Community hospital finances strong until COVID struck

“It’s important for hospitals to maintain a positive margin to make sure they can keep the doors open and have the resources in place to be able to treat patients at the best of times and especially at times like the past year.”

Aaron Wesolowski, AHA’s vice president of policy research, analytics and strategy

STRONG INVESTMENT RETURNS helped community hospitals generate more than $100 billion in profits in 2019, almost 23% more than in the prior year, according to a new American Hospital Association report.

The more than 5,100 community hospitals operating in 2019 produced an aggregate profit margin of 8.8%, up from 7.6% in 2018, when they reported $83.5 billion in profits. Those figures come from the trade group’s annual statistics book, which it shared exclusively with Modern Healthcare ahead of its public release. The book covers calendar 2019, so does not include the effects of the COVID-19 pandemic, which has tightened the margins of many health systems despite federal government support.

“It’s important for hospitals to maintain a positive margin to make sure they can keep the doors open and have the resources in place to be able to treat patients at the best of times and especially at times like the past year,” said Aaron Wesolowski, the AHA’s vice president of policy research, analytics and strategy.

Much of 2019’s higher profits can be chalked up to investment gains, which bounce up and down from year to year. Hospitals’ non-operating revenue nearly doubled from 2018 to $21 billion in 2019. The increase covered more than half of the year-over-year profit growth. The stock market had a banner year in 2019, with the S&P 500 gaining nearly 29% and the Nasdaq composite up more than 35%, according to the Associated Press.

AHA’s community hospitals definition excludes hospitals that are not accessible to the public, including military and veteran hospitals, prison hospitals and other specialty hospitals.

There were 6,090 total U.S. hospitals in 2019, 56 fewer than in 2018, mostly due to rural hospital closures. Of the 2019 total, 2,946 were private, not-for-profit and 1,233 were investor-owned, for-profit.

The report shows that for-profit facilities staff lighter than their not-for-profit peers and spend less money treating each patient. Investor-owned hospitals reported 420 full-time-equivalent personnel per 100 adjusted census, compared with 494 at not-for-profit facilities. And while for-profits spent $10,800 per admission, not-for-profits spent almost $14,500.

Profits also varied by region, with Mountain State hospitals collecting a 14.4% aggregate profit margin, compared with just 5.1% across their New England peers. That could be partly due to higher for-profit hospital ownership in the Mountain states—nearly 30%—compared with just 12% for-profit ownership in New England.

Outpatient revenue will soon surpass inpatient

The gulf continues to narrow between how much hospitals make on outpatient care versus inpatient, and outpatient care will likely overtake inpatient in the coming years. Hospitals’ net outpatient revenue was 98.6% of net inpatient revenue in 2019. That’s compared with 97% in 2018 and 95% in 2017.

Following with that trend, inpatient admissions and surgeries have been declining in recent years, and 2019 was no

exception. At the same time, outpatient visits and surgeries have been increasing.

However, Wesolowski said the pandemic flipped that trend on its head. The AHA has observed bigger drops in outpatient utilization because of the pandemic than inpatient. Inpatient care saw declines early on in the crisis, but COVID-19 hospitalizations have driven that back up, whereas outpatient care hasn’t seen the same rebound, he said.

“Those trends we saw in 2019—which we’d seen for the years leading up to it—I think are sort of scrambled going forward,” he said.

Emergency department visits have been dropping since 2017, including in the most recent report. The COVID pandemic is likely to compound that trend, as data has shown ED volume has been among the slowest to recover.

Community hospitals’ total expenses and net patient revenue both exceeded $1 trillion for the second year in a row.

Decline in uncompensated care ratio, community programs

While hospitals provided more uncompensated care in 2019—$41.6 billion compared with $41.3 billion in 2018—it represented a smaller share of their total expenses.

Uncompensated care was 3.9% of total expenses in 2019 versus 4.1% in the prior year. The number represents the cost of free or reduced-price services provided to low-income patients, otherwise known as charity care, and unpaid bills hospitals expected to collect on but couldn’t, otherwise known as bad debt. The AHA’s definition does not include Medicare and Medicaid shortfalls.

The lower uncompensated care ratio in 2019 might represent a “slight leveling off” after large increases going back to 2015, Wesolowski said.

Given many people lost employer-sponsored insurance during the pandemic, Wesolowski said he expects uncompensated care to tick back up in the short term.

The share of hospitals that offer certain community programs has declined in recent years, the AHA’s book shows. For example, 19.3% offered indigent care clinics in 2016, compared with 18.2% in 2019. Almost 9% had meal delivery programs in 2016, which fell to 7.5% in 2019. Tobacco cessation programs declined from 55.7% to 53.9% in that time, and HIV/AIDS services went from 25.1% to 24.1%. Transportation to health facilities dropped from almost 23% to 21%.

Wesolowski said many factors contribute to hospitals’ ability to provide those services, especially maintaining positive margins.

“We have really serious concerns about the financial challenges hospitals are facing right now because of the pandemic,” he said. “That could feed into concerns about closures or access going forward.” ●