In this episode, we are joined by Jim Blake and Erik Swanson of Kaufman Hall to discuss the financial performance of hospitals and physician practices through March 2021.
Highlights of this episode include:
- How hospital finances and volumes fared in March 2021
- Differences in performance based on hospital bed size
- Changes in physician compensation and productivity
- Takeaways for hospitals and physician practices moving forward
Mike Passanante: Hi, this is Mike Passanante, and welcome back to the award-winning hospital finance podcast. Kaufman Hall recently released their National Hospital Flash Report and Physician Flash report. These comprehensive reports look at the financial performance of hospitals and physician practices in March 2021. Today, I’m joined by Jim Blake and Erik Swanson of Kaufman Hall to discuss the results of these latest reports. Jim and Erik, welcome to the show.
Jim Blake and Erik Swanson: Thanks, Mike, for having us. Yes, good afternoon.
Mike: I’m really looking forward to the discussion. Why don’t we start out with the top line? What would you say is the headline for hospital financial performance through March of 2021?
Jim: Thanks, Mike. This is Jim, and I’ll take that question. In the last year, the major headline for the whole world has been COVID. But when you look at your question of hospital financial performance for the last year through March 2021, the headline I see is patient’s first, financials last. When you unpack the data– and we track about 1,000 hospitals every single month which represent small and large and across all regions. So we have a pretty good insight to the country as a whole. We really saw hospitals last year when COVID first hit really put everything aside and focused on taking care of patients even without knowing if they were going to get financial support in any way to cover this. And they really experienced very dramatic losses in March and April and May and even continued through of the losses. But they really did– they really put patients first and then focused on the hospital financials. If we look at from the more recent times as hospitals have been focused on trying to recover from the financial devastation that COVID has brought, but they’re still not back to their normal levels.
Mike: Okay. Could you walk us through some of the specific financial data points for hospitals?
Erik: Yes, Mike, this is Erik. I can walk through a few important points that we’ve observed not only since the depths of April last year, but also what we’ve seen here most recently in March. So as we begin to look at a high level of hospital performance as measured by the EBITA margins and operating margins, when we look at our operating margin index for hospitals over this time period, we see most recently here in March, on the year-to-date basis, hospitals were turning a margin of approximately 2% when you include that supplemental funding from CARES that is still flowing through. What’s important to note is that this compares against pre-pandemic margins that are usually just north of 3%. So still significantly down from pre-pandemic levels, but certainly much better than they were in April of last year, which at that time– just to note, there were some hospitals that experienced margins. The median operating margin being nearly negative 30%. So there’s been a tremendous recovery since, but still not quite at levels that hospitals were sustaining in pre-pandemic era. Additionally, as well as we unpack that a bit further and look at the revenue side of the equation, what we can see is that gross operating revenue is up as compared with Q1 of last year. But as you’ll recall, that begins to include some of the impacts of the early parts of the pandemic. And so as we look at pre-pandemic levels, that gross operating revenue is still down nearly 5%. And when we look at that, the vast majority of impact is coming from the outpatient side of being depressed, significantly, down nearly 8% from pre-pandemic levels. Now, there’s a little bit of a glimmer of hope here in our most recent report, where we saw some large month-over-month increases in that outpatient revenue as patients began to resume some of their care on that end. But certainly, it remains to be seen what that will look like going forward. But it begins to highlight this notion of right now there’s a concentration of more inpatient revenue to outpatient than historically there had been. But we’re beginning to see that resume slightly.
Mike: And how have hospital volumes fared?
Jim: Overall, the [inaudible] story is really interesting, and we’ve been watching it very closely month to month. And when this all first started a year ago, looking at it, there was a couple of different conjectures out in the press. One was that it was COVID-related. Others that it was related to various state lockdowns and restrictions. So we looked at this closely, and we could see in the data that we’ve proven out that it wasn’t correlated to COVID directly. The places that were hotspots in Detroit and New York City and Louisiana looked very similar to other places in the country that had very few COVID patients. We then looked at it between states in the beginning months of March and April between those that were locked down and those that weren’t. And again, there was no real differentiation. We looked at the correlation volumes, but we then did a series of consumer studies that very much showed that consumer behavior was really the correlation. There was a high correlation with consumer behavior. And the volume story is not just a single story. It’s a whole series of stories. And maybe, Erik, you want to comment on some of the further details within that, the volume stories that are there?
Erik: Yes, certainly. So as we unpack again this volume story, as Jim mentioned, it’s been a very interesting and unfolding story, but there’s been a few things that have remained consistent. And chief amongst them is the volumes relative to emergency department visits. And those, as with our recent report, are showing that they’re down nearly 19% on a year-to-date basis. And this trend has held pretty consistent since April of last year with the ED volumes being down in that 19 to 20% range. And we’re not seeing large changes amongst those visits even here, most recently within March. We’re also seeing depressed volumes on the inpatient side being down nearly 8% as well. But what’s really interesting to note here is while the discharges are down, the patient days aren’t down to nearly the same degree. And so what is happening here is we’re seeing a shift towards higher acuity patients, many of which could also be COVID patients. And so we’re seeing this average length of stay increase over this period as the higher acuity patients come in and those who have the ability to delay or postpone their care are doing so driving up that that acuity. And further, I’ll mention this as well. I previously said outpatient volumes began to see a larger jump here in March of this year. And we’re seeing that reflected as well when we look at the surgical minutes as well. And likely, what we’re seeing is some similar phenomenon as we saw as lockdowns began to lift is that some of the pent-up demand for those elective surgeries is returning, except in this case, it’s not due to lockdowns, but likely due to some of that consumer confidence returning, as Jim alluded to, as well as the vaccination rates improving allowing folks to build back confidence and come back. So that’s what we’re seeing from some key metrics from the hospital volume side.
Mike: Okay. Did you notice any difference in financial performance or volume based on hospital bed size?
Yes. It’s really important to know as we look at our report over the approximately 1,000 hospitals across the nation. We look at it not only by bed sides, but also by region to understand any differences that might have occurred. And it’s important to lay some context here that the negative impacts in April– well, March and April of last year, because the pandemic began, were so, so detrimental to organizations. But they were also very consistent. So nearly all regions and all bed sizes experienced similar impacts to volumes, revenues, and even margins. And just to highlight how detrimental that was, when you look at the median margins that were being returned early on, it was nearly five standard deviations away from the [inaudible] in a non-statistical sense. That’s about a one in a three and a half million probability of occurring. So really, one of the worst impacts that we’ve ever seen. As we looked at this recovery, we’ve seen some unevenness in a recovery based upon the size of the hospital. Now, small hospitals have traditionally had higher volatility in their performance, again, owing to their small size. But what we’ve noticed through this recovery is that volatility in their performance – and it’s mostly dependent upon volumes – has been driven even higher still while the larger hospitals have tended to have lower volatility given their ability to flex in a greater degree. And so certainly in March here, as we saw some of those outpatient volumes increase, we saw some large changes in the smallest hospitals due to that, seeing their outpatient revenues drive up to a much greater degree than the large hospitals. But again, recognizing that those smaller hospitals began with lower outpatient volumes to begin with and are thus seeing some larger changes than the larger hospitals are.
Mike: So let’s turn to physician practices. How is physician compensation faring at this point?
Jim: Well, Mike, we’ve been– as we’ve noted previously, we’ve been tracking over 1,000 hospitals, but we also have about 100,000 physicians in our data that we track every month. And we started the hospital report about three years ago. We started the physician report just– we’re just done the second one right now. But we’ve been looking at this data for some time. And it is real-time data, not survey-based data. So it does give us a greater insight of what’s going on. One of the things that’s at macro level in the data is just as hospitals and health systems put patients first, they also – many of them, not all of them – chose to put their associates and their related caregivers first as well in that they often held them harmless or held them– held them harmless to what was happening. So even if elective procedures were way down, a particular physician still was being compensated by the health system for many health systems. So they really leaned into it and helped out, which obviously directly helped the physicians, but also help the– those local economies as well. But there is a lot of other stories underneath the hood, and there’s quite a lot of variation too that we’re now seeing starting to emerge. Erik, maybe you want to take the second half of the question in terms of some of the further details.
Erik: Yeah, I think as we talk about some of the metrics and looking at the differences across, we’ve certainly seen here that that physician compensation is down by about one and a half percent from where it was in pre-pandemic levels. But again, productivity, as we may discuss, productivity certainly is down to a further degree. So this really highlights how many organizations have held their positions harmless. And further, as we look at the physician compensation story, you do see that compensation dropping in Q2 of last year, but beginning to recover pretty substantially in Q3 and Q4, and again, ending just below 2019 levels.
Mike: So you just talked a little bit about productivity there, and it’s maybe no surprise that it was affected by the pandemic. Can you talk a little bit more about how it was affected by the pandemic and what physician productivity looks like now?
Erik: Absolutely. So there’s some really interesting stories here, but, in general, productivity is down in 2020 versus 2019 by about eight and a half percent. But there are three really interesting observations that I’d like to make as we look at specific specialties viewed from a productivity lens. So the first is with the OB/GYN specialty. That’s where we had the largest decrease in productivity from Q3 to Q4, and it’s still well below pre-pandemic levels. Now, it’s interesting to think about some of the factors that are playing into this, but some that we know of are women and families choosing to delay pregnancies due to school and daycare closures, choosing to remain home or needing to remain home to take care of their families. This is also reflected by the lower labor participation rate of women that has occurred over COVID. And finally, many families are weighing the financial impact of children as well. And so all of this is leading to a drop in productivity for OB/GYN, likely partially due to delayed pregnancy. The second interesting observation here is with the surgical specialties. So certainly in Q2 and the depths of the pandemic, we saw a really large impact as patients delayed or canceled those elective surgeries at the end of Q1 and Q2. We had a few months there as the lockdown eased that we actually saw larger volumes for a single month as that pent-up demand return. But certainly, those surgical specialties and the productivity hasn’t returned to where it was before. And finally, the third and final interesting observation that we see when looking at productivity has to do with psychiatry and psychology. So as we look at psychiatry, we observed a slight reduction in productivity during the course of 2020, but not nearly as great as with the other specialties. However, it has since risen above 2019 levels. So we believe this is likely due to the increased psychological stresses that are brought upon or brought on by the pandemic, as well as some interesting adoption and expanded adoption of telehealth and other virtual care approaches that are being used by these providers. So very interesting story as we look at productivity, especially at that specialty level.
Mike: Most definitely. What are some key takeaways for hospitals and physician practices moving forward in 2021?
Jim: Well, Mike, rather than focus on those types of general broader themes, Eric and I as coming at this from a data perspective, really want to let the data talk and let the data tell us what to expect and what to see. And we’ve spent a lot of time. We’ve been thinking deeply on these questions, and we’ve been working with various– with the American Hospital Association and other state associations, as well as certain leading clients as they’ve posed questions along these lines. And we’ve used various machine learning AI and predictive analytics to go against the data on. What clearly comes out is that if you’re looking at data that’s older than a year ago, for normal times that would have been fine to have older data. But you really need contemporary and real-time data to be able to understand what’s happening right now. And we’ve done some pretty interesting analysis. I’d love, Erik, for you to share some of the results and some of the things that we’re seeing on some of the analysis we’ve done for some of these parties.
Erik: Yes. So, Mike, as we’ve done that predictive analytics and produced some projections and based that upon a number of the market variables, COVID Impact, and others, we’ve produced some interesting findings. But, in general, one of the observations that was demonstrated here was potential revenue losses over the course of 2021 relative to pre-pandemic levels, and that ranges somewhere between 53 to 122 two billion dollars for the nation’s hospitals. And that 53 billion, the high– the low end of that is really for the optimistic scenario. And under that optimistic scenario, we assume that would occur with continued vaccinations, a continuing enhancement of the consumer confidence, and the presumption ultimately of their care and the volumes returning to hospitals and some potential beneficial legislation. And with all of that, we would see hospitals return within about 10% of their pre-pandemic margins, but again, still below. However, under our predictions as well, should several of those falter, performance would only improve marginally from where they are today. And as I mentioned before, it’s still being significantly below those pre-pandemic levels. And it would leave hospitals in a spot with depressed margins and perhaps an inability to reinvest appropriately. And so certainly some of the controls and managerial impacts of that will be very important for those organizations. I think for physicians as well, when we look at that work, too, it means that they’ll need to be actively engaged and participate in managing access for new patients and balance those incentives as well. And as I mentioned earlier, are really working to embrace virtual care and enter that space where they can, as there’s other competitors that have entered that as well. And finally, given the amount of transformation that all this has caused is for those medical groups and physician practices, is really actively looking at this real-time data and these forward-looking projections to understand what an appropriate investment per physician is at that level and really set some realistic expectations and performance targets. So that’s ultimately what the results of some of our predictive and predictive work seem to highlight as not only what we may expect, but also some meaningful outcomes from that.
Mike: Great information. If someone would like to get a copy of the National Hospital Flash Report or Physician Flash Report, where can they go?
Erik: Yeah. This is Erik. Certainly, there’s a few resources that are available. First is we encourage any of our listeners here to visit KaufmanHall.com. There’s a couple of areas. There’s a tab under a data analysis and tools where they’ll be able to access the National Hospital Flash Report, the Physician Flash Report, and any of the past issues. They can also visit the section on the COVID-19 resources which they’ll see on the main page to access this report and others. And finally, should anyone have additional questions that they would like answered, they can always feel free to email Flashreports@KaufmanHall.com with any questions, and we’d be happy to answer or partner with folks on any requests.
Mike: Jim Blake and Erik Swanson, thank you so much for joining me today on the Hospital Finance Podcast.