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Spectrum Health’s Butterworth Hospital along Grand Rapids’ Medical Mile. Spectrum Health’s Butterworth Hospital along Grand Rapids’ Medical Mile. COURTESY PHOTO

Spectrum Health financials steady through pandemic as outlook shifts for hospitals

BY Sunday, April 11, 2021 06:05pm

GRAND RAPIDS — Spectrum Health maintained a solid financial performance for 2020 as the COVID-19 pandemic stressed operating margins at hospitals nationwide.

The Grand Rapids-based health system recorded operating income of $295.5 million for the year on nearly $8.3 billion in patient revenues for a 3.6 percent operating margin. The amount includes $188.9 million in operating income earned by Priority Health in 2020, plus a $24.8 million operating loss at Spectrum Health Lakeland in St. Joseph.

The 2020 operating margin was close to what Spectrum Health budgeted going into the year and followed expectations last spring for a difficult year financially after the COVID-19 pandemic hit, leading the state to impose restrictions on non-emergency care that resulted in the cancelation of elective surgeries, procedures, diagnostic tests and physician visits.

“We are very pleased with how we ended the year,” said Spectrum Health CFO Matt Cox. “If you think about back in February or March when all of my peers were drawing on lines of credit to get ready for what we thought was going to be an absolute once-in-a-lifetime financial disaster, we saw our volumes plummet and our profitability plummet in March and April.”

Cox added that Spectrum was “projecting to have a really bad year, and if you would have told me back in March (2020) that we were going to end the year at a 3.6 percent operating margin, which is very close to our prior year and really close to our budget, I wouldn’t have believed you.

“We don’t have a negative impact because of COVID like some other systems may have, so we can continue to implement our strategic plan (and) our capital plan, invest in our patient care and continue to invest in the things that we need to do to continue to be a solid organization.”

Cox credits strong cost control and making up much of the lost surgical volumes later in the year for generating the positive results for 2020, as well as the income from Priority Health.

In April 2020, Spectrum issued an undisclosed number of layoffs in mostly non-clinical positions, cut executive pay by 30 percent and 40 percent for CEO Tina Freese Decker, and temporarily halted contributions to employee retirement accounts from July through December. Across the region, Spectrum employs more than 31,000 people but the company still won’t say how many were laid off during the pandemic.

Spectrum Health ended 2020 with an even better cash position than it started the year. The health system had 246.3 days of cash on hand as of Dec. 31, an increase of 16.1 days from a year earlier.

Spectrum Health’s bottom line grew further with the receipt of $116.9 million in federal assistance through the CARES Act to cover costs related to the pandemic. Another $375 million in net investment income, minus a number of items such as losses on interest rate swaps and pension settlements, drove Spectrum Heath to $714.1 million in revenue over expenses in 2020, according to an audited financial report posted online.

The federal funding enabled Spectrum Health to take a more aggressive approach in responding to the pandemic as revenue fell last spring. The health system used the federal funds to buy dozens of ventilators and other equipment, millions of gloves, N-95 face masks and other personal protection equipment for medical staff, plus plexiglass barriers to separate workspaces.

“It gave us the ability to make investments quickly,” he said. “We basically took our warehouses and stacked them full of PPE to help get us through COVID.”

Of the federal CARES Act funding, Spectrum Health has another $66 million to use in 2021 for COVID-related expenses in the present case surge, plus administering vaccines. Spectrum Health has until July 1 to use the funding or return it to the federal government, although Cox expects most of the money to get spent.

Patient volumes remain lower in some areas than pre-pandemic levels “and we think that those volumes are going to be down for the long term. We don’t see them necessarily coming back,” Cox said. ER visits, for instance, are down about 10 percent.

National outlook, consolidation

Nationwide, the American Hospital Association (AHA) estimates that U.S. hospitals combined would lose an estimated $323.1 billion for 2020 and that half could record negative operating margins by the end of the year.

An analysis conducted for the AHA by Chicago-based Kaufman, Hall & Associates LLC estimated losses would continue into 2021, with 39 percent of U.S. hospitals operating in the red under the best-case scenario. Under a pessimistic scenario, half of the nation’s hospitals would operate at a loss this year with a median margin down 80 percent from pre-pandemic levels.

Prior to the pandemic, hospitals operated on a “very thin” margin that averaged 3.5 percent, a level that Kaufman, Hall & Associates said was “only minimally sufficient for many hospitals to maintain their facilities and operations, while investing modestly to improve their capabilities to meet community needs.”

Brian Peters, CEO of the Michigan Health & Hospital Association, believes that even with the federal aid provided to hospitals, the financial toll from the pandemic and lost volumes will accelerate a consolidation trend that’s been occurring for years.

Small, rural hospitals that remain independent and operate on thin margins may have to decide whether to pursue a partnership with a larger health system, Peters said.

“It has certainly tested the financial viability of those hospitals that were in a precarious position already,” he said, adding that hospitals that “might have been on the fence” about continuing independently for five to 10 years may have to start thinking about collaboration.

About 30 hospitals in Michigan remain independent, Peters said.

A Michigan Health & Hospital Association report in July estimated that hospitals in the state took a $1.1 billion financial hit last spring from the COVID-19 pandemic and that related costs would continue to grow. The net financial effect on Michigan hospitals resulted in $3.2 billion in revenue lost during the several weeks hospitals were unable to perform non-essential procedures and surgeries, plus $440 million in emergency expenses, according to the MHA.

Several hospitals continue to report reduced inpatient and outpatient volumes as many individuals “are still hesitant to come to the hospital for elective care,” Peters said. “They’re waiting until that day when they feel the lion’s share of Michiganders have been vaccinated and positivity rates and other metrics are such that they believe the coast is now clear.”

Peters credits federal aid to hospitals through the CARES Act with helping to shore up finances at some hospitals and offset the cost of PPE, additional equipment, lost volumes, administering vaccines and other financial effects from the pandemic.

The federal money was “a life saver for a number of our hospitals,” Peters said. “That helped to keep the doors open for some of our members.”

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