February 4, 2023

Volume XIII, Number 35

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February 03, 2023

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February 02, 2023

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COVID-19 Impacts and Outcomes on Hospital Margins in 2021: Increased Activity in Hospital Transactions in 2022?

In its December Hospital Flash Report, Kaufman Hall identified and reviewed the continued, negative impact of COVID-19 on hospital operating margins. After a dramatic drop in hospital margins during the height of the pandemic in 2020 and early 2021, hospitals experienced a fluctuation of decreasing and increasing margins in the latter-half of the year. Overall, hospital margins remain significantly narrower than they were in 2019, before the pandemic. As a result, the industry may see an increase in hospital transactions in 2022 to offset the operational and financial hardships that continue to burden the health care system, as described in greater detail below.

2021 Hospital Margin and Operational Overview

In general, minor year-end improvements in 2021 hospital margins are overshadowed by the overall decrease compared to hospital margins in 2019.

The Hospital News Flash Report indicates an increase in the median change in Operating Margin, not including federal CARES Act funding, of 8.1% between October and November 2021, following two months of month-over-month percent decreases. While the short-term margin increase is a welcome change for hospitals, hospital margins remain depressed compared to the pre-pandemic levels in 2019. Not including CARES Act funding, the median change in Operating Margin dropped 22.1% from November 2019 to the end of 2021.

Additionally, while hospitals experienced a decrease in the volume of discharges, patient days, and emergency room visits from October to November 2021, the average length of stay during this time period increased, corresponding to a possible increase in case severity. This change likely correlates to increased vaccination rates and the Delta variant (i.e. fewer unvaccinated patients to end up in the hospital, but very sick patients when they do).

Reasons for Decreasing Hospital Margins

The decrease in hospital margins since 2019 is almost certainly attributable to the COVID-19 pandemic. Several factors worked together to cause the downward trend.

First, the pandemic led to an influx of high acuity patients requiring a higher level of care, as hospital emergency rooms filled with COVID-19 patients. Simultaneously, a decrease in outpatient visits as a result of individuals postponing or foregoing elective care caused hospitals to lose out on potential revenue from profitable procedures. The imbalance of high-acuity inpatient visits to more lucrative outpatient visits resulted in greater expenses compared to revenue and an overall higher cost of patient care, as evidenced by the 24.7% increase in Total Expense per Adjusted Discharge since November 2019. Additionally, as mentioned above, an increase in average length of stay between October 2021 and November 2021 indicates that hospitals were still seeing sicker patients, likely as a result of the Delta variant.

Further, employment and staffing issues served as another blow to hospitals. The strain of the pandemic on doctors, nurses, and other hospital staff led to employee retention issues as many hospital employees became sick or decided to find jobs in other settings. These retention issues exacerbated what was already a workforce shortage as hospital staff became overwhelmed with COVID-19 cases.

Hospitals continue to face both of these headwinds, among others, as new strains of COVID-19 develop.

A Potential Solution

The financial and operational burden that COVID-19 placed on hospitals may lead to an increase in hospital mergers and acquisitions in 2022. Historically, hospital transactions have saved many financially distressed hospitals from closure or otherwise provided them with the capital and support to expand access and improve quality of care. For example, in a report issued by the American Hospital Association entitled, “Hospital Merger Benefits: An Econometric Analysis Revisited,” indicates that recently-acquired hospitals experience a reduction in annual operating expenses and overall cost savings. As such, hospitals may consider mergers, acquisitions, and other transactions to promote operational efficiency and patient care, and prepare for additional unpredicted impacts of the pandemic.

Notably, the figures referenced in this post do not reflect the new Omicron variant. As hospitalization rates again climb due to the high transmissibility of this variant, it is possible that hospital margins will experience another downturn. Undoubtedly, the potential fluctuations in hospital margins and the impact on hospital transactions will continue to be a topic of issue throughout this year.

Copyright © 2023, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 10

About this Author

Matthew Goldman, Corporate Attorney, Sheppard Mullin Law Firm

Matthew Goldman is an associate in the Corporate Practice Group in the firm's Century City office and is a member of the firm's healthcare practice team.

Areas of Practice

Matthew’s practice blends the regulatory and transactional components of healthcare law, and includes representation of hospitals, managed care organizations, medical groups, and other healthcare entities and providers. On the regulatory side, Matthew’s practice is focused on licensing, regulatory compliance, and managed care arrangements. Matthew has extensive experience preparing Knox-...

Jordan Grushkin healthcare law attorney Sheppard Mullin Law Firm Century City office

Jordan Grushkin is an associate attorney in the Corporate Practice group in the firm's Century City office and a member of Sheppard Mullin's healthcare law practice group.

Jordan’s practice focuses on the transactional and regulatory aspects of healthcare law, and includes representation of a wide variety of healthcare entities, from providers such as hospitals and medical groups to payors and intermediary entities (e.g., independent practice associations (IPAs) and risk-bearing entities). On the corporate side, Jordan counsels clients on...

Anahita Anvari Corporate Attorney Sheppard Mullin Law Firm

Anahita (Ana) Anvari is an associate in the Corporate Practice Group in the firm's Century City office and is a member of the firm’s healthcare practice team.

Areas of Practice

Ana represents clients in the health care industry through business and transactional matters, including mergers & acquisitions and corporate governance. She advises clients on regulatory compliance under federal and state law, including licensure and fraud and abuse compliance. She also guides clients through health privacy issues, including HIPAA.