Not-for-Profit Hospitals in the COVID-19 Era | Lord Abbett

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Fixed-Income Insights

The pandemic has put pressure on operating and financial resources.

Read time: 5 minutes

This article is from the Q2 2020 edition of The Muni Quarterly.

As the COVID-19 pandemic spread across the United States through March, April and May, U.S. not-for-profit (“NFP”) hospitals and health systems saw a material disruption in financial performance. The loss of elective procedures, which had been restricted to ease the resource strain on hospitals, weighed heavily on operating profitability. While this is certainly a challenging time for the sector, many NFP hospitals entered the pandemic from a relative position of strength, with sturdy balance sheet metrics and a sector-wide median of 200 days’ cash on hand and 161% unrestricted cash and investments-to-debt for Moody’s rated hospitals[1]. Thus, we expect most hospitals will be able to successfully navigate through this period of disruption with substantial federal stimulus support and other forms of financial relief.

Suspension of Elective Procedures, Investment Losses Weigh on Financials

Beginning in mid-March, governors of many states issued executive orders suspending elective procedures at hospitals, ambulatory surgery centers, and outpatient clinics. The goal was to free up hospital bed capacity, staff and personal protective equipment (“PPE”) to care for an expected surge of COVID-19 patients. With some exceptions, including New York City and the surrounding tri-state area, many hospitals across the country did not see a large influx of COVID patients during this early phase. However, due to the suspension of elective procedures, volume dropped for many hospitals by more than 50% during the latter half of March, all of April, and part of May. This resulted in a material decline in revenue while at the same time hospitals’ expenses were higher as they purchased supplies and added labor in preparation of a surge of COVID-19 patients. Some hospitals also experienced large investment losses in March, although much of this was recouped in April and May due to the strong market rebound. As of March 31, 2020, many hospitals’ financial statements show a material decline in operating performance and liquidity. We expect results through June 30, 2020 to also show weak performance for the sector overall, but recovery will likely continue through the second half of 2020.

CARES Act Funding Provides Relief

In response to the COVID-19 crisis, the federal government provided significant stimulus funding to support the NFP healthcare sector. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law and included $100 billion of funding to hospitals and other providers. A month later, the Paycheck Protection Program and Health Care Enhancement Act provided another $75 billion of funding. The total $175 billion can be used by hospitals and other providers for health care related expenses or lost revenues attributed to COVID-19. We may also see another potential round of funding in additional federal stimulus bills.

Under the CARES Act, hospitals also received Medicare Accelerated and Advanced Payments, which distributed approximately $100 billion to hospitals for up to six months of projected Medicare payments in advance. While the funds must be repaid, they provided a significant source of cash for hospitals that were facing a liquidity crunch.

Other CARES Act provisions benefited hospitals. These included 20% higher reimbursement from Medicare for the treatment of COVID-19 patients, a temporary moratorium of Medicare sequestration, and a delay in Medicaid disproportionate share (DSH) cuts. Also included: The ability to defer payroll taxes, the ability of smaller hospitals to apply for small business loans to cover payroll costs, and a 6.2 percentage point increase in federal medical assistance percentage (FMAP) for State Medicaid programs.

Beyond CARES Act benefits, NFP hospitals moved to stabilize financial performance and preserve liquidity. Many hospitals and health systems made significant expense reductions by furloughing staff, conducting layoffs, implementing pay cuts and reducing, suspending, and reevaluating capital plans. On the revenue side, a rapid increase in virtual care through telehealth visits helped some hospitals and health systems to replace a portion of their lost revenue. For example, virtual urgent care visits at NYU Langone Health between March 2 and April 14 grew by 683% and non-urgent virtual care visits grew by 4,345% based on daily averages, according to a Science Daily report on April 30.  In addition, draws on lines of credit provided a substantial source of liquidity for hospitals that have strong banking relationships.

For example, the Mayo Clinic – a financially strong, highly reputed health system based in Rochester, Minnesota – took aggressive steps to respond to the loss of elective procedures and a projected $900 million revenue shortfall.  Management announced temporary salary and staff reductions impacting more than 20,000 of their 70,000 employees. In addition, construction projects were halted and most strategic initiatives were deferred or delayed. Mayo also received $220 million in CARES Act funds and $915 million of Medicare advance payments. In April and May 2020, Mayo entered into various bank loans and lines of credit, shoring up liquidity to the tune of $500 million.[1]  As financial conditions improved following a resumption of elective procedures, Mayo announced the end of staff furloughs and the restoration of pay reductions, according to a June 25 report in the Minneapolis Star-Tribune.

Reactivation Plans and Preparing for a Second Surge

As state economies reopened and Governors lifted restrictions on elective procedures, patient volumes began to bounce back in May and June. We expect that a full recovery of lost patient volume will take time. It will also depend on whether the hospital is located in a COVID-19 hotspot location; the degree to which patients avoid going to the hospital or outpatient clinics due to fear of catching COVID-19; and the ability of hospitals to ensure they have enough staff, protective equipment, testing capacity and surge bed capacity.

We do not expect the broad, nationwide shutdown experienced in March and April 2020 to occur again, but there could be local and regional shutdowns depending on the potential for significant increases in COVID-19 cases and an increase in hospitalization occurs. We are closely watching several states that are starting to see rapid increases in COVID-10 hospitalizations. It may be the case that some hospitals in these states are once again required to suspend elective procedures in order to provide sufficient capacity, staff and PPE for the treatment of COVID-19 patients. As this article was being prepared for publication, Texas reimposed restrictions on elective procedures in eight counties.

We have heard health system CEOs and CFOs refer to the resumption of elective procedures as “a dial, not a light switch.” Over the coming months, management teams will be continually assessing whether it is safe to dial up procedures, or if there is a need to dial down in the event of rising COVID-19 cases in their service areas. Fortunately, many NFP hospitals and health systems are better prepared for a second wave of COVID-19 cases. Many have adequate supply chains and stockpiled PPE in March and April, and therefore they may not need to spend as much in the future for these items. Some hospitals have also retrofitted their facilities to separate COVID-19 patients from the rest of their patients, or have designated one hospital within a system of hospitals to treat only COVID patients. Finally, the Department of Health and Human Services recently extended the COVID-19 public health emergency that was set to expire on July 25. This will extend the 20% Medicare add-on payment for COVID-19 patients, the higher federal Medicaid matching rate, and the waiver of telehealth restrictions.

Overall Credit Impact for the Sector

The COVID-19 pandemic has shown that NFP hospitals and health systems are essential to the country’s healthcare infrastructure, and it is a sector in which we anticipate we will continue to invest. (NFP hospitals, which typically tap the municipal bond market for funding, comprise 57% of U.S. hospitals, according to data from the Kaiser Family Foundation.)  It is our view that the sector will be very challenged in 2020 but will ultimately recover due to the strong stimulus support provided by the federal government, gradual resumption of elective procedures, and management teams’ actions to reduce expenses. Some NFP hospitals are better prepared than others to withstand these challenges. When analyzing NFP hospitals and health systems, we look for entities that are market leaders in their service areas, with historically strong financial performance and balance sheet metrics, and with good payer mixes that have less exposure to Medicare and Medicaid.


1”Not-for-profit and public healthcare – US:Medians – Revenue growth rate inches ahead of expenses as margins hold steady,” Moody’s Investors Service. September 3, 2019.

2The May Clinic’s March 31, 2020 financial disclosure.



This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

References to specific securities and issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in portfolios managed by Lord Abbett and, if such securities are held, no representation is being made that such securities will continue to be held. This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be profitable.

A Note about Risk: The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems.

The CARES (Coronavirus Aid, Relief, and Economic Security) Act is a $2 trillion stimulus passed by the U.S. Congress in March 2020, to blunt the impact of an economic downturn set in motion by the global coronavirus pandemic.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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