Revenues are down, but the CARES Act kept our healthcare system in the black.
By Alyssa Rapp, CEO of Surgical Solutions
In most industries, a spike in demand leads to soaring revenues. For the healthcare sector, though, things are more complicated. The COVID-19 pandemic has created vast ongoing demand for hospital services — but our country’s hospitals are poised to lose up to $122 billion in 2021, according to a new Kaufman, Hall & Associates report for the American Hospital Association. Even a best-case scenario would see hospitals lose $53 billion this year, the report warns.
Fortunately, such bleak numbers only tell part of the story. There’s no question that some of our hospitals are still struggling — but talk to healthcare leaders, and you’ll hear them sounding surprisingly upbeat. It’s true, of course, that in the early days of the pandemic hospitals saw precipitous falls in revenues as procedures were put on hold, and also faced a flood of new expenses as they struggled to cope with the cost of COVID response. For many healthcare systems, this looked like a potentially existential challenge.
But since then, things have gotten better. Hospital execs say that CARES Act funding has helped to cancel out many of the losses they suffered during the pandemic, and procedure volume is increasing again. For now, at least, that’s leaving many institutions solvent and capable of withstanding the challenges they’re facing. In fact, according to the latest National Hospital Flash Report, hospitals consistently saw their operating margins remain around 2%, or even higher, during the last six months of 2020 after accounting for CARES Act funding.
Challenges still lie ahead
That doesn’t mean everything’s rosy, of course. As the Kaufman report shows, hospitals still face enormous challenges, not least because the services most in demand during the COVID pandemic aren’t those that hospitals typically rely on to keep them in the black. Elective surgical procedures, not emergency room visits and ICU stays, are the financial engines of our healthcare system — and the pandemic has forced many hospitals to cancel or postpone non-urgent procedures while they handle a flood of coronavirus cases.
It’s also worth acknowledging that the pandemic has changed the economics of running a healthcare system. According to the Kaufman report, labor costs have increased 14% and the cost of medications has risen 17% during the pandemic. Such additional costs are hard to bear, especially given that healthcare systems were operating with average margins of just 2.5% even before the pandemic struck.
What’s needed, then, is for hospitals to use the financial lifeline they’ve been thrown by the CARES Act to rebuild, consolidate their gains, and develop the infrastructure and processes they’ll need to succeed and stay independently profitable in the months and years to come.
Some hospitals are already doing just that, stabilizing cashflows and finding creative ways to cut capital expenses by as much as 20% or 30%, and reaching a point where they’re profitable even without federal assistance. HCA returned $6 billion in CARES Act funding, for instance, while Mayo Clinic returned $156 million after posting $728 in net operating income for 2020.
There’s no room for complacency, though, and many other hospitals have plenty of work ahead of them. They remain under enormous pressure as the new wave of COVID infections washes over the country, and new, more infectious strains threaten to swamp even the best-prepared health systems. Shortages of basic supplies, including oxygen, are still creating treatment bottlenecks even for hospitals that have got their finances in order, and generating obstacles to the full-scale resumption of revenue-producing procedures.
The end is in sight
The bottom line is that the CARES Act kept hospitals afloat at a time when they were struggling, and additional support from Biden’s latest relief plans should provide further help. But financial lifelines alone can’t solve the problem — they just buy hospitals some much-needed breathing room.
Hospitals need to use that temporary respite to resume their revenue-generating activities and fully stabilize their finances. But they are also facing pressure to make substantial new investments in telemedicine, higher-capacity ER and ICU facilities, better vaccination and testing programs, and other resources necessary to deliver adequate care in the post-pandemic world. Even straightforward upgrades such as improving ventilation to avoid the spread of COVID, or setting up separate waiting rooms and triage spaces for suspected COVID patients, are logistically complex and require substantial new investments to implement.
Ultimately, while our hospitals have proven remarkably resilient, they still have plenty of hard work ahead of them. Keeping hospitals solvent will require bold and creative leadership from healthcare administrators, often working in partnership with state and federal leaders.
In the meantime, we should all do our part to help support hospitals by getting our own COVID vaccines as soon as possible. Our hospitals have shown their strength during the pandemic — but we still need to do everything we can to help them through this crisis. That starts with getting vaccinated, and doing our bit to relieve pressure on the healthcare system and bring this crisis to a close as soon as possible.
Alyssa Rapp is the CEO of Chicago-based healthcare services company Surgical Solutions.She is also a lecturer in management at the Stanford Graduate School of Business and an adjunct professor with the University of Chicago Booth School of Business.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
