While the effects of the COVID-19 coronavirus are many and varied, Moody’s Investors Service has added one more item to that list: credit risk. While nonprofit hospitals are unlikely to miss debt service payments, the huge revenue hit caused by the postponement and cancellation of nonemergency and elective services will weaken financial performance, causing many hospitals to breach financial covenants during the fiscal year.
The stimulus and emergency-response funding from the federal government will blunt some of those losses, but hospitals won’t be fully compensated. Financial recovery from the public health crisis depends on restarting elective services, but the pace and timing with which that happens will vary greatly by geography depending on when restrictions are lifted.
A number of other variables will also affect patient volume, including hospitals’ access to rapid coronavirus testing, supply chains, government policy, potential surges in more coronavirus cases, job losses and related changes in insurance coverage, and consumer fears about returning to a hospital.
WHAT’S THE IMPACT?
States and local governments are lifting restrictions at different paces, and Moody’s said that will impact hospitals’ ability to ramp up nonemergency services. While there’s pent-up demand among consumers, patient volumes will likely undergo a lengthy recovery period, driven by factors such as testing capacity, the need for adequate supplies and patients’ unease with accessing the healthcare system.
While some states have recently begun to lift restrictions, as many as half of them – representing nearly 45% of the U.S. population – mandated suspension of nonemergency care and elective surgeries as the scope of the pandemic grew. Governors are weighing a variety of factors, including the local trend in coronavirus cases and hospitalizations, when considering the timing and scope of permitting certain medical services to reopen.
Hospitals in a number of states have already begun resuming some services, and similar actions in other states are likely to follow in the coming days and weeks, said Moody’s. Regions that have endured relatively few coronavirus cases, or where governors have not mandated the cessation of elective procedures, will likely be the first to begin offering a full scope of services. Many healthcare systems in a variety of states are making plans to resume some services later this month or in early June, and are petitioning local regulatory authorities for permission to reopen.
Greater availability of testing – particularly with rapid results – will aid the reopening of services for several reasons. First, many states and local health authorities will look for a sustained decline in the number of new infections before allowing services to resume, which will require greater testing capability to determine. Second, hospitals need sufficient testing capability in order to screen patients and provide a safe environment for patients and staff.
The federal government has delivered cash to hospitals – about 20 to 30 days’ worth of cash, on average, Moody’s found. This infusion has helped the industry avoid a liquidity crunch in recent weeks, but hospitals will need to repay the government for advances on Medicare reimbursement, which will cause cash flow stress starting in August or September for most hospitals.
The effects of the coronavirus will be long-lasting. The pandemic is materially reducing cash flow, and while the federal stimulus money and reimbursement for emergency preparedness will stem some of the bleeding, job losses will likely affect the healthcare industry’s performance by ushering in significant losses in insurance coverage. Subsequent outbreaks will potentially curtail the services being offered.
This means a significant impact on hospitals’ finances will likely continue into 2021. It’s too early to fully determine the scope of this effect, but Moody’s estimates that lost revenue due to the initial suspension and subsequent phased-in reactivation of services could reach 10% or more of revenue on an annual basis.
Although a portion of this lost revenue will be recouped through $175 billion in grants provided under federal stimulus packages, the grants will likely not fully compensate hospitals for lost revenue and increased costs.
Health systems with covenant measurement dates in June or September are most at risk of violating covenants. The ability to meet coverage tests depends on the pace of reactivation of services, and whether federal grants can be included in covenant calculations.
WHAT ELSE YOU SHOULD KNOW
How quickly the economy recovers will have a significant impact on hospital finances. Moody’s expects the U.S. economy to shrink by 5.7% this year, reflecting a severe contraction in the second quarter and a gradual recovery in the second half of the year.
Hospitals will also face difficulties in fully restoring productivity. Hospitals – along with other sectors of the economy – will need to adopt new safety protocols that will add time and costs to office visits and procedures. These changes, including additional screening and testing measures, the use of PPE and enhanced cleaning measures, are likely to slow productivity.
THE LARGER TREND
The predictions echo those made by Moody’s a month ago, when it prognosticated difficult credit conditions for public and private debt issuers.
Combined with other fiscal and regulatory actions, the rescue package should help to contain some of the economic damage and help with recovery once the pandemic is under control, the report found. But because the shock is so profound, it won’t be enough to prevent a serious recession or widespread unemployment.
Larger systems that have regional diversification and strong absolute and relative liquidity will be better able to weather the pandemic. Many larger systems have access to capital in the form of bank lines or revolvers, while others have quickly established new bank lines of credit.