Hospital Planning: 5 Financial Lessons from Covid-19

Blog,Business Planning,Financial Planning and Feasibility
Hospital planning is depicted with a photo of various financial graphs and tables

COVID-19 continues to have a dramatic impact on the financial performance of healthcare systems across the United States. Ascendient analyzed multiple data sources from the first year of the pandemic and found five key financial takeaways for hospital planning. In 2020, healthcare systems experienced:

  • Decelerated net patient revenue growth
  • Increased salaries and benefits
  • Weakened profitability measures
  • Reduced capital expenditures
  • Expanded cash reserves

Net Patient Revenue

Net patient services were impacted by a myriad of challenges in 2020 as some states restricted or prohibited elective services and patients chose to delay care. For example, North Carolina prohibited elective surgeries from March 20 through May 1, 2020. In addition, “15 percent of American consumers with employer-sponsored insurance said they had deferred some care between March and September 2020.” [1]

As shown in the chart below, tax-exempt hospital quarterly revenue bounced back in Q3 and Q4 2020 after declines in the first two quarters. Overall, median net patient services revenue grew by just 2.7 percent in 2020 – the smallest increase in the past 10 years and well below the compound annual growth rate of 7.6 percent experienced from 2010 to 2019. [2] Because budgets often are based on past results, many healthcare leaders undoubtedly faced revenue shortfalls in 2020, and continued volatility in patient services will present budgeting challenges this year.

Hospital planning chart showing the slowdown in net patient revenue

Salaries & Benefits

Salaries and benefits are the largest expense category for healthcare systems. To adjust for the impact of volume changes, salaries and benefits are analyzed as a percentage of net patient revenue. This expense line historically consumes approximately 58 cents of every dollar earned. After somewhat steady, slow growth for the past five years, salaries and benefits jumped sharply during 2020, reaching 62.0 percent of net patient revenue. [2]

Most interestingly, these increases were not felt uniformly, as systems with better credit ratings had less of an increase when compared to systems with lower credit ratings. For hospitals and health systems that are already on shaky financial footing, this growth in salary expense may prove unsustainable, leading to cuts in routine maintenance, equipment purchases, and other strategic investments.

Hospital planning chart showing trends in salaries and benefits

Margin Pressure

With expenses growing at a faster pace than revenues in 2020, healthcare systems saw their margins deteriorate. Median EBIDA, a measure of profitability, saw a decline of 7.9 percent in 2020 compared to a compound annual growth rate of 6.6 percent from 2010 to 2019. [2] EBIDA margin, operating EBIDA margin, and operating margin all declined in 2020, reaching their lowest percentage in the last 10 years. Though all three of these measures remained positive – thanks in part to federal aid – shrinking margins could reduce the ability to invest in better care for the community while ratcheting up the M&A pressure on weaker systems.

Capital Expenditures &  Cash Reserves

As is typical for industries with declining margins, capital expenditures declined in 2020 as healthcare systems continued to accumulate cash and cash equivalents. Capital expenditures as a percentage of depreciation declined by roughly 10 percent in 2020 when compared to 2019, meaning that healthcare systems either delayed or canceled some capital projects. In 2020, median days cash on hand increased to 236.7 days, an increase of 8.4 percent compared to 2019. [2] Because capital projects can take years to come to fruition and are vital for future capacity, healthcare systems may encounter long-term bottlenecks as a result of hoarding cash to guard against near-term uncertainty.

Conclusion

How will these trends impact hospital planning moving forward?  Given constant headlines highlighting healthcare worker vacancies, shortages, and labor disputes in 2021, it is likely that salaries and wages will continue to rise. In addition, shortages and price increases will continue to hit supply, drug, and other expense categories.

There is one key difference between 2020 and 2021 that may help alleviate some financial pressures. Revenues for tax-exempt hospitals were up 12.3 percent through the third quarter of 2021 when compared to that same period in 2020, though it is still unclear whether that revenue growth will be enough to offset rising expenses. [3] Meanwhile, hospitals in Philadelphia, Chicago, and other major cities are starting the New Year by delaying elective procedures due to the surge in Omicron-related admissions – yet another signal of continued financial uncertainty throughout the industry.

The bottom line is this: Long-held assumptions and financial models may not hold true as Covid moves from pandemic to endemic status. While no one has a crystal ball, healthcare leaders would do well to reexamine their budget planning and possibly redefine the definitions of cautious versus aggressive scenarios. At the very least, we expect larger than usual swings in revenue and expenses, so a hospital planning process that adapts and adjusts for fluctuations could prove to be a lasting investment.

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[1] Medical cost trend: Behind the numbers 2022. | PWC. Retrieved December 30, 2021, from https://www.pwc.com/us/en/industries/health-industries/library/behind-the-numbers.html

[2] U.S. not-for-profit health care system median financial ratios–2020 vs. 2019. | S&P Global Ratings. (n.d.). Retrieved December 28, 2021, from https://www.spglobal.com/ratings/en/research/articles/210830-u-s-not-for-profit-health-care-system-median-financial-ratios-2020-vs-2019-12085812

[3] Quarterly Services Releases. | US Census Bureau.  Retrieved December 30, 2021 from https://www.census.gov/services/qss/historic_data.html

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