Non-operating income helps Providence claw back into black for 2020

https://www.healthcaredive.com/news/non-operating-income-helps-providence-claw-back-into-black-for-2020/596370/

Dive Brief:

  • Though the COVID-19 pandemic hampered Providence’s operational performance in 2020, the regional nonprofit powerhouse still ended the year in the black with net income of $1 billion, down about 9% from 2019.
  • Providence ended 2020 with an operating loss of $306 million, compared to an operating income of $214 million in 2019. However, healthy non-operating income recouped operating losses and offset reimbursement shortfalls from Medicaid and Medicare coverage, Providence said in full-year financial results released Monday.
  • The system, which operates 51 hospitals spanning seven states, posted drastic net losses in the first half of 2020 due to the pandemic, but seems to have closed out the year on more stable financial footing though volumes remain down.

Dive Insight:

Like other major systems, the pandemic railroaded Providence’s operational performance in 2020, as state and local lockdowns and orders to pause non-emergency procedures contributed to an unprecedented drop in patient volumes starting in March. As a result, the West Coast system reported a significant dip in patient revenue, along with skyrocketing expenses for personal protective equipment, pharmaceuticals and labor.

Volumes as measured by adjusted admissions were down 9% for the fiscal year ended Dec. 31, Providence said. Despite the lower volume, operating revenues were actually up 3% year over year to $25.7 billion, driven by growth in capitation, premium and diversified revenue streams — and supported by the recognition of $957 million in federal COVID-19 grants to providers from the Coronavirus Aid, Relief, and Economic Security Act passed a year ago.

However, operating expenses climbed 5% year over year to $26 billion, resulting in ​operating earnings before interest, depreciation and amortization of $1.1 billion, compared with $1.6 billion in 2019.

Overall, Providence’s financial results suggest the system was able to sidestep the worst of the pandemic’s financial effects, and mirrors 2020 reports from other major nonprofits.

Kaiser Permanente, which reported in early February, was also able to stay in the black despite COVID-19 deflating operating and net income, which fell about 19% and 15% respectively from 2019. Similarly, nonprofit Mayo Clinic reported a shrinking bottom line, with net income down almost 24% from 2019 though it remained profitable.

California-based nonprofit Sutter Health also squeaked to overall profitability in 2020 despite a operational loss of $321 million. The system, which said it expected to take several years to fully recover from COVID-19, launched a systemwide operational and financial review as a result of its weak operational performance.

For-profit operators weathered similar headwinds and were able to turn a profit in 2020, including Universal Health ServicesHCA HealthcareTenet and Community Health Systems.

A number of hospital executives have called out CARES grants and other federal aid as a key help in turning their finances around in 2020. However, despite the pandemic’s financial pressures, numerous major operators, including Kaiser Permanante, Mayo Clinic and HCA said they would return all or a portion of congressional aid, even as powerful hospital lobbies call on Washington for additional funds.

A recent Kaufman Hall report suggests providers could be overwhelmed by ongoing COVID-19 expenses following a surge in cases over the winter. Researchers estimate hospitals could lose anywhere from $53 billion to $122 billion in revenue in 2021 if pandemic pressures don’t abate, despite the glimmer of hope brought by ongoing vaccination efforts.

Despite increasing distribution of coronavirus vaccines, Moody’s Investors Service has placed a negative outlook on nonprofit hospitals in 2021.

Providence came together in 2016 with the merger of Washington-based Providence Health & Services and California-based St. Joseph Health to create the nation’s fourth-biggest Catholic hospital chain. Its full-year earnings come a week after California Attorney General and Biden nominee for HHS Secretary Xavier Becerra disclosed his office is investigating whether Providence violated legal commitments in applying religious restrictions to medical care at a hospital in Orange County.​

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.

How many “lives” does a health plan need?

https://mailchi.mp/3e9af44fcab8/the-weekly-gist-march-26-2021?e=d1e747d2d8

A Dozen Facts About Medicare Advantage in 2019 | KFF

Doctors and health systems with a significant portion of risk-based contracts weathered the pandemic better than their peers still fully tethered to fee-for-service payment. Lower healthcare utilization translated into record profits, just as it did for insurers.

We’re now seeing an increasing number of health systems asking again whether they should enter the health plan business—levels of interest we haven’t seen since the “rush to risk” in the immediate aftermath of the passage of the Affordable Care Act a decade ago.

The discussions feel appreciably different this time around (which is a good thing, since many systems who launched plans in the prior wave had trouble growing and sustaining them). First, systems are approaching the market this time with a focus on Medicare Advantage, having seen that growing a base of covered lives with their networks is much easier than starting with the commercial market, where large insurers, particularly incumbent Blues plans, dominate the market, and many employers are still reticent to limit choice.

But foremost, there is new appreciation for the scale needed for a health plan to compete. In 2010, many executives set a goal of 100K covered lives as a target for sustainability; today, a plan with three times that number is considered small. Now many leaders posit that regional insurers need a plan to get to half a million lives, or more. (Somehow this doesn’t seem to hold for insurance startups: see the recent public offerings of Clover Health and Alignment Health, who have just 57K and 82K lives, respectively, nationwide.)

We’re watching for a coming wave of health system consolidation to gain the financial footing and geographic footprint needed to compete in the Medicare Advantage market, and would expect traditional payers to respond with regional consolidation of their own.
 

Hedge fund unloads $133M of Tenet shares

Glenview Capital Receives ISS Support To Replace HMA Board

Glenview Capital Management, the hedge fund run by Larry Robbins, has a 12.9 percent stake in Tenet Healthcare after recently selling shares of the Dallas-based company, according to a Securities and Exchange Commission filing.

Glenview sold 2.5 million shares of Tenet, a 65-hospital system, on March 22 for $53.3 per share, bringing in a total of $133.25 million. 

Tenet shares closed March 24 at $50.03 per share, down from $50.49 a day earlier, according to Yahoo Finance

Tenet ended 2020 with net income of $399 million on revenue of $17.64 billion, compared to a net loss of $215 million on revenue of $18.48 billion a year earlier. 

Optum expects to acquire 10,000 more doctors in 2021

https://mailchi.mp/128c649c0cb4/the-weekly-gist-january-22-2021?e=d1e747d2d8

Physician practice consolidation: It's only just begun - STAT

UnitedHealth Group, both the nation’s largest health insurer and largest employer of physicians, just announced plans to continue to rapidly grow the number of physicians in its Optum division.

This week CEO Dave Wichmann told investors in the company’s fourth quarter earnings call that Optum entered 2021 with over 50,000 employed or affiliated physicians, and expects to add at least 10,000 more across the year. (For context, HCA Healthcare, the largest for-profit US health system, employs or affiliates with roughly 46,000 physicians, and Kaiser Permanente employs about 23,300.) Optum is already making progress toward its ambitious goal with the announcement last week that the company is in talks to acquire Atrius Health, a 715-physician practice in the Boston area.
 
As was the case with other health plans, United’s health insurance business took an expected hit last quarter due to increased costs from COVID testing and treatment, combined with rebounding healthcare utilization. Optum, however, saw revenue up over 20 percent, which drove much of the company’s overall fourth quarter growth. 

Expect United, and other large insurers, flush with record profits from last year, to continue to expand their portfolio of care, digital and analytics assets (see also Optum’s recently announced plan to acquire Change Healthcare for $13B) as they looks to grow integrated insurance and care delivery offerings.

It’s part of what we expect to be a 2021 “land grab” for strategic advantage in healthcare, as providers, health plans, and disruptors look to create comprehensive platforms to secure long-term consumer loyalty.

‘We feel bullish’: Payers look ahead to 2021

https://www.healthcaredive.com/news/we-feel-bullish-payers-look-ahead-to-2021/585211/

Amazon.com: I'm Feeling Bullish, Stock Trading Log Book: Day Trading Log  Journal, Stock Trading Log for active traders of stocks, Log Trade.  (9798600033962): Publishing, Stockers & Brokers: Books

Top executives at some of the biggest commercial insurers outlined their shifting strategies and what markets are growth opportunities in light of the recession at Morgan Stanley’s annual conference.

Top executives at some of the biggest commercial insurers provided a peak behind their curtains at Morgan Stanley’s annual investor conference this week, discussing the pace of utilization recovery and how they’re approaching rate setting and risk going into next year

Though there’s significant uncertainty around the future of the insurance industry, many remarks can be summed up in a line from Cigna CEO David Cordani: “We feel bullish on 2021.”

And despite the major role of government in regulating healthcare, most officials seemed agnostic on the presidential election looming in less than two months.

Payers are reporting skyrocketing profits amid the COVID-19 pandemic as patients deferred care in droves in the second quarter, sparking a congressional investigation into business practices. Use of healthcare services continues to recover from a nadir in March and April, and that recovery has continued into the third quarter, payer executives said. But the pace has differed by segment.

At the start of the pandemic, Humana saw beneficiary use drop to about 30% of pre-COVID-19 levels until mid-May, when it slowly started to tick back up. The Louisville, Kentucky-based insurer’s utilization is now still “a little below par,” but well above that depression and meeting internal expectations, CEO Bruce Broussard said.

CVS Health-owned Aetna has seen its commercial business come back faster than Medicare, CFO Eva Boratto said. Primary care and labs have seen a quicker rebound, but it’s been slower in inpatient and ambulatory.

Centene CEO Michael Neidorff predicts utilization will be between 65% to 80% of normal by the end of the year, but remains cautious due to the shifting nature of the pandemic, and how it could coincide with a potentially nasty flu season.

“We don’t know what other peaks we’re going to see,” Neidorff said.

2021 rate setting, strategic pivots

Unsurprisingly, COVID-19 is also shaping major payer’s go-to-market approaches and how they’re thinking about 2021 bids.

Humana, for example, studied both historical data prior to COVID-19 and did scenario planning around what the pandemic could do to factors like utilization, testing and treatment if it continued throughout the year. Eventually, the payer decided to base bid assumptions off trending historical information forward, according to Broussard.

“We were very oriented to pricing that was more conservative as we thought about the approach,” he said.

It appears Centene, contrastingly, is using 2020 data to risk score. When asked how the payer is approaching rate setting, Neidorff said: “We’re dealing with this year. And we’re saying that any concessions this year should not necessarily carry into next year, which is an entirely different year.”

Employers and plans nationwide are struggling with this issue. Only about 60% of employers are using 2020 claims to set rates for next year, while another 26% are calculating expected medical costs based on data from 2019, and 9% are using data from the first two months of 2020 alone, according to Credit Suisse.

The pandemic has also shifted insurers’ broader strategic priorities in 2021 and beyond, especially by hammering home the need for diversified revenue streams to keep afloat, top execs said.

“We’re in 37 states. If you have a stock that’s not performing well in your portfolio, you probably have some that are offsetting it,” Centene’s Neidorff said.

Humana has been investing in telesales, at-home and in-community offerings and digital capabilities, with an eye for growth. Broussard said Humana’s customers have been mostreactive to an omnichannel approach to care delivery.

For example, the payer is seeing home as an increasingly valid path for care a little more acute in service than in the past. As a result, Humana plans to continue investing in areas that dovetail with that trend, and those with biggest impact on downstream healthcare costs, including primary care, social determinants of health, behavioral health and pharmacy.

CVS has also accelerated development of its virtual care offering, eClinic, as a result of the pandemic and relaxed federal regulations. Visits are up 40% since the end of June, CEO Larry Merlo said, noting he believes the future of healthcare delivery is at the intersection between digital and physical.

Because of the pandemic, “we are seeing an accelerated shift to this multichannel, integrated approach,” Merlo said. “We did change some of our priorities, and accelerate some things that may have been further down the road.”

CVS is continuing to convert existing stores to health- and wellness-focused locations, called HealthHUBs, which devote a fifth of floor space to healthcare products and services. Currently, the Rhode Island-based giant has 275 HUBs up and running, despite pausing conversions for a time in March.

Cigna is also looking to drive revenue by moving beyond a payer’s traditional wheelhouse. On Wednesday, the insurer announced it was rebranding its health services division as Evernorth, in a next step for the Cigna-Express Scripts megamerger completed almost two years ago.

For its part, Centene is introducing more value-based contracts in 2021, after seeing providers it contracts with in alternative payment models are reporting stronger cash flow and patient relationships amid COVID-19 than those in fee-for-service relationships.

Going into next year, the payer is also focused on margin expansion, working with states to set rates and federal lobbying for friendly policies like an increased Medicaid match rate, Neidorff said.

Attractive markets

The COVID-19 recession booted millions of Americans off employer-sponsored insurance, though the full scope of the insurance crisis isn’t yet clear. Cigna’s Cordani noted the disenrollment in the first half of the year in its commercial population was lower than expected, helped by the fact the payer is less active in sectors hit hardest by the pandemic like travel and leisure.

But disenrollment could still snowball in the second half of 2020. As a result, a number of major commercial payers are building out offerings in two coverage backstops in the market: Medicaid and the Affordable Care Act exchanges.

Broussard said Humana sees ample opportunity in Medicaid — including the dually eligible — but wants to be more surgical in expansion moving forward, especially as states look for a more contemporary delivery of services and engagement with clinical programs. Humana is going to look for tuck-in acquisitions.

“Is there a way to enter the market in a small way, and leverage our capabilities and grow from that?,” Broussard said.

Cordani agreed that budget-strapped states are looking for new ways to lower costs, but said “Medicaid has always been a lower priority growth platform” for Cigna. Instead, the insurer sees the safety net program as an opportunity for Evernorth in the near term, more than its government business.

Of the 1.1 million new members Centene added from March through August, the majority were in Medicaid, but a significant portion were in the ACA exchanges, Neidorff said. Capitalizing on that momentum, Centene — already the largest payer in the exchanges — is adding 2 new states to its footprint for 2021. “I think we’ll grow in marketplace, given the level of people and the subsidies they get,” Neidorff said. “I see it as a positive going forward.”

Humana, however, is leery on entering the exchange market, given political uncertainty around the upcoming 2020 presidential election, according to its top exec.

“The exchange market has stabilized in a lot of different ways, but still has elements where it tends to be a sicker, more transient population,” Broussard said. “We’d rather not be in the situation where we go in and have to pull out because of the political realm.”

Payers also continue to forecast strong growth in Medicare Advantage. Currently, about 34% of Medicare beneficiaries are in the privately run Medicare plans. It’s a popular program: The Congressional Budget Office predicts MA’s share of the overall Medicare population will swell to 47% by 2029.

CVS is currently on track for mid-single-digit growth next year, and sees Aetna’s continued growth in MA as one of the building blocks to continued earnings power, Boratto said. 

Similarly, Cigna is well on track to meeting its goal of 10% to 15% annual organic growth in MA, Cordani said. Historically, Cigna has only been present in about 18% to 19% of the addressable government market, but is trying to eventually expand to 50%.​

Shrugging off election

Unlike years past when some payers worried of Democratic plans for Medicare and other aspects of insurance, most executives seemed to shrugged off the coming presidential election.

President Donald Trump has made undermining the ACA one of the chief goals of his first term, while Democrat nominee former Vice President Joe Biden’s healthcare plan revolves around shoring up the decade-old law, enacting a public option and lowering Medicare’s age of eligibility.

But executives noted Trump’s tenure hasn’t necessarily been bad for them, and having Biden at the helm could provide some opportunity for savvy operators.

Humana could be particularly at risk going into a period of political uncertainty. The payer has a smaller portfolio and fewer assets than some of its bigger peers, Ricky Goldwasser, managing director at Morgan Stanley, said.

But Broussard said regardless of whether the inhabitant of the White House is blue or red, they’ll likely support value-based payment models — a key tenet of its strategy. Additionally, the seemingly-threatening Medicare buy-in option is “very similar to MA,” Broussard said. “We’d see that as the opportunity to expand our ability to bring our capabilities to maybe a younger population, but with a lot of the same elements.”

Some industry experts see the public option, which has bipartisan support among voters, as a potential benefit for companies with leading market share in MA, like UnitedHealth, Humana and Aetna.

“We’ve had public options and done well in public options. So history says that’s fine,” Centene’s Neidorff said. “I think Biden would not be a threat, but an opportunity. I think a Trump re-election would just be more of what we’ve seen. And we’ve done OK with that.”

Cartoon – The Market Cure

Cartoon – The Market will Cure It | HENRY KOTULA

Another 870,000 Americans filed new unemployment claims last week

https://finance.yahoo.com/news/jobless-claims-coronavirus-unemployment-week-ended-september-19-2020-184747657.html

Another 870,000 Americans filed for first-time unemployment benefits last week, unexpectedly rising slightly from the prior week to reaffirm a slowdown in the U.S. economic recovery.

The U.S. Department of Labor (DOL) released its weekly jobless claims report at 8:30 a.m. ET Thursday. Here were the main metrics from the report, compared to Bloomberg estimates:

  • Initial jobless claims, week ended Sept. 19: 870,000 vs. 840,000 expected, and 866,000 during the prior week
  • Continuing claims, week ended Sept. 12: 12.580 million vs. 12.275 million expected, and 12.747 million during the prior week

At 870,000, Thursday’s figure represented the fourth consecutive week that new jobless claims came in below the psychologically important 1 million level, but was still high on a historical basis. Nevertheless, the labor market has made strides in recovering from the pandemic-era spike high of nearly 7 million weekly new claims seen in late March.

“While jobless claims under a million for four straight weeks could be considered a positive, we’re staring down a pretty stagnant labor market,” Mike Loewengart, managing director of investment strategy for E-Trade Financial Corporation, said in an email Thursday. “This has been a slow roll to recovery and with no signs of additional stimulus from Washington, jobless Americans will likely continue to exist in limbo. Further, a shaky labor market translates into a skittish consumer, and in the face of a pandemic that seemingly won’t go away without a vaccine, the outlook for the economy certainly comes into question.”

On an unadjusted basis, initial jobless claims rose by a greater margin, or about 28,500, from the previous week to about 824,500. The seasonally adjusted level of new claims rose by 4,000 week on week.

By state, unadjusted claims in California – where joblessness due to the pandemic has compounded with labor market stress due to wildfires – were again the highest in the country at more than 230,000, for an increase of about 4,400 week-over-week. Georgia, New York, New Jersey and Massachusetts also reported significant increases in new claims relative to the rest of the country. Most states reported at least increases in new claims last week.

Continuing claims have also trended lower after a peak of nearly 25 million in May, and fell for a second straight week in this week’s report. But these claims, which capture the total number of individuals still receiving unemployment insurance, have not broken below the 12 million mark since before the pandemic took hold of the labor market in mid-March.

Consistently high numbers of individuals have been filing for, and receiving, jobless benefits from regular state programs, and those newly created during the pandemic. The number of individuals claiming benefits in all programs for the week ended September 5 – the latest reported week – fell for the first time following three straight weeks of increases to 26.04 million, from the nearly 29.8 million reported during the prior week.

Of that total, more than 11.5 million comprised individuals receiving Pandemic Unemployment Assistance, which is aimed at self-employed and gig workers who don’t qualify for regular unemployment compensation but have still been impacted by the pandemic.

One of the major downside risks to further improvement in the labor market has been concern that Congress may not soon pass another round of fiscal stimulus aimed at keeping individuals on payrolls during the pandemic. Economists have already said that the end of the last round of augmented federal unemployment benefits in late July has weighed on improvements in joblessness.

“The current picture suggests that growth has slowed sharply in the past three months, and that the labor market is stalling again in the face of rising infections and the sudden ending of federal government support to unemployed people,” Ian Shepherdson, chief economist for Pantheon Macroeconomics, said in a note Wednesday.

The need for more fiscal stimulus to encourage the economy’s ongoing recovery has become a key talking point of policymakers including Federal Reserve Chair Jerome Powell and his colleagues at the central bank. In congressional testimony Tuesday and Wednesday, the Fed leader said further fiscal stimulus is “unequaled” by any other form of support that could be unleashed, with the central bank’s lending facilities having gone largely untouched by Main Street.

“The concept of the [congressionally authorized] Paycheck Protection Program was helpful because for many of those kinds of businesses – those businesses that don’t have cash reserves – the ability to get a forgivable loan if they stay open, if they keep people employed, was sound, and did give them the prospect of staying in business,” Joseph Minarik, The Conference Board chief policy economist and former Office of Management and Budget chief economist, told Yahoo Finance. “The notion that you have businesses that have been weak over the last few months and now have simply had to shut their doors, that’s a real problem, and it is not necessity going to be solved with a loan.”

 

 

 

 

Moody’s: Hospital financial outlook worse as COVID-19 relief funds start to dwindle

https://www.fiercehealthcare.com/hospitals/moody-s-hospital-financial-outlook-worse-as-covid-19-relief-funds-start-to-dwindle?mkt_tok=eyJpIjoiWTJZek56Z3lNV1E0TW1NMyIsInQiOiJKdUtkZE5DVGphdkNFanpjMHlSMzR4dEE4M29tZ24zek5lM3k3amtUYSt3VTBoMmtMUnpIblRuS2lYUWozZk11UE5cL25sQ1RzbFpzdExcL3JvalBod3Z6U3BZK3FBNjZ1Rk1LQ2pvT3A5Witkc0FmVkJocnVRM0dPbFJHZTlnRGJUIn0%3D&mrkid=959610

For-profit hospitals are expected to see a financial decline over the next 12 to 18 months as federal relief funds that shored up revenue losses due to COVID-19 start to wane, a recent analysis from Moody’s said.

The analysis, released Monday, finds that cost management is going to be challenging for hospital systems as more surgical procedures are expected to migrate away from the hospital and people lose higher-paying commercial plans and go to lower-paying government programs such as Medicaid.

“The number of surgical procedures done outside of the hospital setting will continue to increase, which will weaken hospital earnings, particularly for companies that lack sizeable outpatient service lines (including ambulatory surgery centers),” the analysis said.

A $175 billion provider relief fund passed by Congress as part of the CARES Act helped keep hospital systems afloat in March and April as volumes plummeted due to the cancellation of elective procedures and reticence among patients to go to the hospitals.

Some for-profit systems such as HCA and Tenet pointed to relief funding to help generate profits in the second quarter of the year. The benefits are likely to dwindle as Congress has stalled over talks on replenishing the fund.

“Hospitals will continue to recognize grant aid as earnings in Q3 2020, but this tailwind will significantly moderate after that,” Moody’s said.

Cost cutting challenges

Compounding problems for hospitals is how to handle major costs.

Some hospital systems cut some costs such as staff thanks to furloughs and other measures.

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

Hospitals can’t cut costs indefinitely, but the costs for handling the pandemic (more money for personal protective equipment and safety measures) are going to continue for some time, Moody’s added.

“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,” the analysis found. “This will help hospitals free up bed capacity more rapidly and avoid the need for widespread shutdowns of elective surgeries.”

But will that capacity be put to use?

The number of surgical procedures done outside of the hospital is likely to increase and will further weaken earnings, Moody’s said.

“Outpatient procedures typically result in lower costs for both consumers and payers and will likely be preferred by more patients who are reluctant to check-in to a hospital due to COVID-19,” the analysis said.

The payer mix will also shift, and not in hospitals’ favor. Mounting job losses due to the pandemic will force more patients with commercial plans toward programs such as Medicaid.

“This will hinder hospitals’ earnings growth over the next 12-18 months,” Moody’s said. “Employer-provided health insurance pays significantly higher reimbursement rates than government-based programs.”

Bright spots

There are some bright spots for hospitals, including that not all of the $175 billion has been dispersed yet. The CARES Act continues to provide hospitals with a 20% add-on payment for treating Medicare patients that have COVID-19, and it suspends a 2% payment cut for Medicare payments that was installed as part of sequestration.

The Centers for Medicare & Medicaid Services also proposed increasing outpatient payment rates for the 2021 fiscal year by 2.6% and in-patient rates by 2.9%. The fiscal year is set to start next month.

Patient volumes could also return to normal in 2021. Moody’s expects that patient volumes will return to about 90% of pre-pandemic levels on average in the fourth quarter of the year.

“The remaining 10% is likely to come back more slowly in 2021, but faster if a vaccine becomes widely available,” the analysis found.