Apr 2
2020
Health care providers hemorrhaging money
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Western New York’s hospitals were in dire financial shape coming into 2020. The COVID-19 pandemic — with the attendant costs in equipment, staffing and, perhaps most damagingly, lost revenue — is going to compound their problems.
“It’s going to be ugly,” Kaleida spokesman Michael Hughes told Investigative Post in an email.
It’s not just hospitals that will feel the pain, either. Primary care practices, clinics and other medical service providers, their business greatly diminished by the shutdown, all are facing pay cuts, layoffs and even closure.
The $2.2 trillion federal CARES Act, passed last week by Congress, includes a $100 billion lifeline for health-care businesses, big and small. It’s “a ray of hope,” according to Dr. Nancy Nielsen, an internist and senior associate dean for health policy at UB’s Jacobs School of Medicine and Biomedical Sciences.
But it might not come quickly enough to save some smaller health-care businesses. And it’s unlikely to provide enough money to cover the costs at Western New York’s already fragile hospital systems.
“It won’t be,” Nielsen told Investigative Post in a phone interview this week. “No, of course not. But we’ll only know that afterward.”
Both the Kaleida and Catholic Health systems, each of which runs five hospitals in the region, expected to post losses when they closed the books on 2019.
In January, Kaleida CEO Jody Lomeo said the system had run a deficit in 2019 but might break even in 2020. Catholic Health CEO Mark Sullivan announced a hiring freeze last September, citing continuing losses. Both systems generated modest surpluses in 2018.
Kaleida’s projected deficit for 2019 — the system’s first loss since 2014 — continues a downward trend. In 2018, Kaleida cleared $10 million on revenue of $1.85 billion; that was down from 2017’s $27.3 million surplus on $1.67 billion in revenue.
Catholic Health ran a $16 million deficit after the second quarter of 2019. That’s nearly $30 million worse than the system performed in the same period in 2018, a year in which Catholic Health squeaked out a $653,000 surplus on $1.2 billion in revenue.
Erie County Medical Center is more financially stable than Kaleida or Catholic Health, largely because it is a public benefit corporation.
But its margins are thin — less than 1 percent. And ECMC was preparing for a rocky 2020, largely due to proposed cuts in the state’s $70 billion per year Medicaid program. Those Medicaid cuts are part of Gov. Andrew Cuomo’s efforts to address what was, prior to the coronavirus, a looming $6 billion deficit in the state budget.
“And that was before this pandemic hit,” Nielsen said.
Revenues down, expenses up
The COVID-19 crisis has exacerbated the state’s budget problem. And it has delivered a “body blow” to local hospitals, according to Nielsen.
On the revenue side, the crisis has cost the hospitals some of their most lucrative revenue streams. All regional hospitals put an end to elective surgeries two weeks ago in order to conserve supplies of blood for transfusions, personal protective equipment and critical care beds to prepare for the coming surge in hospitalizations for COVID-19.
That’s a lot of money lost. Orthopedic surgeries alone — knee and hip replacements, for example — brought in $92 million in revenue for Kaleida in 2018, according to a report in Business First last month. That’s $1.8 million per week lost, just for orthopedics.
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Emergency room visits are money-makers for hospitals, but those have been drastically curtailed, too.
“People are afraid to go to the emergency room,” Nielsen said. “They’ve been told not to go to the emergency room, to stay home until they need oxygen.”
Other high-margin outpatient procedures — conducted at clinics either owned by hospitals or in business relationships with them — have also plummeted in volume.
Then there are the expenses in preparing for and treating COVID-19 patients, which Nielsen described as enormous.
Among them:
- The purchase of personal protective equipment, or PPE, including masks and gowns, which are difficult to source and subject to bidding wars between hospital systems and government agencies.
- The equipping of testing laboratories with swabs and chemicals to do testing of patients and staff, materials that are, like PPE, in critically short supply.
- A state mandate that hospitals increase their number of available beds by at least 50 percent, preferably by 100 percent, in anticipation of a rush of COVID-19 patients.
- Ventilators for critically ill patients. So far Western New York has not exceeded its capacity, Nielsen said, but that could change as the epidemic peaks regionally.
- Bringing on extra doctors, nurses and other staff to handle the influx of patients, as current staff fall ill and must be cycled off duty. Hospitals in New York City are importing staff from out of state to handle the burgeoning crisis there; the same thing could happen, albeit on a smaller scale, in Western New York.
“All of that stuff has been enormously expensive for the hospitals,” Nielsen said. “And we haven’t even seen the worst of it.”
In an email, Hughes, the Kaleida spokesman, said it was too early to estimate the system’s losses, but anticipated a “multi-million” dollar hit.
“For us, ECMC, Catholic Health, you name it,” he wrote.
The volume of business is down in all Kaleida’s service areas, Hughes wrote.
“Yet we are fully staffed as we ready for the upcoming surge,” he continued. “In addition, we are spending hundreds of thousands of dollars weekly, and sometimes daily, acquiring supplies and equipment.
“So there is no other way to describe it other than it’s going to be ugly when this is all said and done.”
Medical practices also suffering
Primary care offices, urgent care clinics and other medical service providers are bleeding money, too.
“Some practices have actually shut down,” Nielsen said. “Others have gone to a skeleton crew. They’ve told patients not to come in, and patients are canceling. They don’t want to come in for routine visits, and doctors don’t want them to.”
UB/MD, the region’s largest medical practice, has cut its doctors’ pay and furloughed part of its workforce. A doctor at Buffalo Medical Group, the region’s second largest practice, told Investigative Post that its doctors have taken pay cuts, too. Staff layoffs — which have never happened before in the group’s 75-year history — are inevitable, he said.
Smaller practices might never recover, according to Nielsen.
“There’s no mom-and-pop physician’s office that can survive what we’re seeing,” she said. “You don’t have the margin to do it. You can’t just shut a practice for weeks and hope everything will go back to normal.”
The pandemic is not expected to peak in New York State until the end of this month. For hospitals and healthcare professionals, the peak is just a midpoint in the crisis, as they treat patients who continue to need critical care, or who are infected on the downward slope of the curve.
The federal stimulus package passed last week includes $100 billion for health-care providers to cover non-reimbursable expenses incurred in the battle against COVID-19. That includes lost revenues, as well as the costs of material and equipment, expanding capacity and paying extra staff.
The CARES Act will provide something of a backstop for local hospitals. Unsecured and sometimes forgivable small business loans, also provided for in the CARES Act, might help to keep small medical practices afloat.
Practices like Buffalo Medical Group are in a tough spot: They don’t seem to qualify for the CARES Act’s aid to hospitals, and they’re too big for the act’s small business loans.
“Right-sized to fail,” the Buffalo Medical Group doctor told Investigative Post.
Federal aid won’t cover losses
Nielsen anticipates that, as the financial damage to the country’s health-care ecosystems becomes clear, more relief money will be forthcoming. But federal subsidies won’t address systemic financial issues, particularly in Western New York, where they have been coming to a head in recent years.
Federal subsidies, for example, cannot be used to resolve the state’s Medicaid-fueled budget shortfall.
To address that issue, Gov. Andrew Cuomo’s Medicaid Redesign Team is seeking to cut $2.5 billion from the state’s $70 billion Medicaid program. Those proposed cuts include $400 million in reimbursements to hospitals.
In mid-February, before the COVID-19 crisis, Kaleida’s Lomeo suggested those cuts would wipe 10 percent in revenue from the bottom lines of hospitals and other healthcare providers across the state. In 2018, Moody’s Investors Service reported the median operating margin for a nonprofit hospital system was 1.7 percent, according to the industry journal Modern Healthcare.
Local health-care experts tell Investigative Post that long-running competition between the three dominant health systems in Western New York has kept costs — and thus hospitals’ operating margins — on the low end of the industry spectrum.
“Everybody was in a very uncertain financial situation before the coronavirus epidemic hit New York State,” Nielsen said. “Losses in the previous year, and bigger losses this year. That was the gray horizon these hospitals were already facing.”
And then came the Ides of March.
“In our lifetimes, we’ve never lived through an economic situation like this,” Nielsen said.
