$1B in government aid helped financial performance at Minnesota hospitals

Roughly $1 billion in federal and state aid shored up financial performance at Minnesota hospitals during the first year of the pandemic, even as industry concerns grew over diminishing profit margins from patient care operations.

Hospitals across the state reported a median operating margin of 1.2% during 2020, off from 1.4% the previous year, according to a Tuesday report from the Minnesota Hospital Association.

It was the third consecutive year of declines, the trade group said, adding that hospitals would have posted a median operating loss of 2.3% were it not for the emergency government funding in response to COVID-19.

The operating income figures don't include hospital earnings from investments and other non-operating sources of income. When looking at median net income — a measure that includes those other funding sources — data in the report showed that 2020 margin was the best for hospitals in seven years.

"It's the trend that we are raising a flag about," said Dr. Rahul Koranne, the president and chief executive of the Minnesota Hospital Association. "Had there not been that emergency intervention … most of the systems would have been in the red and that is extremely worrisome — which is why we are calling it a crisis."

Of the investment income, Koranne said: "Should a patient care operation, which is driven by the mission of taking care of their patients and communities, be at the beck and call of the stock market? I think we should resist that."

The hospital association's annual report looked at results for 75 hospital and health systems across the state. It did not include Mayo Clinic, which is one of the state's strongest medical centers in terms of financial performance.

Hospitals say there is a misconception that they have benefitted financially from the surge of pandemic patients. The reality is very different, they say, since pandemic concerns and patients needing COVID-19 care stopped many other patients from receiving services that are more profitable for hospitals and health care systems.

Hospitals in 2020 faced what the report calls "skyrocketing" expenses and labor costs. Among other things, they had to pay higher wages to recruit and retain health care workers in the midst of a workforce shortage.

Finally, hospitals say that most pandemic patients were covered by public health insurance programs that reimburse at lower rates than private health insurers.

"We are pointing to this year as a proof of concept that this particular industry has a structural problem in how it comes to financing," Koranne said. "That's why I think this particular year needs to be looked at carefully."

Early in the pandemic, the Minnesota Hospital Association projected the state's hospitals would see a $2.9 billion hit to revenue over a 90-day period due in large part to the shutdown of non-emergency procedures as medical centers also invested resources to safely care for patients.

The hit landed, the trade group says, as hospitals saw increased expenses. Hospitals say they lost about $1 billion in revenue growth they otherwise would have seen. That's in addition the $1 billion revenue loss covered by governmental aid.

Data in the report released Tuesday show collective revenue for hospitals fell from about $28.88 billion in 2019 to $28.34 billion in 2020 — a drop of more than $500 million for the year.

Median operating income fell during the time period from $740,597 to $545,998, while median net income rose from $1.1 million to more than $1.6 million.

The number of Minnesota hospital systems with negative operating margins increased from 31 to 33.

"Hospitals and health care systems are lifelines in their community and when they don't have a positive margin they cannot invest in their communities, in their patients, in their own staff," Koranne said.

Hospitals and health systems in 2020 received about $850 million in federal emergency aid, the report found, plus an estimated $150 million from the state. While many hospitals accounted for the aid as operating revenue, the trade group says, some classified it as non-operating revenue.