ISSUE BRIEF June 2020 Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals John (Xuefeng) Jiang Ge Bai Lovisa Gustafsson Gerard F. Anderson Eli Broad College of Business Johns Hopkins Carey Business School The Commonwealth Fund Johns Hopkins Bloomberg Michigan State University Johns Hopkins Bloomberg School of Public Health School of Public Health Johns Hopkins School of Medicine ABSTRACT TOPLINES ISSUE: During the first three months of the COVID-19 pandemic, hospitals U.S. hospitals experienced a faced significant financial and operating pressure due to their necessary decline in first-quarter revenue and profitability as a result of the response to the public health crisis. In addition to incurring increased COVID-19 pandemic, a new study expenses to prepare for and treat COVID-19 patients, hospitals lost shows. revenue for care that was canceled, postponed, or forgone. The federal government has responded with emergency financial relief, but state and Hospital declines in service federal policymakers still struggle to understand the magnitude of the volumes, profits, and market impact on hospitals because of limited data on hospital financial metrics value since the pandemic began during the pandemic. could indicate trouble on the horizon for other health systems. GOAL: To understand the impact of COVID-19 on hospital utilization, revenue, and profitability. METHODS: Study of quarterly financial disclosures, earnings calls, and stock performance of the four largest publicly traded for-profit hospital systems. KEY FINDINGS: Admissions, surgeries, and emergency department visits of the four for-profit hospital systems dropped 20 percent to 40 percent during the last two weeks of March 2020 and 30 percent to 70 percent in April 2020. Their first quarter operating profits dropped 13.5 percent (though remained positive), and their market value dropped 52 percent from February 3 to March 18, 2020. CONCLUSION: COVID-19 affected hospital systems’ revenue and profitability. The necessity of providing congressional relief to hospitals remains ambiguous and varies with individual systems. Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals2 INTRODUCTION and Universal Health Services, Inc. (UHS). We chose to To help hospitals adjust to the financial pressures caused look at these publicly traded for-profit systems because by the COVID-19 pandemic, Congress has provided $175 they are required to report financial information on a timely basis. While our sample is not representative of all billion in financial relief to hospitals and other providers hospitals, it provides timely empirical data long before through the Coronavirus Aid, Relief, and Economic any national hospital financial information has become Security (CARES) Act and the Paycheck Protection available, and because they must conform to nationally Program and Health Care Enhancement Act.1 In addition, accepted accounting standards, the data are not subject to the CARES Act, among other things, authorized a 20 the response bias that potentially exists in survey studies. percent increase in Medicare payments for COVID-19 patients. The two acts were designed to help hospitals HCA, Tenet, CHS, and UHS are the only four companies adjust to higher expenses and lost revenue, given the in the acute hospital care industry that were publicly concern that hospitals were cancelng elective procedures listed on May 8, 2020. Combined, they have 88,638 beds and account for approximately 13 percent of the U.S. at the same time they were spending more on personal private hospital market share and 68 percent of the protective equipment, testing, ventilators, and additional for-profit hospital market share6 (Exhibit 1). Between treatment capacity. April 21 and May 4, the four systems filed first-quarter When Congress was making relief fund allocation (Q1) 2020 10-Q forms, the Security and Exchange decisions, the operational and financial impact of Commission’s mandatory quarterly financial disclosure COVID-19 on U.S. hospitals was unknown. To date, there for all publicly traded companies in the United States. are only projections,2 estimations,3 anecdotal evidence,4 They also conducted quarterly conference calls to and survey results from some hospitals.5 To better explain past earnings and performance, provide future understand the financial impact on hospitals, we studied prognostications, and answer questions from the evidence from the four largest publicly traded for-profit investment community. These call transcripts provided hospital systems: HCA Healthcare (HCA), Tenet Healthcare information on performance and specific actions the Corporation (Tenet), Community Health Systems, Inc. (CHS), hospital systems had taken. Exhibit 1. Profiles and the COVID-19 Relief Received by For-Profit Hospital Systems Medicare COVID-19 Hospital Number Number Assets Market value advance grant system of hospitals of beds (in millions) (in millions) payments (in millions) (in millions) HCA 186 49,357 $45,058 $50,026 $700 $4,000 Tenet 65 17,210 $23,351 $3,963 $345 $1,500 CHS 99 15,620 $15,609 $342 $245 $1,200 UHS 26 6,451 $11,668 $12,438 $195 $375 Total 376 88,638 $95,686 $66,768 $1,485 $7,075 Notes: The COVID-19 grant and Medicare advance payments are based on the hospital systems’ disclosures during their Q1 2020 conference calls. They reflect the amount received as of the date of the conference calls and are excluded from the Q1 2020 financial statements. Data: Authors’ analysis of 2019 Forms 10-K, Q1 2020 conference call transcripts on quarterly earnings, and stock prices as of December 31, 2019, for HCA, Tenet, CHS, and UHS. commonwealthfund.org Issue Brief, June 2020 Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals3 FINDINGS Impact on Revenue, Expenses, and Profit All hospital systems reported revenues, three components Impact on Service Volume of operating expenses (salary and compensation, One aim of the congressional funding for hospitals was to supplies, and other operating expenses), and operating provide financial relief for lost revenues due to COVID-19. profit (revenue minus the sum of the three components Thirty states and the District of Columbia issued executive of operating expenses). While all four hospital systems orders requiring that elective procedures be canceled or maintained positive operating profits in Q1 2020, their postponed.7 Patients, concerned about possible COVID-19 aggregated operating profits dropped by 13.5 percent infection, are also limiting hospital visits. Compared (Exhibit 3). Compared to Q1 2019, HCA, CHS, and UHS with the same period in 2019, admissions, surgeries, experienced little change in revenue in Q1 2020, but saw and emergency department (ED) visits at HCA declined increases in salary and compensation expenses, supply substantially in the last two weeks of March 2020 (20%, expenses (not UHS), and other operating expenses. Tenet 26%, and 30%, respectively), and the decline intensified in had a 10.4 percent decrease in revenue and reduced all three April (30%, 63%, and 50%, respectively). Tenet reported components of operating expenses. In the conference call, similar trends. CHS reported a 70 percent drop in surgeries Tenet attributed its $83 million drop in operating profit in April, and UHS had a 29 percent decline in admissions to COVID-19, suggesting that during the last few weeks of in the first quarter of 2020 (Exhibit 2). March, COVID-19 caused a $125 million operating loss. Exhibit 2. Service Volumes of For-Profit Hospital Systems Quarterly Last two weeks Q1 2020 Q1 2019 April 2020 change in March 2020 HCA Admissions 514,979 511,817 1% –20% –30% Surgeries 350,871 367,066 –4% –26% –63% ED visits 2,221,294 2,243,856 –1% –30% –50% Tenet Admissions 165,735 173,470 –5% –25% –33% Surgeries 95,352 102,449 –7% –40% –55% ED visits 641,282 651,852 –2% –25% –50% CHS Admissions 127,845 134,882 –5% NA –35% Surgeries NA NA NA NA –70% ED visits NA NA NA NA –45% UHS Admissions 77,768 80,663 –4% –29% NA Surgeries NA NA NA NA NA ED visits NA NA NA NA NA Notes: Surgery volume for HCA is the weighted average of inpatient and outpatient surgeries, weighted by Q1 2020 values. All percentage changes are based on the same period in the previous year. Data: Authors’ analysis of Q1 2020 Forms 10-Q and conference call transcripts on quarterly earnings for HCA, Tenet, CHS, and UHS. commonwealthfund.org Issue Brief, June 2020 Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals4 Exhibit 3. Revenue, Operating Expenses, and Operating Profit of U.S. For-Profit Hospital Systems, Q1 2019–Q1 2020 (in millions) Q1 2020 Q1 2019 Quarterly change Revenue HCA $12,861 $12,517 2.7% Tenet $3,025 $3,376 –10.4% CHS $2,830 $2,804 0.9% UHS $4,520 $4,545 –0.6% Total $23,236 $23,242 0.0% Salary and compensation expenses HCA $6,118 $5,647 8.34% Tenet $1,408 $1,542 –8.69% CHS $1,433 $1,366 4.92% UHS $2,187 $2,151 1.67% Total $11,146 $10,706 4.11% Supplies expenses HCA $2,427 $2,299 5.6% Tenet $737 $811 –9.1% CHS $690 $645 7.0% UHS $1,013 $1,065 –4.9% Total $4,867 $4,820 1.0% Other operating expenses HCA $2,123 $2,041 4.0% Tenet $498 $558 –10.8% CHS $318 $307 3.4% UHS $763 $741 3.0% Total $3,702 $3,647 1.5% Operating profit HCA $2,193 $2,530 –13.3% Tenet $382 $465 –17.8% CHS $389 $487 –20.0% UHS $557 $588 –5.3% Total $3,521 $4,070 –13.5% Note: Q1 2020 financial statements exclude any government relief or financial assistance related to COVID-19. Data: Authors’ analysis of Q1 2020 Forms 10-Q. commonwealthfund.org Issue Brief, June 2020 Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals5 Impact on Cash and Cash Equivalents Impact on Stock Performance Another aim of congressional funding was to provide We also analyzed the impact of COVID-19 on the stock liquidity for hospitals’ cash flows. We used the amount prices of the four for-profit systems compared to other U.S. of cash and cash equivalents to assess liquidity. Cash companies. To do this, we calculated the combined market value of the four systems and compared it against the S&P equivalents refer to short-term securities with high 500 Index, which is widely used to indicate the overall stock liquidity and credit quality, such as treasury bonds, market, and the Vanguard Health Care Index Fund (Health commercial papers, and money market funds. We found Care Index), which represents the overall health care sector that for-profit hospital systems took preemptive actions and is heavily weighted to pharmaceuticals, biotechnology, to improve liquidity. The total cash and cash equivalents and health care equipment. We also reviewed financial of the hospital systems increased by 42 percent between media reports to understand their perception of the Q4 2019 and Q1 2020, from $1.2 billion to $1.6 billion. relationship between stock price volatility and major events Except for UHS, all systems increased their cash positions related to COVID-19. (Exhibit 4). These changes were unrelated to any federal The stock prices of the hospital systems appear to have financial relief pertaining to COVID-19 provided to responded to government actions and key COVID-19 these hospitals. Tenet reduced capital expenditures by related news (Exhibit 5): $300 million, borrowed $700 million in secured loans, • From February 3 to March 18, the combined market and raised its revolving credit commitment by $400 value of the four hospital systems dropped by 52 million. HCA and UHS suspended stock repurchases and Exhibit 4 percent, substantially greater than the Health Care dividend payments. Index (20%) or the S&P 500 Index (26%). Changes in Cash and Cash Equivalents of U.S. For-Profit Hospital Systems, Q4 2019–Q1 2020 Exhibit 4. Changes in Cash and Cash Equivalents of U.S. For-Profit Hospital Systems, Q4 2019–Q1 2020 In millions $2,000 $55 $1,500 $246 $61 UHS $1,000 $613 CHS $216 Tenet $262 HCA $500 $731 $621 $- Q4 2019 Q1 2020 Note: The amount of cash and cash equivalents at the end of Q1 2020 excludes any government relief or financial assistance related to COVID-19. Data: Authors’ analysis of Q1 2020 Forms 10-Q. Data: Authors’ analysis of Q1 2020 Forms 10-Q.end of Q1 2020 excludes any government relief or financial assistance related to COVID-19. Notes: The amount of cash and cash equivalents at the Source: John (Xuefeng) Jiang et al., Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals (Commonwealth Fund, June 2020). commonwealthfund.org Issue Brief, June 2020 Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals6 Exhibit 5 Standardized Market Value of For-profit Hospital Systems, Health Care Index, Exhibit 5. Standardized Market Value of For-Profit Hospital Systems, Health Care Index, and S&P 500 and S&P 500 Index, 2/3/2020–5/8/2020 Index, 2/3/2020–5/8/2020 120 3/18/2020 4/8/2020 100.5 100 Health Care Index 90.2 S&P 500 Index 80 75.2 76.1 Market Value 60 of HCA, Tenet, CHS, and UHS 47.8 40 20 0 0 0 0 0 0 20 20 20 20 20 20 20 20 20 /2 /2 /2 /2 /2 0/ 7/ 4/ 6/ 3/ 0/ 3/ 0/ 7/ 3 2 9 6 4 1 1 2 1 2 3 1 2 2 2/ 3/ 3/ 4/ 5/ 2/ 2/ 2/ 3/ 3/ 3/ 4/ 4/ 4/ Source: Authors’ analysisvalue ofpricesfour hospital systems is the Vanguard Health Care Index Fundeach system. The market valueIndex. system on a given date is its closing Notes: The market of stock the of the four hospital systems, the sum of the market value of (Health Care Index), and the S&P 500 for a share price multiplied by the shares outstanding on that day. It measures what the investment community perceives as discounted future profits. All three trends Notes: The market value of theon February 3, 2020. sum of the market value of each system. The market value for a system on a given date is its closing share price multiplied by the shares are standardized at 100 four hospital systems is the outstanding on that day. It measures what the investment community perceives as discounted future profits. All three trends are standardized at 100 on February 3, 2020. Data: Authors’ analysis of stock prices of the four hospital systems, the Vanguard Health Care Index Fund (Health Care Index), and the S&P 500 Index. Source: John (Xuefeng) Jiang et al., Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals (Commonwealth Fund, June 2020). • On the evening of March 18, the second major STUDY LIMITATIONS COVID-19 relief package was signed into law.8 The First, we only provided evidence of four large for-profit next day, the Health Care Index and the S&P 500 Index hospital systems. For-profit hospitals are located stayed stable, but the market value of the four hospital disproportionately in southern states and outside of systems increased by 23 percent. urban areas, which have the greatest concentration of • On April 8, Dr. Anthony Fauci, director of the Institute COVID-19 patients. They also differ from other types of Allergy and Infectious Diseases, announced that of hospitals in various aspects,10 such as service mix11 new COVID-19 cases were approaching their peak.9 and responsiveness to external changes.12 Second, The hospital systems’ market value increased by 10 the financial information obtained from Form 10-Q percent on that day, but the Health Care Index and does not differentiate domestic operations from the S&P 500 Index increased by only 3 percent and 4 international operations. In our analysis, we were percent, respectively. unable to exclude any finances connected with overseas As of May 8, the Health Care Index and the S&P 500 Index hospitals that these hospital systems may have. Third, had largely recovered all of their value relative to that of stock prices reflect all signals available to the market; February 3 (101% and 90%). However, the market value of thus, the specific impacts of COVID-19 and the effect the hospital systems was still only at 75 percent of their of government actions or other events on stock prices February 3 level. cannot be accurately quantified. commonwealthfund.org Issue Brief, June 2020 Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals7 CONCLUSION NOTES The mandatory financial disclosure of for-profit hospital 1. Coronavirus Aid, Relief, and Economic Security Act of systems provides important signals about the impact 2020, H.R. 748, 116th Cong. (2020); and Paycheck Protection of COVID-19 on U.S. hospitals — the canary in the coal Program and Health Care Enhancement Act of 2020, H.R. mine. While the hospitals studied are not nationally 266, 116th Cong. (2020). representative and many are located outside of COVID-19 hotspots, their declines in service volumes, profits, and 2. Dhruv Khullar, Amelia M. Bond, and William L. Schpero, market value as a result of COVID-19 are likely to be seen “COVID-19 and the Financial Health of U.S. Hospitals,” in other health systems. JAMA 323, no. 21 (May 4, 2020): 2127–28. The necessity of congressional relief for providers remains 3. American Hospital Association, Hospitals and Health ambiguous, however. Hospital systems, when possible, Systems Face Unprecedented Financial Pressures Due to have taken proactive measures to maintain cash positions COVID-19 (AHA, May 2020). and limit spending. Different systems have varying solvency risks and access to capital. The allocations of 4. Christina Farr, “U.S. Hospitals Are Losing Millions relief funds have been based on metrics such as revenue, of Dollars per Day in the Midst of the COVID-19 expenses, or admissions,13 without considering individual Pandemic — and Recovery May Take Years,” CNBC, May hospitals’ financial vulnerability or profitability. None of 5, 2020; and Sarah Kliff, “Hospitals Knew How to Make the hospitals studied reported operating losses during Money. Then Coronavirus Happened.,” New York Times, the time period studied, which may not be the case in updated May 20, 2020. other geographies and hospitals serving different patient populations. As a result, hospitals in more precarious 5. Christi A. Grimm, Hospital Experiences Responding positions might not receive sufficient funds to remain to the COVID-19 Pandemic: Results of a National Pulse viable after the pandemic, while hospitals with strong Survey, March 23–27, 2020 (U.S. Department of Health and financial resilience might receive substantial support. Human Services, Office of Inspector General, Apr. 2020). 6. Henry J. Kaiser Family Foundation, “State Health Facts: Hospital Beds per 1,000 Population by Ownership Type, 2018,” n.d. 7. “COVID-19: Executive Orders by State on Dental, Medical, and Surgical Procedures,” American College of Surgeons, updated June 8, 2020. 8. Claudia Grisales, Susan Davis, and Kelsey Snell, “President Trump Signs Coronavirus Emergency Aid Package,” National Public Radio, Mar. 18, 2020. 9. Todd Campbell, “Why Tenet Healthcare Shares Are Soaring 20.5% Today,” The Motley Fool (blog), Apr. 8, 2020. 10. Ge Bai and Gerard F. Anderson. “A More Detailed Understanding of Factors Associated with Hospital Profitability,” Health Affairs 35, no. 5 (May 2016): 889–97. commonwealthfund.org Issue Brief, June 2020 Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals8 11. Jihwan Moon and Steven M. Shugan, “Nonprofit Versus ABOUT THE AUTHORS For-Profit Health Care Competition: How Service Mix John (Xuefeng) Jiang, Ph.D., is the Plante Moran Faculty Makes Nonprofit Hospitals More Profitable,” Journal of Fellow, professor of accounting and information systems, Marketing Research 57, no. 2 (2020): 193–210. and professor of finance (by courtesy) at the Eli Broad College of Business of Michigan State University. He 12. Jill R. Horwitz, “Making Profits and Providing Care: collects novel data to address public policy questions at the Comparing Nonprofit, For-Profit, and Government interface of accounting, finance, and health care. He has Hospitals,” Health Affairs 24, no. 3 (May/June 2005): made significant contributions to the literature on credit 790–801. ratings, chief financial officers, and firm disclosures. His recent research on cybersecurity has been published in 13. “CARES Act Provider Relief Fund: General JAMA Internal Medicine and Annals of Internal Medicine Information,” U.S. Department of Health and Human and covered by the Wall Street Journal, Forbes, CBS News, Services, updated June 24, 2020. U.S. News & World Report, Reuters, and Huffington Post. Dr. Jiang received the 2017 American Accounting Association Distinguished Contribution to Accounting Literature Award. His Ph.D. students have been placed in the University of Florida and the National University of Singapore. Ge Bai, Ph.D., C.P.A., is an associate professor of accounting at the Johns Hopkins Carey Business School and associate professor of health policy and management at the Johns Hopkins Bloomberg School of Public Health. She is an expert on health care pricing, policy, and management. Bai is currently conducting research on the pricing and financing of health care products and services, hospital charity care, and supply chain of medical supplies. Bai has testified before the House Ways and Means Committee, and she has written for the Wall Street Journal and published her studies in leading academic journals. Her work has been widely featured in major media outlets around the world and cited in government regulations and congressional testimonies. Lovisa Gustafsson, M.B.A., is vice president of the Controlling Health Care Costs program at the Commonwealth Fund. She joined the Fund in 2016 as the program officer for Breakthrough Health Care Opportunities and was promoted to assistant vice president in July 2018. Prior to joining the Fund, Ms. Gustafsson served as senior vice president for the Marwood Group, a health care advisory organization, where she managed various outsourced private equity due diligence and strategy consulting engagements. Before her role at the Marwood Group, she worked as a manager in corporate strategy and business development at McKesson, a senior consulting commonwealthfund.org Issue Brief, June 2020 Canary in a Coal Mine? A Look at Initial Data on COVID-19’s Impact on U.S. Hospitals 9 associate in quality and operations support for Kaiser positions in the Office of the Secretary, U.S. Department Permanente, a senior policy analyst at the Commonwealth of Health and Human Services. D.r Anderson has directed of Massachusetts Office of Medicaid, and a manager at reviews of health care systems for the World Bank, World Avalere Health LLC. Ms. Gustafsson earned an M.B.A. in Health Organization, and U.S. Agency for International health care management from the Wharton School at the Development in multiple countries and has directed over University of Pennsylvania and a B.A. in sociology from 100 research projects. He has authored two books on health Harvard University. care payment policy, published over 300 peer-reviewed articles, and testified before Congress more than 50 times. Gerard Anderson, Ph.D., is a professor of health policy and management and international health at the Johns Hopkins School of Hygiene and Public Health, professor of medicine Editorial support was provided by Maggie Van Dyke. at the Johns Hopkins University School of Medicine, and director of the Johns Hopkins Center for Hospital Finance and Management. Dr. Anderson is currently conducting research on policy options for containing the price of For more information about this brief, please contact: prescription drugs, hospital services, and professional John (Xuefeng) Jiang services; for insurance system reforms; and for improving Eli Broad College of Business the supply chain resiliency of pharmaceuticals and medical Michigan State University devices. Prior to his arrival at Johns Hopkins, he held various jiangjbroad.msu.edu commonwealthfund.org Issue Brief, June 2020 About the Commonwealth Fund The mission of the Commonwealth Fund is to promote a high-performing health care system that achieves better access, improved quality, and greater efficiency, particularly for society’s most vulnerable, including low-income people, the uninsured, and people of color. Support for this research was provided by the Commonwealth Fund. The views presented here are those of the authors and not necessarily those of the Commonwealth Fund or its directors, officers, or staff.