The pandemic's effect on hospitals, a year later

April 13, 2021

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In the year since the COVID-19 pandemic entered the United States, unexpectedly and rapidly sweeping through a Seattle-area nursing home, a staggering number of infections, hospitalizations, and deaths have stretched the U.S. health care system to its limit. But there are reasons for hope. Hospitalizations are declining, and newly created vaccines are being rolled out across the country, even as new strains of the virus emerge.

Craig Standen

Craig Standen

Craig Standen, senior health care investment consultant in Vanguard's Institutional Investor Group, discusses the ongoing financial and other uncertainties hospitals and health care systems face, offering senior decision-makers additional perspectives and potential next steps.

What impact did the pandemic have on health care systems financially and operationally over the past year?

Mr. Standen: The onset of the pandemic in early 2020 had an immediate and dramatic impact on the U.S. health care system, which had to ramp up to the equivalent of wartime footing in record time. In March 2020—just months after releasing upbeat sector forecasts—Standard & Poor's, Moody's Investors Services, and Fitch Ratings revised their nonprofit health care sector outlooks to negative in response to the rapidly unfolding financial and operational impacts on hospitals of all sizes.

Hospitals utilized a range of creative strategies to create more ICU capacity, including repurposing beds and reassigning nurses and clinicians to staff newly opened COVID wings and temporary hospitals. Most stopped all elective and noncritical care procedures, either voluntarily or by government mandate, with an immediate and dramatic negative effect on profitability.

Cash flow plummeted at the same time that hospitals faced a barrage of unbudgeted expenses for PPE, drugs, ventilators, and other supplies to protect staff and treat desperately ill patients. Overtime pay for frontline caregivers and temporary staffing costs gave rise to escalating expenses, as numerous frontline health care workers caught coronavirus and, sadly, many died.

Hospital management teams across the country had to find ways to reduce the financial stress they were under and, in some instances, avert financial collapse. Many providers had to furlough staff, curtail capital spending, eliminate purchases of nonessential items, and reduce benefits, including reducing or suspending 401(k) matches and contributions to defined benefit plans, among other moves.

Telehealth capabilities became critically important across the care continuum to help patients and staunch severe declines in revenue for most, if not all, providers. Early in the pandemic, the Centers for Medicare and Medicaid Services (CMS) loosened regulations limiting the types of care that could be delivered remotely and increased reimbursements for these services. This enabled hospitals and other providers to remain connected to and meet with many patients virtually.

Congress enacted multiple rounds of stimulus measures, and the health care sector received approximately $178 billion of the stimulus funding in 2020 and early 2021. CMS also allowed hospitals to request advanced reimbursement from Medicare, an option typically reserved for those hospitals in areas hit by natural disasters. And existing and new bank lines of credit provided additional sources of liquidity for hospitals needing to shore up their balance sheets.

These infusions of cash helped, but hospital and health care system operating income was down significantly by year-end, driven by steep drops in revenues and dramatically higher expenses.

What is the current landscape for health care providers?

Mr. Standen: Hospitalizations have declined from their recent peaks. Yet, the emergence of more contagious variants of the virus means the nation's health and economy are still at risk. In truth, the U.S. is in a race between the pace at which people can be vaccinated and the speed with which COVID-19 continues to mutate and spread.

To that end, immediately after being inaugurated, President Biden set in motion a 100-day plan to address the pandemic head-on. In addition to providing a one-time stimulus payment to eligible individuals and continuing unemployment benefits, the plan includes measures intended to relieve operational and economic strains on hospitals and health care providers, both directly and indirectly:

  • A mask mandate covering all federal property and interstate travel to limit the pandemic's spread.
  • The coronavirus relief package, enacted March 11, 2021, which provides funding for testing and vaccinations as the rollout of vaccines gains momentum after a rocky start in many states; funds for manufacturing and technologies needed to produce PPE, drugs, and devices used in preventing and treating coronavirus; and $8.5 billion for rural hospitals and providers.
  • New subsidies for people who purchase COBRA coverage through a former employer.
  • A three-month special open enrollment period for the 36 states that use the ACA exchange. As a result of this effort to broaden access to coverage for millions of newly unemployed and uninsured individuals, more than 200,000 people have gained access to coverage during this period.
  • New financial incentives to encourage additional states to expand their Medicaid programs to cover low-income adults under the ACA.

What are providers' next steps?

Mr. Standen: Hospitals and health care systems need to resume a path to normal operations and volumes at the same time they rebuild their balance sheets. As post-COVID strategies take shape, management teams and boards are likely to reconsider large capital projects and broader real estate strategies for their organizations, at least for the near term.

The financial recovery for health care providers will take time. Achieving full recovery will depend on two things: the pace of vaccine deployment and the speed with which patients feel comfortable reengaging with health providers. Because many patients deferred procedures and elective surgeries, volumes are likely to be strong in later 2021 through early 2022.

Additionally, hospital fundraising has remained strong, resulting in many hospitals seeing donations increase in 2020 over 2019. These efforts and generous responses are expected to continue, helping to bolster revenues.

What's on the horizon for the health care sector?

Mr. Standen: The pandemic has accelerated several trends in the health care sector, highlighting challenges and opportunities ahead:

  • High labor costs and staffing shortages will persist. The pandemic has worsened the preexisting shortage of nurses and primary care physicians. Many frontline nurses have left the field after experiencing COVID-related burnout, leading to intense competition among providers for a scarce supply of qualified caregivers. The pandemic has also led many primary care physicians to either close their practices for financial reasons or retire earlier than they had planned.
  • Persistent unemployment will continue to hinder financial performance. The pandemic-induced increase in unemployment has increased levels of bad debt and uncompensated care. It also has negatively skewed payer mixes, with fewer patients covered by more profitable commercial health insurance and more either covered by less profitable governmental payers (Medicare and Medicaid) or uninsured. Additionally, enhanced federal Medicaid matching funds paid to the states will cease when the public health emergency ends. This likely will prompt budget-strapped states to scrutinize Medicaid services, reimbursements, and eligibility.
  • More health care will be delivered outside of hospitals. This trend, which was well underway before the pandemic, is expected to accelerate. Hospitals will continue to expand their outpatient and ambulatory strategies, either on their own or in partnership with physicians and/or other for-profit operators.
  • Telehealth and tech-enabled care delivery models are here to stay. The pandemic showed that telehealth, remote monitoring, and other forms of virtual patient engagement can be rapidly and effectively deployed. Moreover, a segment of the population has indicated it would prefer this type of engagement as a regular and permanent option. The pandemic-induced explosion in telehealth and remote learning also exposed gaping shortfalls in broadband internet access in many underserved rural and urban communities.
  • Ongoing expense management needs will drive more outsourcing of services. Intense expense management over the past few years has helped support hospitals' profitability despite pressure on volumes and revenues. Growing outsourcing of such functions as revenue cycle, accounts payable, scheduling, food service, IT/data management, facilities and real estate management, and investment management—even corporate finance and broader accounting functions—will likely be sources of future expense savings.
  • Competition from nontraditional providers will only intensify. Health insurers have been busy acquiring physician groups, becoming what are loosely termed as "payviders." Many pharmacy chains are offering primary care services in an effort to get closer to the end user (i.e., patient) and have greater control over how health care dollars get spent. These initiatives and many others will continue to encroach on the territory traditionally occupied by acute care hospitals.
  • Mergers and acquisitions will remain the preferred growth strategy for many providers. A recent study conducted by Modern Healthcare found that nearly 40 percent of CEOs said they planned to grow their business through mergers and acquisitions.1 These activities would range from traditional horizontal integration to joint ventures and partnerships to vertical mergers.
  • Vertical mergers, in particular, may gain traction, as health care systems that also had substantial provider-sponsored health plan operations fared better financially than those systems that had traditional acute-care operations only.

    Another item to watch is how former competitors who collaborated out of necessity during the height of the pandemic will coexist going forward.

  • Providers will take advantage of generationally low long-term fixed rates to lock in low cost of capital. Rates remain at or near historically low levels after being driven down by the pandemic-induced economic downturn and market volatility. Many providers have refinanced existing debt to reduce interest costs and also funded new projects at very attractive rates. These low rates won't last forever, so those health care providers that haven't taken advantage of this opportunity should.
  • Investment gains, along with continued volatility, are expected. Hospitals with investment exposure to equity markets saw substantial gains and growth in 2020. They should also not forget that the first quarter of 2020 produced extreme volatility and major sell-offs not seen for many years. Revisit your investment policy statement and return targets, your account structure and liquidity profile, and your risk tolerance and broader enterprise goals to make sure they are aligned. And take action if they are not. As you chart your way forward post-COVID, your investment advisory partner can be a valuable resource.

Vanguard is fully aware that hospitals and other providers continue to fight the pandemic. Health care providers working on the front lines to preserve the nation's health and safety have shouldered the burden of this crisis with remarkable dedication to mission. We offer you our gratitude, support, and partnership during this challenging time.

1 "Providers adding nurses, expanding outpatient care," Modern Healthcare, February 20, 2021.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.

Craig Standen is responsible for delivering Vanguard's holistic investment management solution to health care and nonprofit organizations. Vanguard's solution integrates multiple asset pools with corporate finances and generates coordinated investment strategies that support organizational goals and objectives.