Health systems with better credit ratings tended to weather bigger profitability declines in 2020 than their peers with weaker credit, a new report finds.
Fitch Ratings noted that the median operating margin across not-for-profit hospitals and health systems fell to 1.5% in fiscal 2020, a year marked by the COVID-19 pandemic, even with federal stimulus grants. That’s compared with 2.3% in 2019. But surprisingly, the decline skewed larger among systems with credit ratings in the ‘AA’ and ‘A’ categories than those in the lower ‘BBB’ and below investment grade (BIG) categories.
The bigger hits happened because health systems with stronger balance sheets recognized they had the cushion to absorb losses. With that in mind, they purposefully declined to lay off or furlough employees during the pandemic to ensure they’d have enough staff in the long run, said Kevin Holloran, a senior director with Fitch and its healthcare sector leader.
“They didn’t want to let people go and not be able to get them back,” he said. “Stronger credits pulled that trigger whereas weaker credits didn’t. They had to do furloughs and FTE reductions to be able to make it.”
Retaining employees—especially nurses—is crucial in today’s tight labor market, where hospitals are in bidding wars with one another to hire workers.
Fitch found the ‘AA’ category declined the most of any rating category, with the median operating margin falling to 2.2% in fiscal 2020 from 3.3% in fiscal 2019. The ‘A’ category fell to 1.3% from 2.2% in that time. Meanwhile, the ‘BBB’ category improved slightly to 0.8% versus -0.2% in 2019. The ‘BIG’ category was largely unchanged at about 0.5%.
The same held true for hospitals’ earnings, which Fitch measured as earnings before income, taxes, depreciation and amortization. EBITDA is an important measure of a hospital’s financial standing, although the term does not fall under generally accepted accounting principles.
Ascension Health did not furlough employees to cut costs and experienced the pandemic’s effects for a longer period of time than other systems because of its national presence, Holloran said.
“They knew in their heart of hearts that volumes would come back, and they took the hit because they knew they could afford it,” he said. “They didn’t have to take an operational loss, they chose to strategically.”
That said, St. Louis-based Ascension did lay off more than 200 information technology employees in fall 2020 when it outsourced their jobs in Michigan to a vendor. That’s on top of hundreds of layoffs between 2017 and 2019 when work shifted to India, a Modern Healthcare analysis found.
Ascension posted a $639 million operating loss on $25.3 billion in revenue in its fiscal 2020, which ended June 30, a 2.5% loss margin. That’s compared to $130.6 million in operating income on $25.3 billion in revenue in fiscal 2019. Ascension has 146 hospitals and operates in 19 states plus Washington, D.C.
Fitch’s report noted that health systems whose fiscal years ended June 30, like Ascension, tended to have lower earnings than those whose fiscal years ended in September or December. That’s because the earlier year-ends had less time to recover from mandatory elective procedure shutdowns that started in March and lasted up to three months.
Even excluding the $100 billion worth of accelerated Medicare payments CMS sent to healthcare providers during the pandemic, Fitch found not-for-profit hospitals still had higher liquidity in 2020. Median days cash on hand was about 220 in fiscal 2019 versus about 241 in fiscal 2020 without the loans. Median cash to debt was also higher last year: 163% versus about 159 in fiscal 2019.
In its report, Fitch noted that hospital operating margins will probably remain under pressure for several years, even assuming no additional elective procedure shutdowns, as volumes continue their slow return to normal and staffing and supply costs stay elevated. And even though the pandemic hasn’t yet triggered a significant uptick in Medicaid and self-pay patients, Fitch said it still predicts a higher proportion of government-insured patients in the coming years.
Overall, though, Holloran said not-for-profit hospitals were “extremely resilient” during the COVID-19 crisis. The federal stimulus money helped, but hospitals successfully slashed expenses and, when the time came, ushered patients back.
“You sort of look back on 2020 and it’s actually kind of a good news story,” Holloran said.
Source link : https://www.modernhealthcare.com/finance/hospitals-better-credit-meant-bigger-profitability-declines-2020
