A new study has revealed that many hospitals in the United States experienced increased profitability during the first two years of the COVID-19 pandemic, with a significant boost from federal funds. The study analyzed data from a wide range of hospitals and found that approximately 75% of them achieved a positive net operating income in 2020 and 2021. This figure represents a 12% increase from the pre-pandemic period.
One of the key findings of the study was that 68% of hospitals saw an improvement in their net operating income compared to before the pandemic, with a median change of $4.4 million. The financial success was so substantial that some hospitals attained peak operating margins and historic levels of profitability. The median weighted operating margin during the first two years of the pandemic reached 6.5%, slightly exceeding previous all-time high hospital operating margins. This marked a significant rise from the 2.8% margin observed in the three years leading up to the pandemic.
The study authors, Risha Gidwani and Cheryl Damberg from the RAND Corporation, attributed the record-high operating margins to the infusion of COVID-19 relief funding. They stated that the funding amounts may have been larger than necessary for many hospitals, indicating that the appropriateness of relief funding allocation should be carefully assessed in future pandemic situations. The relief funding received by hospitals, such as payments from the Coronavirus Aid, Relief, and Economic Security Act, contributed to the hospitals’ net operating income during the pandemic.
The study defined net operating income as the profit before taxes, calculated by subtracting operating expenses from operating revenue. The operating margin, on the other hand, was defined as the net operating income divided by operating revenues. This metric enabled a fair comparison across different-sized hospitals. For example, a hospital earning $4 million on $100 million in revenue would have the same 4% margin as a hospital with an income of $32 million on $800 million in revenue.
To conduct the study, the researchers collected data from the RAND Corporation and the American Community Survey, encompassing every short-term acute care and critical access hospital with financial data from 2017 through 2021. A total of 4,423 hospitals were analyzed. The study was published by JAMA Network, a renowned medical journal.
Before the pandemic, 36% of hospitals had negative operating margins, but during the pandemic, that figure dropped to 24%. Similarly, the percentage of hospitals operating with a negative net operating income decreased to 25% from a pre-pandemic decline of 10%. Most hospitals that experienced negative income during the pandemic were already facing financial challenges before the pandemic, and the relief funding did not reverse their situation.
Although some hospitals struggled financially during the initial years of the pandemic, a significant number of hospitals saw a notable improvement in their income, transitioning from a negative to a positive net operating income. The federal funding played a crucial role in increasing hospitals’ profitability and preventing widespread distress. The study revealed that 30% of hospitals avoided pandemic-induced distress due to the received funding. Additionally, more than 75% of hospitals that would have remained financially stable without the funds still received relief funding, raising questions about its appropriateness and future allocation.
Notably, Aaron Wesolowski, a vice president at the American Hospital Association, highlighted some concerns with the research, emphasizing the unique financial situations of each hospital and health system prior to the pandemic. While the study provided insight into the financial performance during the first two years of the pandemic, Wesolowski pointed out that 2022 was the worst financial year for hospitals and health systems during the pandemic, with nearly half of hospitals still experiencing negative operating margins in 2023.
Previous studies have also examined hospital margins during the pandemic. One study analyzing data from 1,378 hospitals found that hospitals’ profit margins in 2020 remained similar to previous years, despite a drop in operating margins during the first year of the pandemic. This stability was attributed to relief funds. Another study focused on California hospitals between early 2019 and early 2021 found that margins initially dropped but rebounded in 2020, with government funding and stock market improvements mitigating revenue losses.
The researchers in the current study suggested that government assistance played a crucial role in increasing hospitals’ other operating revenues and preventing a potentially dire situation. They also noted that federal funding varied widely among hospitals, with academic and COVID-19-focused hospitals receiving more funds. To ensure fair distribution, the researchers recommended policymakers address funding adequacy, particularly for hospitals in rural areas and those focused on critical care.
In conclusion, the study indicated that many hospitals experienced increased profitability during the first two years of the COVID-19 pandemic, partly due to federal relief funding. The study emphasized the need to carefully assess the allocation of relief funds in future pandemics. It also acknowledged the challenges faced by hospitals, including workforce shortages and rising costs.