Early Financial Impact of the COVID-19 Pandemic on U.S. Hospitals

Abstract

Goal: The COVID-19 pandemic has left a significant impact on hospitals' operations, expenses, and revenues. However, little is known about the pandemic's financial impact on rural and urban hospitals. Our main objective was to analyze how hospital profitability changed during the first year of the pandemic. We specifically studied the association between COVID-19 infections and hospitalizations and county-level variables with operating margins (OMs) and total margins (TMs). Methods: We obtained data from Medicare Cost Reports, the American Hospital Association Annual Survey Database, and the Centers for Disease Control and Prevention/Agency for Toxic Substances and Disease Registry (CDC/ATSDR) for 2012–2020. Our final dataset consisted of an unbalanced panel with 17,510 observations for urban hospitals and 17,876 observations for rural hospitals. We estimated separate hospital fixed-effects models for urban and rural hospitals' OMs and TMs. The fixed-effects models controlled for time-invariant differences across hospitals. Principal Findings: In our review of the early impact of the COVID-19 pandemic on rural and urban hospitals' profits as well as trends in OMs and TMs from 2012 to 2020, we found that OMs were inversely related to the duration of hospitals' exposure to infections in urban and rural locations. In contrast, TMs and hospitals' exposures had a positive relationship. Government relief funds, a source of nonoperating revenue, apparently allowed most hospitals to avoid financial distress from the pandemic. We also found a positive relationship between the magnitude of weekly adult hospitalizations and OMs in urban and rural hospitals. Size, participation in group purchasing organizations (GPOs), and occupancy rates were positively related to OMs, with size and participation in GPOs relating to scale economies and occupancy rates reflecting capital efficiencies. Practical Applications: Hospitals' OMs have been declining since 2014. The pandemic made this decline worse, especially for rural hospitals. Federal relief funds, along with investment income, helped hospitals remain financially solvent during the pandemic. However, investment income and temporary federal aid are insufficient to sustain financial well-being. Executives need to explore cost-saving opportunities such as joining a GPO. Small rural hospitals with low occupancy and low community COVID-19 hospitalization rates have been particularly vulnerable to the financial impact of the pandemic. Although federal relief funds have limited hospital financial distress induced by the pandemic, we maintain that the funds should have been more effectively targeted, as the mean TM increased to its highest level in a decade. The disparate results of our analysis of OMs and TMs illustrate the utility of using multiple measures of profitability.

Threatening Nonprofit Hospital Tax Exemption

“…3 Other community benefits include support for community clinics and other nonprofit organizations caring for vulnerable populations, programs addressing social determinants of health, educational programs, medical research, workforce development, and extensive mental health outreach efforts. 3 Perhaps most concerning, nonprofit hospitals choosing to maintain their exempt status would seek new revenues to fundincreasingcosts,includingbyemulating the service mix of for-profit hospitals. Faced with new financial pressure, they would reduce unprofitable services, such as psychiatric care, that are disproportionately needed by already underserved patients.…”

“…On average, nonprofit urban hospitals have long experienced annual operating losses. Increases in supply and labor costs have made things worse even as government subsidies during the pandemic helped keep hospital doors open . Imposing these free-care requirements on the average community hospital could be financially devastating, all the more so for rural hospitals.…”

“…Increases in supply and labor costs have made things worse even as government subsidies during the pandemic helped keep hospital doors open. 3 Imposing these freecare requirements on the average community hospital could be financially devastating, all the more so for rural hospitals. Indeed, even profitable nonprofit hospitals do not have the resources to fill this gap.…”

“…Moreover, any increased free care-by one measure now estimated to be, on average, 1.7% of expenses 4 -would be offset by reduced spending on other community benefits, on average more than 8% of revenues. 3 Other community benefits include support for community clinics and other nonprofit organizations caring for vulnerable populations, programs addressing social determinants of health, educational programs, medical research, workforce development, and extensive mental health outreach efforts. 3 Perhaps most concerning, nonprofit hospitals choosing to maintain their exempt status would seek new revenues to fundincreasingcosts,includingbyemulating the service mix of for-profit hospitals.…”

“…States that now require exempt hospitals to dedicate a specified percentage of revenues to free care would lose those benefits. Moreover, any increased free care—by one measure now estimated to be, on average, 1.7% of expenses—would be offset by reduced spending on other community benefits, on average more than 8% of revenues . Other community benefits include support for community clinics and other nonprofit organizations caring for vulnerable populations, programs addressing social determinants of health, educational programs, medical research, workforce development, and extensive mental health outreach efforts …”