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Latest COVID surge took a toll on hospital sector balance sheets

An April spike in COVID-19 hospitalizations and elevated expenses are hammering hospital and healthcare system balance sheets that no longer enjoy federal aid to help manage the fiscal pressure.

“Combined with the end of supplemental federal funding, the threat of another significant coronavirus wave and the negative impact on the sector looms larger than ever,” Fitch Ratings said in a May report on the not-for-profit hospital sector.

The pressures are expected to linger through the year and beyond.

While hospitals and health systems saw some relief in March after dealing with the winter omicron variant surge, a new spike in hospitalizations in April presented fresh challenges that led to a thinning of margins as expenses also remained burdensome, according to Kaufman Hall’s National Hospital Flash Report.

The median Kaufman Hall year-to-date operating margin index was recorded at negative 3.09% through April. The median change in operating margin was down 38.1% from the previous month and 76% from April 2021.

“The first four months of 2022 have been challenging for the nation’s hospitals and health systems, which has been borne out in the losses many providers have reported so far this year,” said the report’s author Erik Swanson, a senior vice president of data and analytics with the advisory firm. “Even if margins return to pre-pandemic levels, many hospitals may likely end the year with substantially depressed margins.”

Expenses are up 8.3% since April 2021 and 9.6% year-to-date compared with the same period in 2021.

“Labor shortages, high prices for supplies, and cost increases to treat sicker patients over longer stays are ballooning hospital expenses. With a bleak consensus outlook for the U.S. economy, those factors and their effects could be here for a while,” Swanson said.

COVID-related shutdowns in China and the Russian invasion of Ukraine are further fueling the supply chain strains that have driven prices up.

Patient volumes and days declined in April by 5.7% compared to March and 1.8% from April 2021.

“Hospital patients in 2022 are likely sicker, harder to discharge, and more expensive to treat than hospital patients in 2021,” said Swanson. “Fewer patients who are sicker and more expensive weigh heavily on hospitals’ operating margins, putting a strain on both expenses and revenue.”

The 7-day moving average of new COVID-19 cases rose to more than 57,853 at month’s end from an average of 25,535 on April 1.

Kaufman Hall compiles its Flash Reports with data from more than 900 not-for-profit and for-profit hospitals.

Fitch expects an overall weakening of margins this year that will be felt most acutely in the first and second quarters before recovering later this year as staffing costs moderate and revenue picks up after previous pauses in procedures to manage through coronavirus case surges.

Fitch expects margins to improve after 2022 but the stabilization will be below pre-pandemic levels, according to the report authored by analysts Kevin Holloran, Mark Pascaris, and Sarah Repucci.

"Healthcare providers have generally been able to absorb what are now the well-known implications under surge conditions, but they no longer have the benefit of federal stimulus funds to boost liquidity and help cover higher incremental operating expenses or lost revenue,” Fitch said.

While pressures are expected to eventually ease, COVID-19 isn’t going away even as it moves to endemic status, Fitch said.

“Hospitals will need to maintain some level of coronavirus care capacity going forward…especially if variants are difficult to contain and vaccination rates and immunity levels begin to wane,” Fitch said. “This will require resources to be able to sustain operations through periods of lower revenues and elevated expenses.

“Hospitals need effective, ongoing cost-cutting or the ability to grow top-line revenues,” Fitch said.

A limited number of Fitch’s rated credits may see minimal benefits from smaller amounts of Federal Emergency Management Agency or business interruption insurance. The Biden administration recently extended the U.S. coronavirus public health emergency for 90 days through mid-July, which extends Medicaid coverage to those already covered without additional checks, and hospitals will continue to receive 20% higher Medicare reimbursement rate for treating coronavirus patients.

Most of Fitch’s rated portfolio of hospitals benefits from balance sheets that are weathering the inflationary expenses and intermittent coronavirus disruptions but that could change.

“Current balance sheet strength is a key credit factor, stabilizing ratings in the sector. However, additional coronavirus surges and negative equity market trends will erode the existing balance sheet cushion, which could lead to negative rating actions,” Fitch said.

Fitch maintains a neutral outlook on the sector. Over the last six months, Fitch upgraded four hospital ratings and downgraded none. The upgraded hospitals demonstrated robust liquidity growth and maintain solid margins, Fitch said.

The lower rated, typically smaller hospitals with limited resources and liquidity face the most rating risks and “may see margins shrink to levels incompatible with current ratings, particularly in a high inflation environment,” Fitch said.

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