter of 2022 marked the toughest performance quarter on record for U.S. not-for-profit hospitals and health systems, highlighted by widespread inflationary pressures across the sector. 
  • High labor expenses are likely to cause sustained operating hurdles, and demands on cash flow combined with weaker investment market returns could reduce financial flexibility through the remainder of 2022 and into 2023.
  • S&P notes that higher interest costs are likely to make borrowing options more expensive. Furthermore, the re-introduction of sequestration and the likely end of the public health emergency later this year will also have to be absorbed into cash flow.
  • The regulatory environment is becoming tougher and eliminating mergers and acquisitions as an option for many providers. Given recent denials by the Federal Trade Commission and other regulatory agencies, this option may be increasingly difficult to deploy. If these denials affect organizations that are already struggling operationally, options could become increasingly limited for certain providers.

Read the full report here.

Is healthcare still recession-proof?

https://mailchi.mp/3390763e65bb/the-weekly-gist-june-24-2022?e=d1e747d2d8

A recent conversation with a health system CFO made us realize that a long-standing nugget of received healthcare wisdom might no longer be true. For as long as we can remember, economic observers have said that healthcare is “recession-proof”—one of those sectors of the economy that suffers least during a downturn. The idea was that people still get sick, and still need care, no matter how bad the economy gets. But this CFO shared that her system was beginning to see a slowdown in demand for non-emergent surgeries, and more sluggish outpatient volume generally.

Her hypothesis: rising inflation is putting increased pressure on household budgets, and is beginning to force consumers into tougher tradeoffs between paying for daily necessities and seeking care for health concerns. This is having a more pronounced effect than during past recessions, because we’ve shifted so much financial risk onto individuals via high deductibles and cost-sharing over the past decade.

There’s a double whammy for providers: because the current inflation problems are happening in the first half of year, most consumers are nowhere near hitting their deductibles, leading this CFO to forecast softer volumes for at least the next several months, until the usual “post-deductible spending spree” kicks in.

Combined with the tight labor market, which has increased operating costs between 15 and 20 percent, this inflation-driven drop in demand may have hospitals and health systems experiencing their own dose of recession—contrary to the old chestnut.

Saying farewell (for now) to a terrible financial quarter

Judging from our recent conversations with health system executives, we’d guess CEOs across the industry woke up this morning glad to see the first quarter in the rearview mirror.

Almost everyone we’ve spoken to has told us that the past three months have been miserable from an operating margin perspective—skyrocketing labor costs, rising drug and supply prices, and stubbornly long length of stay, particularly among Medicare patients.

In the words of one CFO, “I’ve never seen anything like this. For the first time, we budgeted for a negative margin, and still didn’t hit our target. I’m not sure how long our board will let us stay on this trajectory before things change.”

Yet few of the drivers of poor financial performance appear to be temporary. Perhaps the over-reliance on agency nursing staff will wane as COVID volumes bottom out (for how long remains unknown), but overall labor costs will remain high, there’s no immediate relief for supply chain issues, and COVID-related delays in care have left many patients sicker—and thus in need of more costly care. Plus, the lifeline of federal relief funds is rapidly dwindling, if not already gone.

Expect the next three quarters (and beyond) to bring a greater focus on cost cutting, especially as not-for-profit systems struggle to defend their bond ratings in the face of rising interest rates.

Buckle up, it’s going to be a bumpy landing.

Looking ahead to a year of belt-tightening

Looking ahead to a year of belt-tightening

https://mailchi.mp/92a96980a92f/the-weekly-gist-january-14-2022?e=d1e747d2d8

We’ve been having “year ahead” discussions with our health system members over the past few weeks, although it’s been difficult for some to carve out time for planning in the midst of the Omicron surge.

One common theme is that, from a financial perspective, 2022 is expected to be a more difficult year. For many systems, despite the trying COVID situation, the past two years have been financial record-setters. In 2020, systems benefited from a massive infusion of COVID relief funding from the government, and in 2021, they continued to enjoy enhanced reimbursement due to COVID, plus had a resurgence of volume as patients sought care that was previously postponed.

2022 looks to be a more “normal” year—meaning a return to the financial pressures of pre-pandemic times. Those include mounting price compression from payers, an accelerating shift of care from inpatient to outpatient settings, and increasing competition for patients from disruptors and others. At the same time, patient acuity will continue to rise, with patients presenting sicker and with more comorbidities. The cost of caring for those patients will escalate, as the workforce shortage drives labor costs higher and supply chain woes persist.

We’d anticipate a year or more of belt-tightening among many health systems, as they adjust to the post-pandemic environment.

Affiliation improves rural hospital sustainability

https://mailchi.mp/161df0ae5149/the-weekly-gist-december-10-2021?e=d1e747d2d8

In 2020, a record-breaking 19 rural hospitals closed their doors due to a combination of worsening economic conditions, changing payer mix, and declining patient volumes. But many more are looking to affiliate with larger health systems to remain open and maintain access to care in their communities. The graphic above illustrates how rural hospital affiliations (including acquisitions and other contractual partnerships) have increased over time, and the resulting effects of partnerships.

Affiliation rose nearly 20 percent from 2007 to 2016; today nearly half of rural hospitals are affiliated with a larger health system.

Economic stability is a primary benefit: the average rural hospital becomes profitable post-affiliation, boosting its operating margin roughly three percent in five years. But despite improved margins, many affiliated rural hospitals cut some services, often low-volume obstetrics programs, in the years following affiliation. 

Overall, the relationship likely improves quality: a recent JAMA study found that rural hospital mergers are linked to better patient mortality outcomes for certain conditions, like acute myocardial infarction. Still, the ongoing tide of rural hospital closures is concerning, leaving many rural consumers without adequate access to care. Late last month, the Department of Health and Human Services announced it would distribute another $7.5B in American Rescue Plan Act funds to rural providers. 

While this cash infusion may forestall some closures, longer-term economic pressures, combined with changing consumer demands, will likely push a growing number of rural hospitals to seek closer ties with larger health systems.

S&P upgrades view on nonprofit health sector as COVID-19 cases drop

Dive Brief:

  • S&P Global Ratings on Wednesday upgraded its view on the nonprofit healthcare sector to stable. It had been at negative since March 2020, a view that was affirmed in January.
  • Analysts said the change results from coronavirus vaccination rates and decreasing COVID-19 cases as well as a drop in the unemployment rate that should reduce payer mix shakeup. They also pointed to generally healthy balance sheets across the sector.
  • Headwinds remain, most notably labor expenses as burnout among staff was heavily exacerbated by the pandemic. Increased salaries and benefit expenses will dampen margins going forward, according to the report.

Dive Insight:

The change is another sign for providers that their financial situation is on a rather swift recovery from the upheaval caused by the pandemic. Although some facilities, especially those that are smaller and in rural areas, are certainly still struggling, that was the case before COVID-19 as well.

Most nonprofit health systems reported first-quarter results that showed improved volumes and investment returns. Some are still sporting more than a year’s worth of cash on hand.

Many of them took advantage of federal coronavirus relief funds, most of which can now be used more flexibly. A few, like Kaiser Permanente, did fine without the aid and ended up returning it.

The S&P analysts warned, however, that potential COVID-19 outbreaks this fall would be a setback. That remains a concern with some parts of the country lagging in vaccination rates and the increasing prevalence of more contagious COVID-19 variants.

Other risks include the end of enhanced federal reimbursement and the return of the Medicare sequester cuts when the public health emergency ends, which is expected to be after the end of this year.

But the analysts said agile management teams should be able to combat these challenges.

“[T]o the extent that the pandemic has enabled faster decision making and allowed management teams to pivot and identify new opportunities for expense base restructuring and revenue enhancement, we believe these risks are manageable within our view of the stable sector view,” according to the report.

How hospital operators fared financially in 2020

“For the most part providers were dependent on that CARES funding. I think they would have been in the red or break even without it,” Suzie Desai, a senior director at S&P Global Ratings, said.

The pandemic weighed heavily on the financial performance of not-for-profit hospitals in 2020, but some of the larger health systems remained profitable despite the upheaval — in large part thanks to substantial federal funding earmarked to prop up providers during the global health crisis. 

Industry observers have been closely watching to see how health systems ultimately fared in 2020. Now, with the fiscal-year ended and accounted for, analysts say the $175 billion in federal funds was crucial for providers’ bottom lines.

Without the stimulus funding, it is very likely we would have seen more issuers [hospitals/health] systems experience either lower profitable margins, or outright losses from operations,” Kevin Holloran, senior director of U.S. public finance for Fitch Ratings, said.  

Still, the pandemic put a squeeze on nonprofit hospital margins last year, according to a recent Moody’s report that showed the median operating margin was 0.5% in 2020 compared to 2.4% in 2019.

The first half of the year hit providers especially hard as volumes fell drastically, seemingly overnight. Revenue plummeted alongside the volume declines as the nation paused lucrative elective procedures to preserve medical resources.

One estimate showed hospitals lost more than $20 billion as they halted surgeries in the early months of the outbreak in the U.S. 

But as the year wore on, the outlook improved as some volumes returned closer to pre-pandemic levels. At the same time, health systems worked to cut expenses to mitigate the financial strain.

Still, some health systems did post operational losses even with the federal funds meant to help them. Moody’s found that 42% of 130 hospitals surveyed posted an operating loss, an increase from 23% the year prior. Yet, the 2019 survey included more hospitals, a total of 282.

Sutter Health, the Northern California giant, reported an operating loss for 2020 and said it was launching a “sweeping review” of its finances as the pandemic exacerbated existing challenges for the provider. Washington-based Providence also reported an operating loss for 2020. However, both Sutter and Providence were able to post positive net income thanks in large part to investment gains.    

Investment income can aid nonprofit operators even when core operations are stunted like during 2020. Though, initially, the pandemic put stress on the stock market as uncertainty around the virus and its duration ballooned. The stock market took a dive and it was reflected in some six-month financials as both operations and investments took a hit. 

“COVID and the stimulus is (hopefully) a once in a lifetime disruption of operations,” Holloran said, who noted analysts have been trying to assess whether the top line losses can be placed squarely on COVID-19. If that’s the case, analysts are typically more apt to keep the provider’s existing rating. 

“For the most part providers were dependent on that CARES funding. I think they would have been in the red or break even without it,” Suzie Desai, a senior director at S&P Global Ratings, said.

For example, Arizona’s Banner Health would have posted an operating loss without federal relief, according to their financial reports. Banner Health was able to work its way back to black after it reported a loss through the first six months of the year. The same was true for Midwest behemoth Advocate Aurora. 

The providers that were able to weather the storm of the pandemic tended to be integrated systems that had a health plan under their umbrella. 

Kaiser Permanente ended the year with both positive operating and net income and returned relief funds it received.   

“The integrated providers, yeah, were one group that just had a natural hedge with the insurance premiums still coming in,” Desai said.  

Still, the hospital lobby is hoping to secure more funding for its members as the threat of the virus is still present even amid large scale efforts to vaccinate a majority of Americans to reach a blanket of protection from the novel coronavirus and its variants.

A New Front in America’s Pandemic: College Towns

The coronavirus is spiking around campuses from Texas to Iowa to North Carolina as students return.

Last month, facing a budget shortfall of at least $75 million because of the pandemic, the University of Iowa welcomed thousands of students back to its campus — and into the surrounding community.

Iowa City braced, cautious optimism mixing with rising panic. The university had taken precautions, and only about a quarter of classes would be delivered in person. But each fresh face in town could also carry the virus, and more than 26,000 area residents were university employees.

“Covid has a way of coming in,” said Bruce Teague, the city’s mayor, “even when you’re doing all the right things.”

Within days, students were complaining that they couldn’t get coronavirus tests or were bumping into people who were supposed to be in isolation. Undergraduates were jamming sidewalks and downtown bars, masks hanging below their chins, never mind the city’s mask mandate.

Now, Iowa City is a full-blown pandemic hot spot — one of about 100 college communities around the country where infections have spiked in recent weeks as students have returned for the fall semester. Though the rate of infection has bent downward in the Northeast, where the virus first peaked in the U.S., it continues to remain high across many states in the Midwest and South — and evidence suggests that students returning to big campuses are a major factor.

In a New York Times review of 203 counties in the country where students comprise at least 10 percent of the population, about half experienced their worst weeks of the pandemic since Aug. 1. In about half of those, figures showed the number of new infections is peaking right now.

Despite the surge in cases, there has been no uptick in deaths in college communities, data shows. This suggests that most of the infections are stemming from campuses, since young people who contract the virus are far less likely to die than older people. However, leaders fear that young people who are infected will contribute to a spread of the virus throughout the community.

The surge in infections reported by county health departments comes as many college administrations are also disclosing clusters on their campuses.

*Brazos County, Tex., home to Texas A&M University, added 742 new coronavirus cases during the last week of August, the county’s worst week so far, as the university reported hundreds of new cases.

*Pitt County, N.C., site of East Carolina University, saw its coronavirus cases rise above 800 in a single week at the end of August. The Times has identified at least 846 infections involving students, faculty and staff since mid-August.

*In South Dakota’s Clay and Brookings counties, ballooning infections in the past two weeks have reflected outbreaks at the state’s major universities. In McLean County, Ill., the virus has been spreading as more than 1,200 people have contracted the virus at Illinois State University.

*At Washington State University and the University of Idaho, about eight miles apart, combined coronavirus cases have risen since early July to more than 300 infections. In the surrounding communities — rural Whitman County, Wash., and Latah County, Idaho — cases per week have climbed from low single-digits in the first three months of the pandemic, to double-digits in July, to more than 300 cases in the last week of August.

The Times has collected infection data from both state and local health departments and individual colleges. Academic institutions generally report cases involving students, faculty and staff, while the countywide data includes infections for all residents of the county.

It’s unclear precisely how the figures overlap and how many infections in a community outside of campus are definitively tied to campus outbreaks. But epidemiologists have warned that, even with exceptional contact tracing, it would be difficult to completely contain the virus on a campus when students shop, eat and drink in town, and local residents work at the college.

The potential spread of the virus beyond campus greens has deeply affected the workplaces, schools, governments and other institutions of local communities. The result often is an exacerbation of traditional town-and-gown tensions as college towns have tried to balance economic dependence on universities with visceral public health fears.

In Story County, Iowa, a local outcry following a burst of new Iowa State University cases pressured the university on Wednesday to reverse plans to welcome 25,000 football fans for its Sept. 12 opener against the University of Louisiana at Lafayette. In Monroe County, Indiana, the health department quarantined 30 Indiana University fraternity and sorority houses, prompting the university to publicly recommend that members shut them down and move elsewhere.

In Johnson County, where the University of Iowa is located, cases have more than doubled since the start of August, to more than 4,000. Over the past two weeks, Iowa City’s metro area added the fourth-most cases per capita in the country. The university has recorded more than 1,400 cases for the semester.

With a population of roughly 75,000, Iowa City relies on the university as an economic engine. The University of Iowa is by far the community’s largest employer, and its approximately 30,000 students are a critical market. Hawkeye football alone brings $120 million a year into the community, said Nancy Bird, executive director of the Iowa City Downtown District.

When the pandemic first hit in March, the university sent students home and pivoted to remote instruction, like most of the country’s approximately 5,000 colleges and universities. That exodus, heightened by health restrictions, has been an existential challenge for many downtown businesses, Ms. Bird said.

Jim Rinella, who owns The Airliner bar and restaurant, said the 76-year-old landmark across the street from campus “had zero revenue the whole month of April.” May was almost as scant, he said, and in June, he shut down after a couple of employees became infected.

By the time he reopened after July 4, too few students were in town to come close to making up the losses. He and his wife, Sherry, had hoped the campus reopening in August might be a lifeline.

The Rinellas live in Detroit, where they have other businesses, and Mr. Rinella said he was out of town when crowds jammed downtown on the weekend before the Aug. 24 start of classes. He said he immediately called his manager to make sure they were following state and local health rules.

But the photos taken by the local press from outside his establishment and others were damning. In an open letter, the university president lashed out, saying he was “exceedingly disappointed” in the failure of local businesses to keep students masked and socially distanced. Days later, the governor cited high infection rates among young people as she closed bars and restricted restaurants in Johnson County and five other counties with high concentrations of students.

Now The Airliner — where a booth is named for the University of Iowa’s most famous dropout, Tom Brokaw, and a modeling scout is said to have discovered Ashton Kutcher — has to close at 10 p.m. as well as require customers to buy a meal and sit far apart if they want to drink there.

“I’m at a pain point,” Mr. Rinella said. “If my grandfather hadn’t started the place, I’d question whether I want to be in the restaurant business.” A recent lunch hour visit found one customer at the bar drinking a beer.

The rise in local case counts reverberated at the county’s community college, which decided to start its fall semester with continued online instruction. Iowa City’s K-12 schools followed suit, which also meant canceling extracurricular activities, including sports, until students come back to the classroom in person.

“This is one of our last chances for college coaches to see us play or to get recent films sent out to college coaches. For some of us, playing in college is a goal we have been working toward since we were 11 or 12,” Lauren Roman, a 17-year-old high school volleyball player, told the school board last month. She burst into tears as she explained that she has waited since March for college recruiters to see her play. “Some of us really do need that scholarship money.”

“This sucks,” the board vice-president Ruthina Malone, agreed at the same meeting, choking up as she described emails she had received from families of children whose education relies on in-person instruction. But, she told the board, “we do not operate in isolation.” Her husband, she said, is an art teacher who would like nothing more than to teach again in person, and she works at the university.

The pandemic has hurt colleges’ finances in multiple ways, adding pressure on many schools to bring students back to campus. It has caused enrollment declines as students have opted for gap years or chosen to stay closer to home, added substantial costs for safety measures, reduced revenue from student room and board and canceled money-generating athletic events.

Governments have not always stepped into the breach: In Iowa, the state cut $8 million from its higher education appropriation even after the Board of Regents, which oversees the state’s universities, requested an $18 million increase. Over the summer, the University of Iowa announced a salary freeze and other significant cuts. This was before the Big Ten Conference postponed fall competition, erasing more than $60 million from the university’s athletics program.

When the university announced its plans for reopening with a combination of in-person and virtual instruction, it did not mention its finances as a factor, though it froze tuition rather than reduce it, as some universities have done. It also mandated mask wearing inside buildings and said it would test students with symptoms or who had been exposed to the virus.

Still, its decision to hold in-person classes drew criticism from some faculty. “We’re scared for our health and yours,” one group of instructors wrote in an open letter to students in July.

And its decision not to test asymptomatic students unless they had been exposed unnerved some city officials. Dr. Dan Fick, the campus health officer, said the university wanted to avoid a false sense of security.

But Janice Weiner, who represented the City Council in meetings with the business community and campus, questioned the approach. “We have a robust and capable medical community, we have good public health officials, we have everything we need,” she said. “But then the university didn’t require everyone coming back to campus to be tested.”

Iowa City is a blue town in a state with a pro-Trump Republican governor, Kim Reynolds, who has clashed with the state’s cities over masks and Covid policies.

Though the governor in March restricted large gatherings, closed Iowa schools and banned indoor operations of many businesses, she began relaxing those orders in May and has argued that face-mask mandates couldn’t be legally enforced.

Several municipalities have nonetheless passed ordinances requiring face masks, including Johnson County and Iowa City — largely in preparation for the return of students. But because state health rules have become a patchwork, not all returning students come from places where mask wearing is required, said Ms. Weiner. And, she said, the inconsistency offers an excuse to those who don’t want to wear them.

Interviews with students suggested that concern had at least some justification.

“If people get sick, they get sick — it happens,” Mady Hanson, a 21-year-old exercise science major, said last week on campus. She added that she and her family had survived Covid-19 and that she resented the city’s “ridiculous” restrictions.

“We’re all farmers and don’t really care about germs, so if we get it, we get it and we have the immunity to it.”

Both university and city officials said they believe the spike in cases has been a wake-up. “When we look back,” said Dr. Fick, “I think we’ll be proud that when students got the message, a majority stepped up.”

On the City Council, Ms. Weiner was less upbeat.

“There’s not a whole use in placing blame — we have to figure out a way forward,” she said. “But it’s going to take a herculean effort here for our numbers to start to go down.”

 

 

 

Executive Order On Housing Doesn’t Guarantee An Eviction Moratorium

https://www.forbes.com/sites/advisor/2020/08/10/trumps-executive-order-on-housing-doesnt-guarantee-an-eviction-moratorium/?tid=newsletter-dailydozen&utm_source=newsletter&utm_medium=email&utm_campaign=dailydozen&cdlcid=5d2c97df953109375e4d8b68#3a33cbc3359a

After negotiations for another stimulus package hit a dead end in Washington last week, President Donald Trump signed executive orders to extend relief in the meantime. One order, according to the president, would extend the federal eviction moratorium. 

The original moratorium, included in the CARES Act, prohibited landlords or housing authorities from filing eviction actions, charging nonpayment fees or penalties or giving notice to vacate. It expired on July 24 and only applied to federally subsidized or federally backed housing.

But housing advocates are pushing back, saying Trump’s executive order to extend an eviction moratorium actually does nothing at all—and keeps struggling Americans at risk of losing their housing. 

 

Details on the Order

Trump’s order doesn’t actually extend the federal eviction moratorium. Instead, it calls on the Department of Health and Human Services and the Centers for Disease Control and Prevention to “consider” whether an additional eviction ban is needed.

“The Secretary of Health and Human Services and the Director of CDC shall consider whether any measures temporarily halting residential evictions of any tenants for failure to pay rent are reasonably necessary to prevent the further spread of COVID-19 from one State or possession into any other State or possession,” reads the order.

Additionally, the executive order does not provide any new money to help struggling renters during the pandemic. Instead, it says the secretary of Treasury and the secretary of Housing and Urban Development—Steven Mnuchin and Ben Carson, respectively—can identify “any and all available federal funds” to provide temporary rental assistance to renters and homeowners who are facing financial hardships caused by COVID-19.

During a White House press briefing on Monday, Kayleigh McEnany said the president did “did what he can within his executive capacity…to prevent resident evictions.”At the time of publishing, officials mentioned in Trump’s executive order have not released guidelines on extending the federal eviction moratorium.

 

Housing Advocates React to Trump’s Eviction Order

Housing advocates have not reacted positively to Trump’s executive order, suggesting officials extend an eviction moratorium.

“The executive order that he signed this weekend is really nothing more than an empty shell that creates chaos and confusion, and it offers nothing more than false hope to renters who are at risk of eviction because that executive order does literally nothing to prevent or stop evictions,” Diane Yentel, president and CEO of the National Low Income Housing Coalition, said on Sunday during an MSNBC interview.

The House of Representatives included a more thorough plan to prevent evictions in its HEROES Act proposal. The proposal included $175 billion in rent and mortgage assistance and would replace the original federal eviction moratorium with a 12-month moratorium from all rental housing, not just federally subsidized ones. There also would be funds available to provide homeowners with assistance to cover mortgage and utility payments, property taxes or other resources to help keep Americans housed.

Sen. Richard Shelby (R-AL) introduced the Coronavirus Response Additional Supplemental Appropriations Act as part of the GOP’s HEALS Act proposal. Shelby’s bill included significantly less money for housing assistance than the HEROES Act—$3.2 billion—and would be used for tenant-based rental assistance. Shelby’s proposal did not include any language about extending the CARES Act eviction moratorium. 

A recent report by a group of housing advocates finds there could be as much as 40 million renters at risk of eviction in the coming months. The U.S. unemployment rate currently sits at 10.2%. 

Individuals who are struggling to pay rent might have assistance options available. Some cities and states have implemented their own eviction moratoriums—you can learn more about them by visiting the Eviction Lab at Princeton University. There are also legal aid options, like Just Shelter, that will help tenants who are facing eviction for low-cost or free.