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The COVID-19 pandemic stung not-for-profit hospital balance sheets hard in January amid the omicron surge and while those strains have eased, challenges persist as hospitals navigate a growing shift away from in-hospital care.

The fiscal damage from the highly contagious omicron variant put a dent in margins, which sunk for the time in 11 months.

“The first month of 2022 was devastating for hospitals and health systems nationwide as they were hit full force by the Omicron tidal wave,” Erik Swanson, a senior vice president with Kaufman Hall’s Data Analytics practice, wrote in the advisory firm’s February national hospital flash report.

The median Kaufman Hall operating margin index fell to a negative 3.68% without factoring in funds from the March 2020 federal CARES package and a negative 3.3% with CARES.

The median change in operating margins dropped 71.3% from December to January without counting CARES and year-over-year the median change in Operating Margin was down 23.7% versus January 2021 and 73.3% from pre-pandemic levels.

“Outpatient volumes and revenues dropped abruptly as providers delayed non-urgent, outpatient care to mitigate Omicron’s spread and ease demands on hospitals that saw a stark increase in sicker patients requiring longer hospital stays,” Swanson wrote. “Meanwhile, hospital expenses continued to climb, spurred by widespread labor shortages and global supply chain challenges.”

The 7-day moving average of new COVID-19 cases jumped 93% in the first half of the month to 807,115 from 417,524 leading to a 54% spike that receded in the second half of the month. “Consistent with past surges, hospital performance likely will stabilize somewhat in coming months as a result, but January’s losses could have repercussions throughout 2022,” the report warned.

Margins have been in recovery mode since the early days of the pandemic. Even as hospitals resume procedures nationwide labor shortages and rising inflationary and supply chain costs are expected also to pressure margins throughout the year.

Longer term, the sector must navigate a growing shift in care delivery to lower-cost outpatient or in-home settings that threatens revenue growth prospects.

The evolving service model was underway for some time but the pandemic accelerated it, Moody’s Investors Service said in a special report published this week.

“Changes in reimbursement models, new drugs, devices and growing investment in outpatient services, including ambulatory surgery centers will drive down inpatient care, the traditional measure of market share and presence,” Moody’s analysts wrote. “The pandemic has fueled a shift in the way consumers access healthcare, with increasing use of telehealth and fewer emergency room visits.”

The trend has been decades in the making as insurers have incentivized providers to offer quality care in the least costly setting. More recently, the Centers for Medicare and Medicaid Services’ decision to remove certain orthopedic and cardiac procedures from its inpatient-only list further fueled the shift.

Advances in drugs and medical devices are also contributing to the trend. In cardiology, new drugs and at-home heart monitors will reduce the risk of hospitalizations for heart failure, a key reason that patients over 65 are admitted. In orthopedics, new technologies that help reduce surgical time or create patient-specific implants will aid the shift to outpatient procedures, Moody’s said.

To adjust to the shifting model, hospitals have invested in outpatient centers and ambulatory surgery centers and they are expected to increasingly seek out partnerships with leading industry players in telehealth and urgent care while also expanding their capacity to provide in-home care.

Last May, Mayo Clinic and Kaiser Permanente invested in Medically Home, a firm that provides infrastructure to enable health systems to care for their patients at their homes, to help hospitals expand the ability to offer complex, at-home care on a larger scale.

“These models would allow some providers, such as critical-access hospitals, to reduce inpatient beds and costs but allow others, such as academic medical centers, to increase inpatient capacity where needed,” Moody’s said. An additional 11 not-for-profit health systems last October launched the Advanced Care at Home Coalition with Mayo and Kaiser.

An aging population, higher acuity cases and strong population growth in markets like Florida, Texas, Arizona, Utah, and Idaho will lessen the balance sheet impact of the shift for some. The accelerated shift might also take some time to fully unfold as hospitals will see a greater demand in the near term because of a rise in high-acuity patients who put off care during the pandemic.

“Hospitals, such as academic medical centers, with a strong focus on quaternary and tertiary care – highly complex cases requiring greater levels of specialty care – will be better able to sustain demand for inpatient services than hospitals offering primarily less complex, or secondary care,” Moody’s said.

The rating agencies hold mixed views on the sector. The lingering effects of federal aid should help not-for-profit hospital ratings weather pandemic wounds even as labor shortages, supply chain struggles, and other strains persist through 2022, S&P Global Ratings said in holding its sector outlook stable.

Fitch Ratings assigned a neutral outlook for the sector while Moody’s Investors Service assigned a negative outlook to the NFP and Public Healthcare sectors citing growing labor expenses as well as rising supply costs due to shipping delays all pressure hospitals as key outlook considerations.

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