‘TROUBLING INDICATORS’
Philly-area facilities had worst operating margins in state
The suburban Philadelphia region showed the worst hospital operating margins in all of Pennsylvania in the fiscal year that ended June 2020, according to a recent report from the Pennsylvania Health Care Cost Containment Council.
Tower Heath’s suburban Philadelphia hospitals had some of the greatest losses in the state while its anchor Reading Hospital in Berks County kept a healthy margin.
Tower is up for sale and bids are being taken.
An operating margin reflects expenses incurred for operations, which is almost exclusively patient-treatment related.
The report shows how heavily the beginning of the pandemic weighed on hospitals as 38% statewide lost money in fiscal year 2020, which includes the first wave of the pandemic. Another 18% had margins below 4%, the level experts say is needed to keep a hospital sustainable.
The statewide operating income for Pennsylvania hospitals decreased from $2.8 billion in 2019 to $1.9 billion in 2020.
“This significant change in operating and total margins reflects the financial impact on hospitals due to the pandemic COVID 19 crisis,” said Joe Martin, executive director for the Cost Containment Council. “Many hospitals will face serious financial challenges as Pennsylvania works to mitigate the fiscal impact of the epidemic.
“In fiscal year 2020, 38% of Pennsylvania hospitals posted a negative operating margin, and 18% of Pennsylvania hospitals posted an operating margin between 0% and 4%. Thirty-eight percent of Pennsylvania hospitals posted a negative total margin, and 17% of Pennsylvania hospitals posted a total margin between 0% and 4%. These are very troubling indicators.”
Pandemic stress
According to the the containment council, 34% of Pennsylvania’s hospitals operated with a negative margin in 2019.
Those hospitals entered the pandemic with relatively weak balance sheets, and COVID-19-related margin shortfalls threaten their ability to serve their communities, a May 2021 report from the Hospital and Healthsystem Association of Pennsylvania pointed out.
Precautions for the pandemic such as testing tents, increasing intensive care capacity and establishing COVID-19 units to treat and isolate infected patients were costly for hospitals, the Healthsystem Association said.
Those expenses came on top of the loss of revenue from elective surgeries, which state and federal government orders required hospitals to defer or cancel to free up capacity for COVID-19 patients, the Healthsystem Association report said.
During 2020, between increased costs and revenue losses, Pennsylvania hospitals incurred an estimated $5 billion shortfall.
The report noted that health systems are anchors in their communities.
They contributed $143 billion in spending that includes $37
billion in salaries and supported more than 660,000 jobs during fiscal year 2019.
The report says hospitals will need long-term federal and state support to ensure they can remain economic and health care leaders for their communities.
Suburban Philly
The average operating margin for Chester, Montgomery, Delaware and Bucks counties was minus 5.86%. The region had some of the worst financially performing hospitals in the state, too.
Pottstown Hospital in Montgomery County operated at a minus 71.38% margin. And in Chester County, Jennersville Hospital operated at minus 56.44% while Brandywine Hospital was minus 49.27%.
All three are part of the struggling Tower Health system, which is seeking a buyer after steep losses and credit downgrades to junk bond status.
Operating margins in the region ranged from 9.19% at St. Luke’s Upper Bucks in Bucks County to Pottstown’s minus 71.38%. Just eight out of 23 hospitals in the region showed a positive operating margin.
By comparison, the average operating margin in the region that includes Lehigh, Berks and Schuylkill counties was 6.83%.
That includes Tower’s flagship Reading Hospital and hospitals in the Penn State Health, Geisinger, Lehigh Valley and St. Luke’s systems.
The region that includes Lancaster and York counties had the highest operating margin in the state at 8.76%. Hospitals in that region are affiliated with UPMC, Wellspan, Penn State Health and Penn Medicine.
Geisinger St. Luke’s in Orwigsburg posted the highest losses with minus 81.4% operating margin for fiscal 2020. The new hospital, a first for the county in 90 years, opened in 2019.
The containment council is an independent state agency charged with collecting, analyzing and reporting information that can be used to improve the quality and restrain the cost of health care in the state. It was created in the mid-1980s to aid in creating market-based health care reform.
Which hospitals did better?
Hospitals in the Lehigh Valley operated by St. Luke’s University Health Network and Lehigh Valley Health Network in Lehigh and Northampton counties fared either average or better than average for fiscal year 2020, the containment council report shows.
With an operating margin of 24.76%, the Surgical Institute of Reading in Wyomissing was among the highest in the state.
St. Luke’s-Anderson Campus and St. Luke’s University Hospital in Fountain Hill had operating margins around 20%. In Schuylkill County, St. Luke’s Miners campus in Coaldale had a 16% operating margin.
Uncompensated care
Statewide hospitals saw a decrease in uncompensated care expenses, which is a combination of bad debt and charity care, the report said.
For the fiscal year ending June 30, 2020, Pennsylvania general acute care hospitals’ uncompensated care decreased 1.4% to $809 million from $820 million in fiscal year 2019.
The cost went down, but it slightly increased relative to net patient revenues. The statewide percentage of uncompensated care to net patient revenue increased from 1.72% in 2019 to 1.73% in 2020.
For years, charity care and bad debt had risen steadily to above $1 billion several years ago, Martin said. Then it leveled off and dropped for several years.
“The plateau and then drop undoubtedly was due to the impact of the Affordable Care Act and PA’s Medicaid Expansion,” Martin said in an email.
In part, the figures reflect an impact by the COVID pandemic on uncompensated care, said the council’s health care analyst George Gugoff.
“Net patient revenue was driven down beginning in the second quarter of 2020 due to the elimination of elective procedures, while hospitals expenses increased preparing for the pandemic,” he wrote in an email. “The fiscal year 2021 report will also reflect the impact of the COVID-19 pandemic during July 1, 2020, through June 30, 2021.”
A precarious future
The Hospital and Healthsystem Association report said a health care management consulting firm analyzed historical hospital revenues and possible paths of hospital volumes, vaccine progress and decline in COVID-19 cases to forecast 2021 hospital revenue.
“Both of the optimistic and pessimistic scenarios presented in the report show a significant revenue loss compared with what would be expected without the effect of COVID-19,” HAP said.
Under an optimistic scenario, U.S. hospitals could face a total revenue loss of $53 billion during 2021, including $27 billion in outpatient revenue, $17 billion in inpatient revenue and $9 billion in emergency department revenue.
Under a pessimistic scenario, U.S. hospitals could face a total revenue loss of $122 billion during 2021, including $64 billion in outpatient revenue, $41 billion in inpatient revenue and $17 billion in emergency department revenue.
HAP said hospitals experienced increased expenses, in addition to revenue losses.
During 2020, hospitals reported a 17% increase in drug expenses, a 16% increase in purchased service expenses, a 14% increase in labor expenses, and a 13% increase in supply expenses — all of which could continue into 2021 as the pandemic continues.
The report concludes that operating margin shortfalls threaten hospitals ability to maintain facilities and the long-term viability of some hospitals is threatened.
“Some hospitals have reported they are only replacing equipment as it breaks or threatens patient safety,” the association wrote. “While a short-term solution, deferral of facility renovation and slowing proactive equipment replacement may result in costly repairs and disrupt patient care in the future.”