Delta variant surge threatens hospital sector’s recovery

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Surging COVID-19 hospitalization rates driven by the highly contagious Delta variant threaten to set back the not-for-profit healthcare sector’s recovery and pose new uncertainties, new reports warn.

Hospitalizations are trending upward in all states with the 14-day increase at double-digit percentages for all but a few. The most daunting strains that could negatively impact hospital margins are in states where hospitalization rates are peaking, Fitch Ratings said in a special report Friday.

A healthcare worker treats a patient in the COVID-19 ICU of Freeman Hospital West in Joplin, Missouri, earlier this month.

Bloomberg News

“Operations for hospitals in Covid-19 hotspots are stretched more significantly than any time during the pandemic, with hospitalization rates exceeding prior peaks and intensive care unit beds at full capacity in some states,” Fitch warned.

The top 10 states with the highest hospitalizations per 100,000 people are Florida, Alabama, Louisiana, Mississippi, Georgia, Arkansas, Texas, Nevada, Kentucky and Missouri, Fitch said, citing U.S. Department of Health and Human Services’ data. Other than Florida, all of these states have less than half of their population fully vaccinated.

The flood of COVID patients strains staffing and supplies and is leading in some cases to a self-induced postponement of non-emergent, surgical cases to deal with the influx and that will cut into revenues generated by more profitable elective and surgical procedures.

“Additionally, hospitals and skilled nursing facilities are competing for a limited supply of nurses, including more expensive contract nursing staff,” Fitch said in the report authored by Kevin Holloran, senior director and sector leader of not-for-profit healthcare, and Sarah Repucci, senior director, Fitch Wire credit research and risk analytics.

The hospital sector’s fiscal damage ran deep as elective procedures were put on hold in the spring and summer of 2020 — in many cases due to local and state orders — due to the swelling case load from the pandemic’s first wave. Federal aid helped tamp down the fiscal impact but margins still suffered.

The resurgence in hospitalizations also poses longer term operational challenges.

“Healthcare providers may be required to maintain some level of pandemic capacity going forward if coronavirus variants are difficult to contain,” Fitch said.

Staffing shortages will continue through at least 2022 and the ability to depend on revenue from elective procedures is hard to predict. Those factors likely constrain operating margin improvement for the current fiscal year especially if the federal government doesn’t offer additional relief. Federal aid offered to hospitals primarily through the March 2020 CARES Act and in the form of Medicare Advance payments, that must be repaid, put hospitals in a better position entering the latest surge.

As was the case earlier in the pandemic, higher-rated hospitals enjoy balance sheets that can cushion the losses but smaller hospitals grappling with full ICUs could struggle to maintain current rating levels. On a positive note, liquidity remains at or near all-time highs across Fitch’s rated portfolio.

Kaufman Hall echoed the warnings in its deep dive into the latest margins and fresh threats in a report published Aug. 23 report titled “Delta Variant Hinders Recovery for Hospitals and Physician Groups.”

Margins in July landed close to June levels but fell compared pre-pandemic levels in 2019 due the Delta-driven hospitalization surge, said the healthcare financial advisory firm that has tracked the pandemic’s impact. Its “flash report” draws on data from more than 900 hospitals.

The median operating margin was 3.2% in July, not including federal CARES aid. With the funding, it was 4.1%. Not including CARES, operating margins were down 7% for 2021 through July compared to the same period in 2019.

Revenues actually rose in July compared to 2019 but the gains couldn’t overcome the impact of rising expenses for the month. The July results also suggest that some healthcare consumers once again may be postponing non-urgent procedures and other outpatient care due to COVID-19 concerns, Kaufman Hall said.

“Hospitals likely will face additional setbacks with continued spread of the Delta variant and concerns over diminishing protection from the COVID-19 vaccines,” said Erik Swanson, a senior vice president of data and analytics with Kaufman Hall. “Not surprisingly, hospitals in the regions with the highest rates of the variant were most affected in July, and we expect those impacts to deepen in the months ahead.”

National COVID-19 cases spiked during July with the 7-day moving average of new cases skyrocketing by 486% to more than 84,000 on July 31 from just over 14,000 on July 1, Kaufman Hall said citing data from the Centers for Disease Control and Prevention.

The seven-day moving average of new hospital admissions with confirmed COVID cases jumped 256% by the end of July while vaccinations continued to lag with the 7-day moving average of daily doses administered rose just 9.4% from July 1-31. More than 165 million Americans were fully vaccinated by month’s end, Kaufman Hall said.

“Looking ahead to the coming months, hospitals likely will face additional setbacks with ongoing spread of the Delta variant as schools reopen and cooler weather drives more activities indoors in the fall,” Kaufman Hall warned. “Diminishing protection from the COVID-19 mRNA vaccines also could hinder hospital recovery efforts by contributing to additional case increases as the CDC rolls out plans to offer booster shots for those who are eight months past receiving their second dose.”

More recent data this week showed COVID-related hospitalizations rose 6.3% from the previous week and more than 100,000 were hospitalized, according to the Washington Post.