Hospitals Say They’re Still Ailing From Covid-19. Their Investors Feel Better.

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Source: Wall Street Journal
Author: David Wainer
Date: November 4, 2022

America’s hospital chains faced unprecedented strains during the pandemic and are pleading poverty. The view from Wall Street is more upbeat.

Just last week, industry lobbyists asked Congress for more aid in a letter that painted a dire picture: “America’s hospitals and health systems,” the American Hospital Association wrote to Senate and House leaders, “are facing crushing financial challenges.” The group said 2022 is expected to be the most financially difficult year for hospitals since the start of the pandemic, citing a report from consulting firm Kaufman Hall that was prepared at AHA’s request.

But here’s the thing: Covid-19 was far from a washout for many hospitals. True, few industries got lashed by the pandemic like hospitals. Not only did providers feel the direct impact of Covid-19 as hospitalizations surged, but they also grappled with the delay of lucrative, voluntary procedures such as joint replacements while facing unprecedented staffing shortages after almost a fifth of America’s healthcare workforce quit.

But hospitals also were major financial beneficiaries of the pandemic, receiving more than $170 billion in subsidies to defray their operating losses. A study looking at the finances of more than 2,000 hospitals concluded that financial losses from Covid-19 were largely offset by government relief in 2020, keeping profit margins largely intact. What is more, says Dr. Ge Bai, a professor who conducted the study with two other academics, profit rose significantly in 2021 as government aid persisted even as non-Covid activity rebounded.

“Contrary to the public perception, the industry benefited from the pandemic,” says Dr. Bai, a professor of health policy at the Johns Hopkins Bloomberg School of Public Health.

Since reporting quarterly earnings last month, shares of some of the country’s largest chains, including HCA Healthcare, Universal Health Services and Community Health Systems, are trading up as labor costs stabilize and they work to reduce their dependence on travel nurses.

During the height of the Covid-19 emergency, hospitals had to pay as much as $8,000 a month for nurses who shuttled between hot spots as they sought to make up for staffing shortages, and reliance on this service is still higher than before the pandemic. Shares of Tenet Healthcare, however, are down 19% over the past month as its use of travel nurses continued to pinch results.

Broadly speaking, though, most publicly traded hospitals, including Tenet, have generated positive shareholder returns since the pandemic was declared. Shares of better-managed, better-positioned chains like HCA have more than doubled in value during that period while operationally-challenged systems like Community Health have lagged behind. And to be sure, the government’s largesse didn’t flow equitably to the industry, with many hospitals receiving disproportionate amounts of aid while others were hit harder and are still very much strained.

Many of the trends associated with the pandemic finally are starting to unwind, allowing hospitals to look more like their old selves. On the positive side are a return of non-Covid patients and a stabilizing labor environment as most hospitals hire new medical staff and cut back on travel nurses.

“Hospitals have worked really, really hard to reduce the utilization of this very expensive service,” says Whit Mayo, a healthcare analyst at SVB Securities.

Driving that reversal is the fact that many of the medical workers who quit at the height of the pandemic, in 2020 and 2021, are finally coming back, according to Todd Bellemare, senior vice president of strategic solutions at data and analytics firm Definitive Healthcare.

Recruiting permanent medical staff hasn’t come cheap, though. Both HCA and UHS saw most of the gains from cutting back on travel nurses offset by spending more to attract full-time staff, and they are far from done. HCA said it had to turn away about 1% to 1.5% of patients in the quarter due to lack of capacity. Some of that could take years to resolve because America’s shortage of medical workers is an acute issue. HCA also refrained from providing 2023 earnings guidance, reflecting the vicissitudes of the labor market.

“Normally on this call, we attempt to provide you with some early perspectives on the upcoming year,” Samuel Hazen, CEO for HCA, told analysts last month. “Currently, we have reasonable insights into certain aspects of our business such as demand,” he said, before delivering the bad news: “With respect to inflation, we are less certain.”

Unless a new Covid-19 variant upends the current trajectory, though, hospitals are going to continue to see their more traditional business lines improve. For instance, UHS’s behavioral hospitals, which provide things like addiction treatment, have been able to hire more staff, leading to higher volumes. On the minus side, hospitals will lose out on the emergency funds that provided a financial windfall during the pandemic: HCA said they got around $300 million in Covid support payments this year—something its investors can’t count on in 2023.

Looking toward next year, hospital chiefs are hoping that business will continue to rebound while a reduced labor shortage means costs will stabilize. Meanwhile a recession, if it materializes, could actually provide a boost to hospitals as government-backed insurance sustains demand even as higher unemployment could help push down labor costs.

Another thing going for hospitals is that they might finally be able to pass on some of their higher costs to insurers, and indirectly to those paying the premiums. Many agreements with insurers are multiyear. Now hospital executives are seeking to negotiate new contracts to reflect those pay increases—something the nation’s largest insurer, UnitedHealth Group, acknowledged in its last earnings call.

Hospitals are telling insurers and Congress that times are hard. Investors, though, are right to see their glass as half full.