Some of the largest health systems in the country saw their profits rise in 2020 even as COVID cases soared. Modern Healthcare hospital operations and finance reporters Alex Kacik and Tara Bannow talk about why, and what the future holds for providers.
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Alex Kacik: Hello, and welcome back to Modern Healthcare it's Beyond the Byline, where we offer behind the scenes look into our reporting. I'm your host, Alex Kacik. I write about Hospital Operations for Modern Healthcare. Today, I'm talking with Tara Bannow, our Finance reporter, to discuss how COVID-19 impacted some of the biggest US health systems. Thanks for coming on, Tara.
Tara Bannow: Thanks for having me. Excited to be here.
Alex Kacik: So when the pandemic first hit, the hospitals framed it as doom and gloom from a financial standpoint. They had their elective non-urgent surgeries abruptly halted, and that is those are typically more lucrative that coupled with the cost of treating more acute COVID patients who are staying in their hospitals for longer, that would put them into a financial tailspin. I'm curious, as you analyzed year-over-year financial data for some of the largest systems, how did the financial picture play out?
Tara Bannow: Some of them quite surprisingly did pretty well, despite all the challenges they faced. I found that for some of the country's largest not-for-profit and for-profit health systems, their margins actually grew in 2020 relative to 2019. And I decided to look at it without counting their federal stimulus grants and just because that kind of skews the actual operating performance. So obviously, with the grants, that would have pushed them much further into the profit territory, but there's a whole bunch of reasons why providers did better in 2020. A lot of them, specifically in the back half of 2020, mention two points that their patients were sicker, patients tended to be higher acuity, which draws more revenue. They're more expensive to treat, so they get more money. And then also they tended to have a higher proportion of commercially insured patients.
Obviously commercial insurance pays hospitals more than Medicare, Medicaid, or if those patients don't have insurance. But beyond that, I think hospitals were better at cost-cutting than maybe they even expected to be. They were really able to slim down their expenses, and employees tended to be pretty understanding about things that you wouldn't see in a typical year, like cutting 401(k) contributions, for example, furloughing employees on large scales. You just wouldn't see that happen in a typical year. But during the pandemic, I think providers had understandably a lot of leeway to do things like that. But there were other benefits from the federal government beyond the stimulus grants that also boosted their operating earnings. There was the 20% Medicare add-on payment for COVID patients. There was a moratorium on the Medicare sequenced ration, which actually some said was a huge help, and then there was the ability to defer taxes. This is not an exhaustive list, but there were a lot of things that contributed.
Alex Kacik: I know the sequester has been something that the rural hospitals have been advocating delay for... You mentioned all these other elements that are impacting finances. Let's start with the commercially insured versus those covered by Medicare and Medicaid. Hospitals were worried that insurance coverage would shift as so many people lost their jobs and associated insurance through their employers. But in going through your common spirit story where you listen to that earnings call, where one executive said that he was surprised he didn't see a declining care for those covered by commercial payers and exacts also mentioned, as you said, that they could charge more for more complex care because patients were sicker. And I'm wondering what you made of the initial fears that there would be this massive shift to the Medicare and Medicaid and how still so many were covered by commercial insurance toward the back half of the year?
Tara Bannow: That was really interesting. So I think early in the year when we saw that very dismal jobs report in April when it said we lost 20.5 million jobs, I mean and that's across all industries, but you see a number like that. And I think a lot of hospitals CEOs were like, "Oh my gosh, we are going to see this wave of people who don't have insurance, or people who had to go on Medicare or Medicaid, or they bought a high deductible plan. And now they're on the hook for a huge proportion of their care." But by and large, it seems like hospitals have not seen that huge wave of Medicaid patients or uninsured patients, they kind of described it as a pleasant surprise a little bit on their earnings calls. HCAs executives mentioned, they were also surprised by this.
So, that's not to say that it won't ever happen. I mean, we could still see that shift, but it hasn't played out in the numbers yet. We're still seeing a pretty high proportion of commercially insured patients, at least in the back half of 2020. Some of the people that I talked to, some of the CPAs I talked to, didn't really want to say this necessarily on the record, but they said that they get the sense that a lot of the people who are still choosing to go in for care are more likely to be commercially insured patients. They might be younger. They might be more likely to have commercial insurance than someone who's on Medicare. Maybe you're older, and you don't want to take the risk of going into a hospital. So, that could also be part of what's playing out here.
Alex Kacik: So Tara, patients are higher acuity, the ones who are coming in during the pandemic, but looking after things relatively returned to normal, there could be some permanent shifts in different sectors of the healthcare system in terms of how much volumes are returning. I've heard some projections that emergency department volumes will always, from this point, be a little lesser than they were historically. So I'm wondering if exacts have gotten into how that shift in what settings patients are seeking care will affect their finances.
Tara Bannow: Yeah, that's right about emergency rooms. I think we're going to see a permanent shift away from emergency rooms. One projection that CEO's have talked about is that now that you've had an entire year of patients avoiding hospitals, avoiding emergency rooms for things that arguably could have been treated in an urgent care clinic now that they're more acclimated to seeking care elsewhere that, that's a trend that's going to persist long-term and maybe we will never see emergency room volume go back to where it was previously. And I mean to add to that, maybe that's a good thing because a lot of these patients were patients who hospitals weren't getting reimbursed for the entirety of that care.
So having low acuity emergency department volume go into other areas is probably a good thing for everybody. Hospital executives are really trying to focus more investment right now in urgent care clinics and ambulatory care. As you wrote in your great in-depth series recently, or in-depth piece on ambulatory care, that's a huge area of investment because I think the tendency to want to avoid hospitals will definitely be a long-term trend interestingly, I wrote this week. Trinity Health just bought a majority stake in a big urgent care providers. So they're really kind of going all-in on urgent care, expecting that that is a trend that's going to just persist nationwide.
Alex Kacik: And one thing comes to mind, I'm thinking of, I forget the exact specifics on this study, but there is estimates. I think it was 13.4% of care that's funneled through the ED is unnecessary. So it's lower acuity than what needs to be cared at that level. So it sounds like some of that care will naturally be funneled through Telehealth, or as you're saying, urgent care centers or ASCs, so it'll be interesting to see for the longterm how those trends materialize. Could you take me through a little bit of how you chose which systems to focus on somewhere on the not-for-profit side? Some are on the for-profit side, but just to reiterate, a lot of them saw their margins improve?
Tara Bannow: Yeah. So in terms of which systems to look at, I'm under a time crunch. I only have so many hours to write a story. So it's more efficient when you can pull one financial statement and capture more than 100 hospitals in that single financial statement. So naturally, I'm going to gravitate toward those, but I understand that it does create a little bit of a skewed perspective. It makes hospitals look like they're doing better than they are because these bigger systems have purchasing power. They can negotiate big, well, better, more favorable contract terms with insurers. So I think I went with these bigger systems that both said that they were doing better because of higher acuity patients and better commercial volumes. Those were trends that I think really were interesting and played out in the back half of 2020, so that was one thing I looked for.
But I think it is important to note that a lot of these smaller systems, a lot of these rural providers, one or two hospital systems, they really were not having the same experience as the freighter health, the common spirits, the HCAs, the community health systems. These were much they're in much different positions. They don't have the capital to pay super high prices for travel nurses. They can't negotiate higher insurance contract rates with insurers. So I think it is important to point out that while this article makes it look like hospitals are doing pretty well during the pandemic, which many of them are, small providers are still having a pretty tough time. It's hard to pick on an individual hospital or a super small health system in an article because when you get to that granular of a level, there can be no regional factors or different factors in their community that impact them that just don't have that national relevance.
Alex Kacik: Yeah. And that's something I struggle with too, trying not to over-generalize since we have this dichotomy between the so-called have and have-not hospitals and health systems. So it makes it tricky when policymakers are trying to determine how to allocate federal stimulus funding, but also for us to report on, I feel like there's always a counterexample. Like you said, for some of these bigger systems to let maybe a more regional or smaller provider that don't have the cash on hand or access to capital, they don't have the bulk purchasing discounts. They don't have access to a broader range of physicians and staff. Do you run into that in your reporting where you try to make sure that you're inclusive of different sectors and different types of organizations?
Tara Bannow: Well, that's always a struggle. I mean, in a perfect world, you'd be able to capture that nuance in every article you write, but that's tough there's a lot of providers that are just in very different situations. It's important to focus on a lot of these smaller providers, a lot of these rural providers who are having a harder time, and then talk about how these macro trends happening at a national level trickle down and affect them. But I think as the big effect of the pandemic on these providers is just going to be that all of these pressures of the pandemic, the expense pressures, getting travel nurses, this is really going to just encourage them to join up with larger systems and get acquired by a larger health system, a private equity firm. It's just going to increase the consolidation because I think a lot of them are going to feel like there's just, they can't, the financials don't work to go it alone.
Alex Kacik: And I'm sure on these calls, you're hearing that some of these bigger systems are interested in acquisition opportunities. So it sounds like there'll be looking to expand their footprint where they think it's a strategic benefit.
Tara Bannow: Yeah, absolutely. Some of the bigger for-profits have mentioned that on earnings calls, I believe some of the not-for-profits have mentioned it too, that they're not trying to benefit from the pandemic obviously, but they're going to help other smaller providers operate better if they can leverage their resources to do that.
Alex Kacik: Well, Tara, that's a whole nother conversation. Next time you come on, we're going to talk about all the effects of mergers and acquisitions and consolidation in the hospital space. But for now, it's been wonderful. Thanks so much for taking the time. That was great talking with you. And we'll talk again soon.
Tara Bannow: Thanks for having me, Alex.
Alex Kacik: All right. Thank you all for listening. If you'd like to subscribe and support our work in the detailed data analysis that goes into the kind of business reporting that we do, there's a link in the show notes you can subscribe to Beyond the Byline, wherever you listen to your podcasts, stay connected with our work by following Tara and I, Modern Healthcare and Twitter and LinkedIn, we appreciate your support.
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