Published in Health Care

Health systems face financial crisis brought on by pandemic

BY Sunday, April 26, 2020 06:00pm

In normal times, Trinity Health’s seven hospitals across Michigan generate combined operating income of $9 million to $10 million a month.

But the current operating environment is far from normal, and the COVID-19 pandemic has pushed the Catholic health system’s financial performance deep into the red.

Rob Casalou, president and CEO of Trinity Health Michigan COURTESY PHOTO

The Michigan operations for Trinity Health, the Livonia-based parent corporation of Mercy Health in West Michigan and Saint Joseph Mercy Health System in Southeast Michigan, recorded a $50 million operating loss for March, “and remember in March half the month was a normal month,” said President and CEO Rob Casalou.

The operating loss stems from the lost revenue from canceling non-essential surgeries and procedures, combined with ramped up spending to test and care for COVID-19 patients.

Trinity Health Michigan now conservatively projects monthly operating losses in excess of $100 million for April, May and June, Casalou told MiBiz.

The situation at Trinity Health Michigan illustrates the severe and potentially long-lasting financial effects that the COVID-19 pandemic has on hospitals.

“This crisis has really weakened the financial foundations of health systems across the country,” Casalou said. “A lot of us believe that this crisis may alter the configuration of not just for Trinity, but other health systems.”

The Michigan Health and Hospital Association estimates that in the last two weeks of March, after Gov. Gretchen Whitmer issued an executive order for care providers to postpone or cancel non-essential surgeries and procedures, member hospitals across the state lost more than $600 million in combined net patient revenue from the pandemic. 

The lost revenue from the pandemic is on top of losses in their investments and an estimated minimum $150 million that hospitals in Michigan spent on unbudgeted expenditures “in a very short time,” MHA CEO Brian Peters told MiBiz. Even hospitals that have not had many COVID-19 patients have had to prepare to increase bed capacity for a possible surge, Peters said.

That “conservative estimate” is based on information from about three-quarters of the MHA’s member hospitals, according to Peters.

“It has already impacted our hospitals and health systems very significantly in Michigan and that impact is going to be felt more severely in the months ahead, there’s no question about it,” Peters said. “And every day, every week that goes by, those numbers get worse.”

Given the mounting losses, Peters worries that small community and rural hospitals that generate a large majority of their revenue from outpatient care and procedures — many of which were already having financial difficulty — may not make it.

Initial support

Further relief for hospitals nationally from the federal government — beyond the $100 billion under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act that Congress enacted in March — “is desperately needed,” Peters said. The CARES Act provided $468 million to Michigan hospitals, according to the MHA.

A subsequent stimulus Congress passed last week provides another $75 billion for hospitals, health systems and other health care providers across the country. The $75 billion would reimburse eligible health care providers for expenses or lost revenues attributed to COVID-19, according to the American Hospital Association.

“We are very concerned that if we don’t have the appropriate support, and that is from the state and federal level, that we could have small rural hospitals, small independent hospitals that are very much in jeopardy,” Peters said in an interview with MiBiz prior to the new stimulus package. “Even before the COVID-19 came along, for a variety of reasons, we had hospitals that were in very severe financial straits. This obviously is an incredibly significant problem to add to the existing challenges that those hospitals were confronting.

“We can’t afford to lose many of these hospitals. They are the only source of care in communities throughout the state. Whether it’s COVID, whether it’s treating trauma, whether it’s primary care, or deliveries, you name it, if that hospital goes away, we have a real problem in those communities.”

Building confidence

At Trinity Health, which has 92 hospitals nationally, federal money from the CARES Act covered about one month of operating losses, Casalou said.

“The CARES Act, while appreciated, was really not going to be the panacea that I think lawmakers were hoping it would be because of the losses in the health systems,” said Casalou, who’s hoping Congress will provide further aid to hospitals. “We’re burning through cash right now and no system has unlimited capability to do that forever.”

Casalou doubts the financial pain the pandemic brought on will wane anytime soon. He expects the fallout from the pandemic to linger for months, even after outpatient centers reopen and hospitals can resume elective procedures and surgeries. He expects a “mini bump” will occur from pent-up demand that will drive some volume immediately after the state’s stay-home order is lifted and elective procedures resume. A steady resumption of “real activity” may not come until late summer or early fall “at the earliest,” he said.

“Our recovery could be months down the road before we actually start seeing activity resume,” Casalou said. “It’s going to be a while before the public is ready to come back into health care. Just psychologically, people have been afraid to come to hospitals. They’ve been afraid to go anywhere they think they may catch this virus. So, we’re going to have to spend time building confidence back in people that the health care systems are safe to use.”

Costs add up

In response to the financial hit, Trinity Health Michigan has been drawing from reserve funds and earlier this month said it would furlough about 2,500 mostly non-clinical employees in April. According to Casalou, “we may have to look at some additional” furloughs in the coming months. 

The furloughs affected about 10 percent of Trinity Health’s workforce in Michigan who work at Mercy Health and Saint Joseph Mercy Health System.

Many other health systems are taking similar actions.

In West Michigan, revenues at Bronson Healthcare in Kalamazoo are down more than 50 percent since March. The health system cut executives’ pay through August, starting with a 25-percent reduction for new CEO Bill Manns. Bronson said last week that furloughs “will be implemented over the next few weeks for several hundred mostly non-clinical employees. The furloughs are expected to be for 16 weeks, however, some employees may be called back sooner as their areas ramp back up.”

Bronson said predictive models indicate Southwest Michigan “may experience ongoing community spread of COVID-19 into the fall rather than an overwhelming surge this spring, assuming responsible social distancing continues after the governor’s order expires.”

Grand Rapids-based Spectrum Health, which owns and operates 14 hospitals, said this month that it plans to aggressively cut costs, starting with executive pay, to shore up finances that have been hit by the COVID-19 pandemic.

Spectrum Health’s revenues are down after having to postpone or cancel non-urgent and non-emergency surgeries, procedures and clinical appointments to prepare for a surge in COVID-19 patients. That resulted in “a multimillion dollar reduction in revenue in just one month,” according to the health system.

As well, Spectrum Health said it spent “more in one month than it would typically spend in one year” for supplies and personal protection equipment for staff.

Financial health in question

The financial effects of the pandemic on hospitals led ratings agencies to lower their outlooks for the industry.

In March, Moody’s reduced the outlook for nonprofit hospitals in the U.S. from “stable” to “negative,” citing how the sector “will likely see lower cash flow compared to 2019. This compares with our previous expectation of 2 percent to 3 percent growth in 2020.”

S&P Global Ratings took a similar view, reducing the nonprofit health care sector to “negative” from “stable.” 

“For all health care organizations, we believe the pandemic will result in sizeable increases in operating costs, particularly for labor and supplies, reduced volume and revenues related to elective and non-essential health care needs, reliance on working capital lines of credit, and material declines in unrestricted reserves and non-operating revenue as the investment markets weaken,” S&P analysts wrote in a March 25 outlook on the sector. “These added constraints are coming at a time when organizations were already under some revenue and expense pressure related to industry dynamics and balance sheet strength had been a stabilizing factor.”

Inpatient revenue from treating COVID-19 patients may offset some of the financial burden, although “it will likely not compensate for that full amount,” according to S&P.

Rethinking independence

As the pandemic goes on and financial pressures mount, some hospitals may “have an increased appetite for M&A,” according to Chicago-based Juniper Advisory, an investment bank specializing in nonprofit hospital transactions.

The pandemic and resulting financial pressures may lead directors at smaller community hospitals that remain independent to “rethink” that strategy, said Rex Burgdorfer, a managing director at Juniper Advisory.

“The pandemic response has underscored the need for the access to capital, supplies and equipment, and operational expertise that is often afforded to hospitals in health systems. As part of a system, a hospital may find itself better positioned to respond to their communities’ needs and more resilient in challenging times,” according to a note to clients issued by Juniper Advisory. “After experiencing a global pandemic, hospital boards may choose to prioritize operational and clinical effectiveness over independence, trading some of their ‘nimbleness’ for stability.”

Even with a wave of consolidation among hospitals over several years, the industry in the U.S. remains “pretty fragmented” and “a patchwork configuration of local community hospitals that by and large has been driven by ‘independence,’” Burgdorfer said. At a minimum, hospitals will have to consider collaborating and partnering clinically, he said.

“Most believe that’s going to be imperative to future success,” Borgdorfer said.

Pain for physicians

The financial pain in health care from the pandemic surely goes beyond hospitals. Physician practices also are ailing from lost non-essential patient visits.

“This is going to hurt a lot of people,” said Dr. Rose Ramirez, a family physician at Jupiter Family Medicine P.C. in Belmont.

At ophthalmology practice Sight Eye Clinic P.C. in Zeeland, Dr. Bryan Huffman typically sees 130 patients a week. Since the executive order in mid-March that required care providers to stop non-essential care, he’s been averaging six to eight patients a week who have an urgent or emergency condition such as eye infections or injuries.

“It’s been a huge hurt on our business,” Huffman said. “We have a lot of expenses that just don’t stop when we stop working.”

The ophthalmology practice has had to lay off much of its staff, he said.

The pandemic’s effect on the health care industry could drive more independent medical practices to look at becoming part of a health system, if possible, Burgdorfer said. The high costs of I.T. systems for electronic medical records have been a contributor for years to physician practices deciding to sell to a health system. The fallout from the pandemic could push more in that direction.

“Being part of a system is really just having a safety net to fall back on,” Burgdorfer said.

The Michigan State Medical Society has been surveying physicians to gauge the pandemic’s effects on medical practices.

Dr. Ramirez, a past president of the Michigan State Medical Society, believes more doctors will want to become part of a health system because of the fallout from the pandemic. But she wonders whether health systems will have the capital needed to acquire more physician practices.

“I don’t think hospitals are going to have the deep pockets anymore, at least not anytime soon,” she said.

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