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

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Fixed-Income Insights

Despite pressures, hospitals’ credit quality has held up during the pandemic.

Read time: 5 minutes

[This article is from the forthcoming edition of the Lord Abbett Muni Quarterly.]

In the early days of the COVID-19 pandemic, the not-for-profit (NFP) hospital industry was hurt by the suspension of elective procedures, which resulted in a large drop in revenue for many NFP hospitals and health systems. But sizeable federal stimulus (nearly $190 billion in total) provided a significant tailwind for the sector, and we did not see large-scale downgrades or defaults. As we expected, most NFP hospitals have successfully navigated this complex operating environment, although challenges remain. The hospital sector represents a significant portion of the municipal bond market, accounting for 9.3% of the Bloomberg Municipal Bond Index.

Significant Stimulus Support

At the start of the pandemic, many state governors issued executive orders suspending elective procedures at hospitals, ambulatory surgery centers, and outpatient clinics in order to preserve capacity for a potential onslaught of COVID-19 patients. This resulted in a material decline in patient revenue for hospitals across the United States. At the same time, hospitals’ expenses were higher as they purchased supplies and added labor in preparation for a surge of COVID-19 patients.

Recognizing the importance of the hospital sector in combating this new virus, the U.S. federal government provided massive stimulus to the sector. According to the Kaiser Family Foundation, $178 billion of provider relief funds were allocated by the federal government to hospitals and other providers as of March 1, 2021. An additional $8.5 billion was allocated to rural healthcare providers. To put this in context, total federal stimulus funding represented approximately 16% of total hospital expenses.

This infusion of funds provided significant support to the hospital sector. Moody’s Investors Service noted in a September 2021 report[1] that the suspension of elective procedures resulted in a 1.9% decline in net patient service revenue for NFP hospitals, but the allocation of federal provider relief funds (Figure 1) resulted in overall revenue growth of 3%.


Figure 1. Allocation of Federal Provider Relief Funds as of March 1, 2021
Allocations in billion US$

NOTE: General grants were paid in three phases and amounted to a minimum of 2% of patient revenue for each provider. Phase 3 grants may include additional funding beyond the 2% of revenue to cover COVID-19-related losses and expenses; $10B for skilled nursing facilities includes $2.25B in incentive payments. “Other” includes Indian Health Services ($0.52B), children’s hospitals ($1.06B), and administration ($0.98).
SOURCE: Kaiser Family Foundation analysis of U.S. Department of Health and Human Services announcements regarding provider relief grant allocations and distributions of funds to providers treating uninsured COVID-19 patients and the Government Accountability Office’s “COVID-19:Sustained Federal Action Is Crucial as Pandemic Enters Its Second Year,”, March 11, 2021.


Elective Procedures Rebound

As state economies reopened, and governors lifted restrictions on elective procedures, many hospitals recovered much of the patient volume that was lost in 2020, and in some cases, the acuity level (a measure of resources needed for patient care) of patients is higher. Patients that deferred care during the pandemic have returned to hospitals in order to receive treatment, often resulting in more complex cases. Higher levels of patient acuity usually result in higher revenue for hospitals, but the additional staff and supplies needed to treat these patients can also generate higher operating expenses.

Delta Variant Risks

COVID-19 hospitalizations began dropping sharply in early 2021, coinciding with the initial days of the vaccine roll-out. But beginning in July 2021, COVID-19 hospitalizations began to rise—driven by the more infectious Delta variant. By early September, there were over 100,000 patients hospitalized with COVID-19, approaching the January 2021 peak when over 130,000 patients were hospitalized.

This surge of hospitalizations over the summer of 2021 was driven primarily by unvaccinated patients in the southeastern United States. Florida and Texas hospitals were hit hard with high numbers of COVID-19-positive patients. Many hospitals in Florida chose to suspend elective procedures, and in August 2021, Texas Governor Greg Abbott asked hospitals to voluntarily delay elective procedures to save beds for COVID-19 patients.

COVID-19 hospitalizations peaked in early September in Texas and Florida and have been declining over the past several weeks (Figure 2). There is uncertainty about the trajectory of the pandemic, and pockets of COVID-19 surges could continue in parts of the United States through the fall and winter months. This could possibly result in hospitals once again curtailing elective surgeries and other procedures.


Figure 2. Number of COVID-19 Patients in U.S. Hospitals
Daily hospital occupancy, July 15, 2020–October 26, 2021

Source: Data as of October 27, 2021.


Labor Shortage Stress

With the latest surge of COVID-19 hospitalizations, NFP hospitals across the U.S. are also facing acute labor shortages—particularly for nursing staff. In our review of interim FY 2021 financial statements, we have observed that salaries/benefits expense is rising for some hospitals. Even before the pandemic, hospitals were facing growing challenges related to recruiting and retaining nurses; the number of new nurses entering the pipeline of talent has been insufficient to offset the numbers of retiring nurses. The pandemic has exacerbated the nursing shortage. A growing number of nurses have retired or left the industry due to difficult working conditions including higher caseloads and sicker patients.

Hospitals have responded in various, creative ways to address the nursing shortage. Many have temporarily hired travelling nurses, often at a very high cost. Other health systems have reduced service lines or bed counts. Henry Ford Health System, located in Michigan, recently reduced its bed count by 7% (or 120 beds) due to a shortage of workers. In addition, the organization plans to fill 500 of its 1,000 open nursing positions by recruiting nurses from the Philippines over the next few years. Providence Health System, a large network of hospitals operating in several states in the western U.S, plans to invest more than $220 million for hiring and retaining healthcare workers.

Rising labor costs will continue to be a pain point for the sector, but we expect most NFP hospitals and health systems will successfully navigate this challenge. Last year’s infusion of sizeable fiscal support provides a large balance sheet cushion to withstand operating challenges.

New Highs for Liquidity

If cash is king, NFP hospitals were royally positioned in FY 2020. Moody’s notes in their medians report that “absolute liquidity and days’ cash on hand reached new heights” in FY 2020. According to their data, median days’ cash on hand improved to 252.6 days compare to 203.8 days in FY 2019. The material improvement in liquidity is due to several factors, including strong investment returns, lower capital spending, and the receipt of Accelerated and Advance payments from Medicare. The Medicare Accelerated and Advanced Payments program 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.

Overall Credit Impact

The COVID-19 pandemic has shown that NFP hospitals and health systems are essential to the healthcare infrastructure of the United States; we expect to continue to invest in the sector. (NFP hospitals, which typically tap the municipal bond market for funding, comprise nearly 60% of U.S. hospitals, according to data from the Kaiser Family Foundation.) It is our view that the sector will continue to be challenged for the remainder of 2021 but will ultimately remain resilient due to healthy balance sheets and the guidance of management teams that have become more adept at managing through the pandemic.


1“Not-for-Profit and Public Healthcare - US Medians - Financial performance declined in 2020 after pre-pandemic stability.” Moody’s Investors Service. September 9, 2021.



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