Costly COVID: Calif. Safety-Net Hospitals Lost Over $3.2B Early in Pandemic

John McCormack

September 26, 2022

While it's common knowledge that COVID-19 brought a new set of financial challenges to the healthcare industry, a study of California hospitals digs deeper and reveals that safety-net hospitals were much harder hit than non-safety-net hospitals ― and that government assistance programs played a critical role in keeping these struggling hospitals afloat.

From the first quarter of 2020 to the second quarter of 2021, net operating losses of California safety-net hospitals were more than $3.2 billion, according to the study, which was published in JAMA Health Forum. Safety-net hospitals provide a significant level of care to low-income, uninsured, and vulnerable populations.

Starting in the second quarter of 2020, hospital financial performance was highly variable among the 348 hospitals studied. Indeed, safety-net hospitals experienced large losses, while non-safety-net hospitals maintained positive operating margins throughout the pandemic, according to the study, which was based on Hospital Quarterly Financial and Utilization Data from the State of California Office of Statewide Health Planning and Development

Dr Yu Wang

"Hospitals had to cancel a lot of elective and outpatient surgeries to accommodate COVID patients. That is a huge part of their revenue. Actually, the literature suggests it is about 63% of their revenue. So you essentially cut out a huge part of their revenue and you treat patients who are more vulnerable with less insurance coverage and less payment," Yu Wang, PhD, lead author of the study, told Medscape Medical News.

While all hospitals dealt with this ongoing challenge during the pandemic, safety-net hospitals struggled more than their non-safety-net counterparts, Wang, assistant professor for business analytics and information systems at the Cameron School of Business, University of North Carolina Wilmington, pointed out.

Safety-net hospitals typically "have a tougher time financially" than non-safety-net hospitals, Wang said. COVID-19 simply added salt to the wound.

The pandemic created a surge in demand for healthcare services. Ordinarily, hospitals might deal with a surge in demand from "something like a highway car crash, where 20 or 30 people get sent to the hospital," Wang noted. With such surges, the clinical staff treats the affected patients, and the situation is resolved relatively quickly, after which the hospital returns to normal. With COVID-19, however, hospitals had to deal with the surge of patients on an ongoing basis over an extended period.

A Debilitating Blow

Interestingly, these operating difficulties seemed to affect safety-net hospitals much more acutely than non-safety-net hospitals. For all hospitals, the operating margin decreased from 2.8% in 2019 to 0.4% in 2020, then increased to 1.3% in the first 6 months of 2021. In contrast to non-safety-net hospitals, however, safety-net hospital margins did not show a recovery in 2021 and were negative in both 2020 and 2021, according to the study.

Interestingly, the research indicates that non-safety-net hospitals struggled financially only during the first quarter of 2020 and that those difficulties could be attributed to a falling stock market.

Dr Allison Witman

"In the first quarter of 2020, the stock market tanked towards the end of the quarter when the news of the pandemic broke and things started to shut down. That actually affected the non-safety-net hospitals. That was really the only quarter during our study where the non-safety-net hospitals had negative net operating income," said Allison Witman, PhD, co-author of the study and assistant professor of economics at the University of North Carolina Wilmington.

After this quarter, both safety-net and non-safety-net hospitals "got to ride the wave that came from the positive equity market performance, but despite the positive equity market performance, it wasn't quite enough to bring safety-net hospitals into the green," Witman noted.

Some Financial Relief

Government assistance provided a lifeline for safety-net hospitals. Indeed, the study found that government assistance programs played a substantial role in lessening the financial damage of COVID-19 for hospitals in California, especially the safety-net hospitals.

Although hospitals' profits fell between January 2020 and June 2021, the intervention of government assistance programs mitigated more detrimental fiscal consequences.

"For safety-net hospitals to ensure accessibility to care for patients who are actively impacted by COVID-19, they needed the government assistance. There's just no way around it. Without it, they don't have the money to keep paying all the staff and keep the operations running," Wang said. "Overall in this pandemic environment, it's really difficult for an institution by itself to face this kind of event and then try to resolve the operational and financial issues. It requires the government to step in and to help them out in many cases."

The government eventually realized that the need to help safety-net hospitals was more acute than the need to help non-safety-net hospitals

"The initial payment was 2% of your previous year's operating revenue. And then a lot of people said, 'Whoa, wait a minute. These more vulnerable hospitals need more help.' The formula needed to be adjusted more towards safety-net hospitals. And then that's when more targeted government programs came in to help those hospitals specifically," Witman pointed out.

While the study only analyzes hospital financial performance through the second quarter of 2021, its findings point to the importance of ongoing study of the need of government assistance ― especially for safety-net hospitals.

"The reliance on the funding is pretty heavy for safety-net hospitals, and unless things have changed significantly, if they operate at the same way they operated for the first six quarters of COVID-19, I think they may have a difficult time financially when all the funding runs out," Wang concluded.

John McCormack is a Riverside, Illinois-based freelance writer covering healthcare information technology, policy, and clinical care issues.

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