Local hospitals weathered financial storm from COVID

Apr. 16—Local hospitals saw rising patient revenue over the past three years totaling billions of dollars, but also increasing labor costs and other financial demands put on hospitals during the pandemic.

A Dayton Daily News examination of hospital finances through audited financial statements and an independent analyst, along with a roundtable with local hospital leaders and the Greater Dayton Area Hospital Association, revealed that for some area hospitals, the pandemic was a financial setback. For others, it was catastrophic.

"It just absolutely adversely impacted everything that we do, and on top of it, the stresses and strains of inflation in general," said Kevin Harlan, president of Atrium Medical Center and Upper Valley Medical Center. "I think it's probably safe to say those are our worst financial years as a health system. Collectively, those three years, the losses are in the hundreds of millions of dollars."

Kettering Health and Dayton Children's Hospital, by comparison, weathered the worst of the pandemic while still operating at a positive operating margin — what would be called a profit if the networks weren't non-profit entities. Kettering Health operated at a loss in 2022 after being in the black in 2020 and 2021. Investment income buoyed all three networks' net operating margins considerably in 2021 as well, though those fortunes were reversed in 2022.

The financial health of these hospital networks impacts both the economic, and physical, health of our region. They serve hundreds of thousands of patients each year at dozens of facilities across western Ohio and employ more than 29,000 people.

The pandemic also revealed larger questions about how health care in the U.S. is funded. With the majority of hospitals in the U.S. being not-for-profit while still focusing on margins, think tanks and analysts questioned if this serves patient outcomes.

Operating gains, losses

Revenues increased from 2020 to 2022 — going from $1.9 billion to $2.1 billion for Premier Health and $2.1 billion up to $2.4 billion for Kettering Health — but with those increases came increased expenses. Expenses rose from $2 billion to $2.3 billion for Premier Health and $2 billion to $2.4 billion for Kettering Health over that same three-year time period, according to financial statements from each health system.

"Hospitals that serve working people tend to have lower margins, lower profits, and less of a cushion in the event of a crisis," said Dr. Vikas Saini, a physician and the president of the Lown Institute, a health care think tank.

While Premier Health saw worsening operating margins throughout the pandemic, Kettering Health reported slight increases to operating margins. Kettering Health's audited operating margin was 0.1% in 2019, 2.2% in 2020, and 2.4% in 2021. The hospital network brought in $56 million in earnings (operating revenues minus operating expenses) in 2021.

Kettering Health said "all three years are lower than historic profitability levels for the organization."

Kettering Health's figures dropped for 2022 down to an operating margin of -0.2%, or a loss of $5 million.

Premier Health reported negative operating margins through the pandemic, including -3.0% in 2020, -2.0% in 2021, and -8.5% in 2022. This means the hospital network had a $281 million deficit over the three years.

Labor costs, supply chain issues with ordering major medical equipment or other equipment, and inflation have all had impacts on the health system.

"Last year, compared to pre-pandemic, we probably used about five times as much contract labor, and the rate of pay for both contract labor and internal labors has really risen across all industries, but especially health care," Harlan said.

Dayton Children's, which operates on a fiscal year of July 1 through June 30, reported fluctuations in operating margins throughout the last few years as well, though leaders noted the fiscal year ending June 30, 2019 was a particularly rough one, with a negative margin of -17.49%.

Revenues for Dayton Children's increased from $381.3 million in 2019 to $599 million in 2022, according to financial statements. Expenses for the organization also increased from $448 million in 2019 to $587.2 million in 2022.

Hospital leadership attributed gains seen during the pandemic to initiatives set forth by the organization prior to the pandemic, such the patient tower and increasing the number of specialists they have available. Operating margins for the last three years were reported by Dayton Children's as being 3.62% for the fiscal year ending June 30, 2020; 6.07% for fiscal year 2021; and 1.97% for fiscal year 2022. This translates to operating earnings between $12 million and $33 million.

Fluctuations in investment markets also impacted non-operating gains, providing hospitals large gains on their investments in 2021 and some losses in 2022. For example, investment income jumped from $11.8 million to $151.1 million at Dayton Children's from 2020 to 2021, before losing $71.2 million in 2022.

Investing in community

GDAHA President and CEO Sarah Hackenbracht said local hospital earnings go toward providing access to care for patients and communities, as well as investing in the community.

"I think you see hospitals in the Dayton region balance that and do that every single day in a time period in which other investors in health care, like private equity firms and others, are coming into the community and cherry picking individuals that are insured through businesses and they're not investing in our communities of need and our communities where there are not as many individuals covered on private insurance," Hackenbracht said.

"Our hospitals, time and time again, are leaders in the region and across the community investing in communities above and beyond their work as health care providers, and they serve as the pillars of their communities and lead the partnerships for investment and health equity and upstream solutions to improve the overall health outcomes in our region."

Hospitals response to the pandemic

During the pandemic, area hospitals became leaders in providing congregate care facilities with personal protective equipment (PPE), as well as coordinating response, testing, and treatment efforts, GDAHA said.

"There was no one better prepared than our hospitals to step into that leadership role with Public Health and our emergency management agencies to evaluate whether or not we needed stand up an alternate care site, and if so, how we would do that," said Hackenbracht.

Hospitals managed the shutdown of non-essential and elective procedures during the beginning months of the pandemic in 2020. At Dayton Children's, furloughed employees were still paid by Dayton Children's, although some employees chose to go on unemployment insurance instead.

"None of us knew what was going to happen," said Deborah Feldman, president and CEO of Dayton Children's Hospital. "In the moment, we had no idea what was coming next, and the challenge in leadership in such uncertainty was something none of us had ever faced, and so we were all trying to figure it out as it came."

As the pandemic went on, Dayton Children's was not as busy as the adult hospitals when it came to treating COVID patients — their surge would come later when RSV and respiratory illnesses impacted children in 2022. During the pandemic, Dayton Children's opened up a testing site for both adults and children, and Dayton Children's also became a subcontractor in processing tests for the Ohio Department of Health.

Federal assistance

Hospitals were unable to conduct elective procedures, which generate much of hospitals' patient revenue, during the beginning months of the pandemic. Hospitals also incurred additional costs for PPE and screening measures. Even when hospitals opened back up to elective procedures, some patients were hesitant to return right away. Dayton Children's reported have a "significant loss of volume" from March of 2020 to February of 2021.

"Our volume went from 120 kids a day down to about 20," said Dayton Children's CFO Chris Bergman.

Of the initial $30 billion in provider relief funds distributed through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, over 10,000 providers and systems in Ohio received a total of $989.7 million, according to the U.S. Health Resources and Services Administration.

The federal government went on to provide additional phases of provider relief funds through the CARES Act that totaled $37.8 billion.

Premier Health reported receiving $117.2 million from the CARES Act. If Premier Health did not receive this and other relief funding, its losses during the pandemic would have reached $300 million, Harlan said.

Kettering Health reported receiving $46.3 million in provider relief funds in 2020 and $13.3 million in 2021. Kettering Health also received $15 million in 2022.

Dayton Children's received $35.3 million in provider relief funds, along with $7.5 million through the employee retention credit, according to Bergman.

In addition to provider relief funds, FEMA provided $62.4 billion in public assistance support in response to COVID-19.

In 2021 and 2022, Premier Health reported receiving $13.1 million and $6 million in FEMA funds, respectively. Kettering Health also reported receiving $19 million in FEMA funds in 2021 and $950,000 in 2022.

Impact on patients

Health care industry experts interviewed by the Dayton Daily News say hospitals being forced to focus on profit margins can come at the expense of patient care.

"It is ironic and it is symptomatic of how we do health care in America that when the vast majority of hospitals are non-profit, we talk all about profits," Saini said.

When an emergency room visit often costs $1,000 or more — some level 1 emergency room visits range between $500 and $600 in the Dayton region, depending on the hospital — this can discourage patients from seeking care.

"The other thing about it is if we make hospitals conform to this for-profit model, even if they're non-profits, then things like charity care are second in priority, and that has a huge impact on communities, and there are a lot of people who can't afford their care because the prices are too high," Saini said. "Quite often, they'll get sent to collection or even worse, liens on their homes, or wages being garnished. So there's a lot going on that affects the patient that isn't obvious and visible to patients."

Positive operating margins are needed, though, to provide access to care for patients and communities, the American Hospital Association, a health care industry trade group, said.

"Without positive operating margins, hospitals cannot make the needed investments in their workforce, facilities, and programs and services, and may be forced to cut back on what they can offer and in extreme cases, forced to close their doors," said Aaron Wesolowski, a vice president for policy at the American Hospital Association. "Financial support is even more imperative now, as more than half the hospital field ended 2022 with negative operating margins and in 2023 hospitals continue to face increased costs for labor, supplies, and drugs, and insurer-required administrative burden."

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BY THE NUMBERS

Relief funds for local hospitals during the pandemic: — Premier Health received $117.2 million from the CARES Act and $19.1 million from FEMA. — Kettering Health received $74.6 million from the CARES Act and $20 million from FEMA. — Dayton Children's received $35.3 million from the CARES Act, along with $7.5 million through the employee retention credit.