How are hospitals doing? Not so well. Profits are down and cash flow sucks—which has a direct impact on orthopedic product sales and pricing.
A new study from Kaufmann, Hall & Associates, LLC, management consulting paints a sobering picture of hospital financial health as we pass COVID-19’s one year anniversary.
As 2020 was winding down, U.S. hospitals were grappling with a flood of new COVID admits (125,423 COVID-related hospitalizations in December, up 30% from November). Expenses spiked, profitable activities like elective orthopedic procedures were pushed back and U.S. hospitals in the aggregate struggled to break even—and most did not.
Hospital Profitability Hit 0.3% of Revenue in December
Quoting directly from the Kaufmann Hall January 2021 Flash Report:
“COVID-related hospitalizations—which have steadily increased since early September—climbed to a December high of 125,423 nationwide at month’s end, up more than 30% since late November, according to The COVID Tracking Project.”
As a result, “The median Kaufman Hall hospital Operating Margin Index* for all of 2020 was 0.3%, not including federal CARES funding. Operating [Profit] Margin was down 55.6% (4.9 percentage points) for January through December without CARES. Operating EBITDA Margin fell 34.8% (4.9 percentage points) in 2020 without the federal funding.”
CARES, by the way, refers to the Coronavirus Aid, Relief, and Economic Security Act which assists small businesses that have been affected by the COVID pandemic. Even with CARES funding, hospital profits were down by double digit rates.
Aggregate hospital profitability, measured as a percent of revenue, fell from 5.2% of sales to 0.3% of sales in December 2020.
Details
Because of COVID, hospital inpatient volumes rose in 2020. Average patient days in the hospital were up 4.5% over 2019 levels. Conversely, patient discharges were down 4.3% year-over-year. Which, of course, means that average length of stays, a key barometer of costs, rose 11% over 2019 levels.
Emergency rooms bore the biggest brunt of the COVID spike. ER patient volumes dropped 16.2% from 2019 levels. Second most affected hospital department—and this had a direct effect on orthopedic company revenues—was operating rooms. Operating room minutes fell 10.5% in 2020.
Fear of COVID prompted many patients to stay away from hospitals which, in turn, changed the Inpatient/Outpatient dynamic and, therefore, also drove expenses up—way up. The Total Expense per Adjusted Discharge and Labor Expense per Adjusted Discharge popped 14.4% in 2020.
One final stat really stood out as we read the Kaufmann Hall report. In December, again for the overall hospital system in the United States, Drug Expenses per Adjusted Discharge leaped 44% in December versus 2019 December levels. This was almost entirely due to COVID surge around the 2020 holiday season.
Outlook
As we write this article, hospitalizations for COVID are dropping sharply and by the end of March, approximately 175 million doses of 3 different COVID vaccines will be in broad U.S. distribution.
Operating rooms are back to routine use. Patients, particularly those over the age of 65, the prime population for orthopedic and spine care, are returning to their doctors and scheduling long delayed procedures.
And yet. Hospitals have yet to recover financially from 2020 and remain cautious. To quote from the Kaufmann report:
“The next few months are expected to be rough, as the nation’s hospitals and health systems cope with rising COVID-19 infections as people congregate indoors over the colder winter months, and as the new, more contagious variant of the virus spreads nationwide.”
“The CDC projects the new variant could be the most prevalent COVID-19 strain in the U.S. by March. Hospitals already saw COVID-19 hospitalizations jump 6% between December 31 and January 7, likely due to infections from holiday related gatherings. As of January 7, hospitals reported that 79% of intensive care beds were occupied nationwide, up 2 percentage points from just one week prior.”
Finally, in OTW’s view, the end of the COVID effect on clinic and hospital revenues and cash flow is within sight. Certainly, we think, by the second half of 2021, the vast majority of the U.S. population will have been vaccinated, which should bring hospital and clinic activity back to pre-COVID levels. Among the permanent changes will be, we think, the percentage of orthopedic care being offered within the ambulatory surgery center (ASC) setting.
For suppliers of orthopedic implants and instruments, we continue to expect that there will likely be a sales rebound effect coming from two factors: the full return of elective surgeries and in-person surgeon and company meetings like American Academy of Orthopaedic Surgeons (AAOS) in late August/early September.
