MAY 2023 Issue Brief by Glenn Melnick and Susan Maerki Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 T he COVID-19 pandemic has had a profound 2022. Total hospital volume (outpatient visits includ- impact on the operation, finance, and delivery ing emergency department visits plus inpatient days) of health care services in California's acute care rebounded to prepandemic levels by Q2 of 2021 and hospitals. Previous analysis has shown pronounced now exceeds 2019 levels by 6%. While net patient rev- reductions in total patient volume, increases in under- enue across all payers increased yearly in 2020, 2021, lying operating costs, and the importance of other and 2022, so did underlying expenses, due in part to operating and nonoperating revenue streams in the higher acuity of services and rising staffing and supply first calendar year of the pandemic.1 Now three full costs. Nonoperating revenue, an increasingly impor- years in, hospitals report persistent operational chal- tant source of financial stabilization for many California lenges and financial headwinds, including higher facilities, grew markedly in 2020 and 2021 before underlying staffing and supply costs, longer lengths declining sharply in the first three quarters of 2022. of stay and lack of adequate discharge locations for postacute patients, and the end of federal pandemic- Taken together, the large sample of hospitals reported era subsidies.2 Some stakeholders predict a wave of total net income of $5.2 billion in 2020, around half the hospital bankruptcies without more public funding.3 net income of the previous year. Hospitals netted $9.2 billion in 2021, still slightly less than they made before This issue brief updates prior estimates of utilization, the pandemic. The data reveal a sudden and sharp costs, and revenue in California hospitals through decline to $207 million in net income for California the end of 2022. The analysis is primarily based on hospitals in 2022. Within this broader decline in prof- utilization and financial data covering calendar years itability, a subset of facilities experienced significant 2019 through 2022 for 348 acute care hospitals that losses. Hospitals with the worst net income margins reported each quarter throughout the period.4 These varied substantially based on size, geographic area, 348 facilities are classified as "comparable" by the and patient population. Notably, those with the low- California Department of Health Care Access and est margins were not necessarily more dependent Information (HCAI) and represent about 80% of hos- on Medi-Cal or Medicare volume than the average pital capacity in the state.5 Excluded from the analysis California hospital. are Kaiser hospitals, which account for 8% of statewide bed capacity, as well as state, long-term psychiatric, Excluded from this analysis is information on the long-term care, and other noncomparable facilities. liquidity of hospitals and health systems in California. Previous national and state studies have shown that, The data in this analysis paint a nuanced and rap- like measures of income and profitability, indicators of idly changing portrait of the operations and financial overall financial status and financial reserves vary dra- health of California hospitals through the end of matically among facilities and systems.6 Utilization: Total Hospital began exceeding prepandemic levels by the last quarter of 2021. Volume Rebounds, Average Length of Stay Increases Taken together, an aggregate measure of total hos- pital volume that incorporates inpatient discharges, Inpatient discharges, outpatient visits, and average outpatient visits, and the acuity of services delivered length of stay are all key indicators of hospital utili- within a facility rebounded the quickest. These "total zation and important inputs into a facility's financial adjusted patient days" fell between 2% and 4% dur- performance. HCAI utilization data show that inpa- ing the last three quarters of 2020 and the first quarter tient discharges declined sharply beginning in the of 2021. Total adjusted days exceeded 2019 levels by second quarter of 2020 and have remained 4% below 6% to 7% each quarter of 2022. This increase is largely prepandemic levels through the end of 2022 (Figure explained by a longer average length of stay (ALOS) 1). Outpatient volume also dropped dramatically in for patients receiving inpatient services and the return 2020, though these visits returned more quickly and of outpatient visit volume to prepandemic levels. Figure 1. Inpatient Discharges, Outpatient Visits, and Adjusted Patient Days in California Hospitals, 2020–22, Percentage Change from 2019, by Rolling Four Quarters 10% 7.3% 6.6% 6.3% 5.9% 5% 3.2% 2.3% 0.7% 0.1% 0% -2.3% -2.6% -3.4% -4.2% -5% -10% -15% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 Adjusted Patient Days Discharges Visits Note: Percentage calculated to compare by quarter the rolling four quarter data for 2020 and onward to the rolling four quarters ending in 2019. Source: "Hospital Quarterly Utilization and Financial Report - Sum of Four Quarters," California Health and Human Services Agency, 2019 Quarter 1 - Sum of Four Quarters to 2022 Quarter 4 - Sum of Four Quarters. Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 2 -15% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 Adjusted Patient Days Discharges Visits The increase in ALOS for inpatients in California hospi- the largest driver of this increase is a more complex tals is detailed in Figure 2. By the first quarter of 2021, hospital case mix for patients admitted to California ALOS was roughly 12.5% higher across all payers, 6.2 hospitals,7 another widely reported factor is the grow- days compared to a starting point of 5.5 days, with a ing number of "administrative" days for patients who range across payer groups of 5.2 (third-party) to 6.5 cannot be appropriately discharged to rehabilitation (Medi-Cal). This trend generally persisted throughout facilities, nursing homes, and other sources of post- 2022 and was at 6.0 days at the end of the year. While acute care.8 Figure 2. Average Length of Stay in California Hospitals, 2020–22, Percentage Change from 2019, by Rolling Four Quarters 14% 12% 12.5% 10% 10.2% 10.2% 9.3% 9.6% 9.2% 9.0% 8% 8.6% 8.0% 6% 5.7% 4% 2.8% 2% 1.2% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 Note: Percentage calculated to compare by quarter the rolling four quarter data for 2020 and onward to the rolling four quarters ending in 2019. Source: "Hospital Quarterly Utilization and Financial Report - Sum of Four Quarters," California Health and Human Services Agency, 2019 Quarter 1 - Sum of Four Quarters to 2022 Quarter 4 - Sum of Four Quarters. Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 3 Revenue: Increases in Net revenue, which rebounded sharply and exceeded prepandemic levels by 12% in 2021 and 26% in 2022. Patient Revenue, Variability Inpatient revenue slowed but remained 2% higher than in Other Revenue Sources prepandemic levels in 2020, growing to 18% above 2019 levels in 2022. Taken together, total net patient Figure 3 details the revenue received by California revenue (total revenue collected minus any contrac- hospitals for inpatient, outpatient, and all services tual adjustments) from all lines of business and payers in 2020, 2021, and 2022. Relative to 2019, hospitals was 1% higher than prepandemic levels in 2020, 12% in 2020 experienced a 5% decrease in outpatient higher in 2021, and 18% higher in 2022. 0% Figure 3. Gross Outpatient, Inpatient, and Net Patient Revenue by Payer in California Hospitals, 2020–22, Percentage Change from 2019 GROSS Medi-Cal OUTPATIENT REVENUE Medicare Third Party (Commercial) All Payers GROSS Medi-Cal INPATIENT REVENUE Medicare Third Party (Commercial) All Payers TOTAL Medi-Cal REVENUE Medicare Third Party (Commercial) All Payers NET Medi-Cal PATIENT REVENUE Medicare Third Party (Commercial) All Payers -10% -5% 0% 5% 10% 15% 20% 25% 30% 2020 2021 2022 Source: "Hospital Quarterly Utilization and Financial Report - Sum of Four Quarters," California Health and Human Services Agency, 2019 Quarter 1 - Sum of Four Quarters to 2022 Quarter 4 - Sum of Four Quarters. Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 4 An important source of revenue for many hospitals In 2019, hospitals in California reported $5.9 billion in in California derives from activity not directly related net nonoperating revenue, or 4.8% of their total reve- to care of patients. This "nonoperating revenue" nue that year. Net nonoperating revenue totaled $5.4 includes outside investment income (e.g., finan- billion in 2020 and $6.7 billion in 2021, or roughly 4% cial market returns), payments to hospitals for real to 5% of total revenue in those years.9 Net nonoper- estate (e.g., doctor office rentals), and income from ating revenue fell precipitously in the first quarters of endowments, and may be reduced by major capital 2022 as inflation took hold in the broader economy and spending. Figure 4 highlights the relative contribution financial market returns slowed significantly. Despite a of nonoperating revenue to overall revenue in the year slight rebound in the fourth quarter, net nonoperating right before and during the most acute phases of the revenue totaled just $109 million for all of 2022. COVID-19 pandemic. Figure 4. Net Nonoperating Revenue as a Percentage of Total Revenue in California Hospitals, 2019–22 6% 5% 4.8% 4.9% 4.8% 4% 4.3% 3% 2% 1% 0% -0.6% -1% -1.4% -2% -2.5% -3% 2019 2020 2021 2022:Q1 2022:Q2 2022:Q3 2022:Q4 Source: "Hospital Quarterly Utilization and Financial Report - Sum of Four Quarters," California Health and Human Services Agency, 2019 Quarter 1 - Sum of Four Quarters to 2022 Quarter 4 - Sum of Four Quarters. $5,000 $4,800 Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 5 $4,600 1% 0% -0.6% -1% -1.4% Expenses -2% Increase Rapidly higher case-mix severity have remained persistent fac- -2.5% tors three years since the onset of the pandemic. Through -3% 2020 Before 2019 2020 2021 2022:Q1 2022:Q2 2022:Q3 2022:Q4 Stabilizing As seen in Figure 5, operating expense per adjusted day increased rapidly early in the pandemic, from Underlying expenses for hospital operations grew rap- $4,056 in the first quarter of 2019 to almost $4,800 in idly in the first two years of the COVID-19 pandemic. the first quarter of 2021. This represented an increase As reported in multiple studies, facilities incurred of over $740 per day, or 18%. Notably, operating additional costs for pandemic-related safety and miti- expenses per adjusted day began to stabilize after that, gation efforts, contract nursing staff, and higher supply but remained at about $4,600 per adjusted patient costs.10 Anecdotally, higher labor and supply costs and day, roughly 13% higher than before the pandemic. Figure 5. Total Operating Expenses per Adjusted Patient Day in California Hospitals, 2019–22 $5,000 $4,800 $4,600 $4,400 $4,200 $4,000 $3,800 $3,600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 Source: "Hospital Quarterly Utilization and Financial Report - Sum of Four Quarters," California Health and Human Services Agency, 2019 Quarter 1 - Sum of Four Quarters to 2022 Quarter 4 - Sum of Four Quarters. Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 6 The Bottom Line: Total Beginning in 2020 this pattern began to change. As detailed in the previous section, expense per adjusted Margins Eroded in 2022 day increased substantially and faster than increases After Significant Profitability in net patient revenue by the second quarter of 2020. As a result, hospitals on the whole suffered negative in 2021 margins on patient care. However, these losses were Figure 6 summarizes quarterly trends in revenue and offset by increases in both "other operating" and non- net income per adjusted day for 2019 through 2022. operating revenue sources, which included substantial In 2019, operating costs were covered by net patient federal COVID-19-related help and favorable invest- revenue - essentially, hospitals were breaking even ment returns. on providing care to patients. In addition, given posi- tive net nonoperating revenue sources, hospitals This allowed California hospitals to report positive net generated positive total net income margins, averag- income margins per adjusted day in 2020 and 2021. In ing $320 in net income per adjusted day in 2019. fact, net income margins in 2021 averaged more than $335 per adjusted day, higher than prepandemic 2019. Figure 6. Sources of Revenue and Total Operating Expenses per Adjusted Patient Day in California Hospitals, 2019–22 $5,000 $4,700 $4,400 $4,100 $3,800 $3,500 Q1 Q2 Q3 Q4 Q4 Q4 Q1 Q2 Q3 Q4 2019 2019 2019 2019 2020 2021 2022 2022 2022 2022 Net Patient Revenue per Adjusted Day Other Operating Revenue per Adjusted Day Net Nonoperating Revenue per Adjusted Day Total Operating Expenses per Adjusted Day Sources: "Hospital Quarterly Utilization and Financial Report - Sum of Four Quarters," California Health and Human Services Agency, 2019 Quarter 1 - Sum of Four Quarters to 2022 Quarter 4 - Sum of Four Quarters.; "HCAI Quarterly Profile Characteristics," Department of Health Care Access and Information, (Search terms: Aggregate, Four Quarters Ending Q4 2019 -22, Comparable, All Hospitals, CA Statewide). 20% 15% for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 Heading 7 Figure 7 details total operating revenue, nonoper- losses were offset by $5.4 billion in net nonoperating ating revenue, and net income across all California income, leading to $5.2 billion in net income in 2020. comparable hospitals for 2019–22.11 In 2019, hospitals Higher operating margins and continued nonoperat- reported $4 billion in net operating revenue and $6 ing revenue growth led to net income of $9.2 billion billion in net nonoperating revenue, for total pretax in 2021. There was a sharp decline in net profitability net income of roughly $10 billion. Hospitals reported across all hospitals in 2022, though the sector ended losing $222 million on patient care during the first year the year about $207 million in the black. of the pandemic, though as detailed above, these Figure 7. Summary Income Statement for California Hospitals, 2019–22 2019 2020 2021 2022 Net Patient Revenue $111,409,172,421 $112,286,819,861 $123,557,433,336 $130,852,111,581 Other Operating Revenue $4,865,273,391 $8,555,607,745 $6,805,017,437 $6,725,992,415 Total Operating Revenue $116,274,445,812 $120,842,427,606 $130,362,450,773 $137,578,103,996 Total Operating Expenses $112,271,891,820 $121,064,840,384 $127,866,721,999 $137,479,882,198 Net Operating Revenue $4,002,553,992 -$222,412,778 $2,495,728,774 $98,221,798 Net Nonoperating Revenue $5,929,145,821 $5,409,788,398 $6,706,232,016 $109,107,629 Net Income (Pretax) $9,931,699,813 $5,187,375,620 $9,201,960,790 $207,329,427 Source: "Hospital Quarterly Utilization and Financial Report - Sum of Four Quarters," California Health and Human Services Agency, 2019 Quarter 1 - Sum of Four Quarters to 2022 Quarter 4 - Sum of Four Quarters. Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 8 $4,700 $4,400 Small Subset of Hospitals ranged in size from 10 licensed beds to 482, with an average of 180 beds. Nearly two-thirds of the low- Experience Very Negative margin hospitals (64%) are members of multihospital Financial Performance in 2022 $4,100 systems, and 14% were designated as rural hospitals. Facilities are located in all areas of the state. Within this broader context of aggregate but lower profitability, a small subset of facilities experienced $3,800 Payer mix varied within very low-margin facilities. significant losses in 2022. While both the average and Notably, these hospitals were no more dependent on median profitability for all hospitals remained positive Medi-Cal or Medicare than the average hospital. The for all but one quarter of 2020–22, those in the bottom average hospital in California has a payer mix (based quartile of financial performance had total margins $3,500 Q1 Q2 Q3 Q4 Q4 on inpatient Q4 discharges) Q1 of 40% Medicare Q2 Q3 and Q4 32% averaging2019 −8% in the2019 fourth quarter 2019 of 2022 (Figure 8). 2019 2020 2021 2022 2022 2022 2022 Medi-Cal. The sample of low-margin hospitals had a Net Patient Revenue per Adjusted Day payer mix Other of 42%Revenue Operating Medicare and 31% per Adjusted DayMedi-Cal. Nearly An analysis of the subset of California hospitals with 20%Total of the lowest margin hospitals had a private payer the most negative Net (bottom quintile) Nonoperating margins Revenue in 2022 per Adjusted Day Operating Expenses per Adjusted Day mix of 50% or more. reveals a diverse set of facilities. These hospitals Figure 8. Total Revenue Margin in California Hospitals, 2019–22 20% 15% 10% 5% 0% -5% -10% -15% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 75th Median Average 25th Source: "Hospital Quarterly Utilization and Financial Report - Sum of Four Quarters," California Health and Human Services Agency, 2019 Quarter 1 - Sum of Four Quarters to 2022 Quarter 4 - Sum of Four Quarters. Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 9 Conclusion The financial data used in this study suggest that the experience of any one hospital can be better or worse state's hospital system as a whole was relatively profit- than the average. For example, a handful of general able during the first two years of the pandemic, despite acute care hospitals in California reported bringing increases in operating expenses. Hospitals had a net in enough revenue to cover just half of their operat- income of nearly $10 billion in 2019, the year before ing costs in 2022. Losses of this magnitude are clearly the pandemic, dipping to $5 billion in 2020 and then unsustainable, particularly when experienced by facili- returning to $9 billion in 2021. Significant public sub- ties that are not part of large systems or those without sidies and strong financial market returns helped many the financial reserves to weather temporary decreases facilities come through the worst of the pandemic to in income or increases in expenses. stay in the black. While many of California's hospitals appear to have Data for 2022 show larger financial challenges for CA come through the most acute phases of the COVID- hospitals: total net income across the sector had fallen 19 pandemic on sound financial footing, significant to $207 million. The decline in profitability appears and fundamental challenges persist. As policymak- largely driven by increases in operating expenses that ers seek to ensure access to care in all communities, were triggered during the pandemic (including staffing they must confront the long-term sustainability of and supply costs) combined with substantial reduc- the underlying business model for hospital-based tions in nonoperating revenue sources. Quarterly data services in various parts of the state, the need for suggest that underlying costs began to stabilize in investments in alternative, non-hospital-based 2021 and 2022, and both operating and nonoperat- services in different communities, and, given the ing revenue have begun to increase, if only modestly, centrality of human resources and personnel in in the fourth quarter of last year. underlying expenses structures, expanding the edu- cational pipeline of nurses and other key inputs to While these aggregate numbers show a significant address the long-term consequences of California's decline in profitability across the entire sector - the health care workforce shortage. Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 10 About the Authors About the Foundation Glenn Melnick, PhD, is Blue Cross of California Chair The California Health Care Foundation (CHCF) is an in Health Care Finance and professor of public policy independent, nonprofit philanthropy that works to at the University of Southern California. Susan Maerki, improve the health care system so that all Californians MHSA, MAE, is an independent health consultant and have the care they need. We focus especially on mak- former director and health policy specialist at PwC. ing sure the system works for Californians with low incomes and for communities who have traditionally faced the greatest barriers to care. We partner with Acknowledgments leaders across the health care safety net to ensure they The authors acknowledge and thank the follow- have the data and resources to make care more just ing organizations for their input and expertise: the and to drive improvement in a complex system. CHCF California Hospital Association, Kaweah Delta Health informs policymakers and industry leaders, invests in Care District, Adventist Health White Memorial, Martin ideas and innovations, and connects with change- Luther King Jr. Community Hospital, Steve Clark & makers to create a more responsive, patient-centered Associates, and Arnold Ventures. These organizations health care system. were not asked to endorse the final content of this issue brief. Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 11 Endnotes 1. Glenn Melnick and Susan Maerki, The Financial Impact of 5. Documentation for Hospital Quarterly Financial and COVID-19 on California Hospitals: January 2020 Through Utilization Data Files, HCAI, last updated March 21, 2018. June 2021, California Health Care Foundation, August 2021. 6. Nancy M. Kane, "Hospital Profits, a Misleading Measure 2. Hospital Services at Risk Throughout California, Kaufman of Financial Health," Journal of Amer. Health Policy 1, no. Hall, April 2023. 1 (July–Aug. 1991): 27–35; and Nancy M. Kane et al., "Why Policymakers Should Use Audited Financial Statements to 3. Ana B. Ibarra, "Hospital Closures, Cuts in Services Loom for Assess Health Systems' Financial Health," Journal of Health Some Communities. How the State May Step In to Help," Care Finance 48, no. 1 (Summer 2021). CalMatters, April 6, 2023. 7. Case Mix Index 1996–2021, California Health and Human 4. The major source of data is the 16 California Dept. of Health Services Agency, last updated September 2022. Care Access and Information (HCAI) Sum of Four Quarters Quarterly Utilization and Financial Reports starting with 8. Hospital Services at Risk, Kaufman Hall. 1Q2019, covering the four quarters April 2018 to March 2019, 9. The 2019–21 period was marked by double-digit investment through 4Q2022, covering the four quarters January 2022 to returns. An S&P 500 index would have returned over 20% per December 2022. Hospitals report quarterly data quickly after year. the close of each quarter and, as a result, final annual reports filed later in the year by hospitals may show different values 10.Hospital Services at Risk, Kaufman Hall. due to time lags and other adjustments. The authors compared 11.These data represent all comparable hospitals and include all quarterly and annual data and found only small differences hospitals that reported in any of the quarterly periods from for utilization measures and larger differences for financial 2019 to 2022. There is a maximum of 368 hospitals, and measures at the hospital level but substantial agreement of therefore aggregate values differ slightly from the panel of overall trends across all hospitals. 348 hospitals that reported in all quarters of the period. Heading for an Acute Crisis? Utilization, Revenue, Expenses, and Margins in California's Hospitals, 2019–22 12