September 25, 2020

The epidemic has hammered hospitals' finances, Moody's says. (But there's reason for hope.)

Daily Briefing

    In a recent report, Moody's said the financial outlook for for-profit hospitals for the next 12 to 18 months is negative, as government relief funds wane and hospitals are forced to continue cutting costs amid America's coronavirus epidemic. However, Moody's offered some hope for 2021.

    A negative outlook

    In the report, Moody's said managing costs will be difficult for for-profit hospitals throughout the next 12 to 18 months, particularly as more surgical procedures move to outpatient settings. "Outpatient procedures typically result in lower costs for both consumers and payers and will likely be preferred by more patients who are reluctant to check-in to a hospital due to Covid-19," Moody's explained.

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    This shift will "weaken hospital earnings, particularly for companies that lack sizeable outpatient service lines (including ambulatory surgery centers)," according to the report.

    Moody's also predicted that a shift in payer mix will negatively affect hospitals' finances, as more patients leave commercial plans and enroll in Medicaid and CHIP due job losses stemming from the coronavirus epidemic. "This will hinder hospitals' earnings growth over the next 12-18 months," Moody's said, because "[e]mployer-provided health insurance pays significantly higher reimbursement rates than government-based programs like Medicaid and Medicare."

    Further, federal coronavirus relief funds to hospitals—which the government distributed earlier this year under the Coronavirus Aid, Relief, and Economic Security (CARES) Act—will start to fade out and lead to a decrease in revenue, Moody's said.

    The firm found that aid from the CARES Act "represented a significant portion of acute care hospitals' adjusted [earnings before interest, taxes, depreciation, and amortization (EBITDA)]" in the second quarter of 2020. According to the report, "[h]ospitals will continue to recognize grant aid as earnings in Q3 2020, but this tailwind will significantly moderate after that."

    Moody's predicted that, as a result of lost revenue, for-profit hospitals will be forced to continue to cut costs at unsustainable levels. "Some hospitals have said that for every lost dollar of revenue, they were able to cut about 50 cents in costs" during the second quarter of 2020, Moody's said. "However," the firm added, "we believe that these levels of cost cuts are not sustainable."

    And because hospitals will continue to face increased costs related to the coronavirus epidemic, "hospitals will operate less efficiently," Moody's surmised. But the report noted that hospitals' "early experiences in treating Covid-19 patients will enable them to provide care more efficiently than in the early days of the [epidemic]," and that "will help hospitals free up bed capacity more rapidly and avoid the need for widespread shutdowns of elective surgeries."

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    Hope for 2021

    While the overall financial outlook for for-profit hospitals is negative for the next year, Moody's offered some hope for 2021.

    For example, Moody's noted that some relief funds under the CARES Act haven't yet been distributed to hospitals, so some facilities could see a bump once they receive those funds. In addition, the federal government will continue to provide a 20% add-on payment for services related to treating Covid-19 in Medicare patients, and the federal government also has suspended a planned 2% sequestration cut to Medicare payments, Moody's said.

    Further, Moody's noted that CMS has proposed a 2.9% increase to Medicare in-patient payment rates and a 2.6% increase to Medicare outpatient payment rates for fiscal year 2021 when compared with this year's payment rates. According to Moody's, those payment bumps will help to "support hospitals in 2021."

    In addition, Moody's predicted that patient volumes will return to normal in 2021, after seeing significant declines this year amid the coronavirus epidemic. "Absent any widespread halting of elective surgeries, we expect volumes to exceed 90% of normalized levels in the fourth quarter of 2020," the Moody's said. "The remaining 10% is likely to come back more slowly throughout 2021, but faster if a vaccine becomes widely available" (King, FierceHealthcare, 9/21).

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