01 Sep Financial Analysis of the Hospitals in Puerto Rico under COVID-19 Emergency
November 2019 marked the start of an unprecedented international health phenomenon, with devastating economic and social impact seen and felt around the globe. In Puerto Rico, the COVID-19 pandemic hit us aggressively in late February 2020. As a result, commercial activity island-wide has been affected by intermittent lockdowns since March 2020. This cycle has severely altered the operations and revenue of many businesses, and hospitals have not been the exception. Additionally, hospitals were subject to several periods under which Health authorities in Puerto Rico ordered to postpone all elective medical procedures, with the objective of reducing the risk of contagion of COVID-19 among patients and visitors. Under such conditions and in order to determine the effects of such an extraordinary situation, on April 25, 2020, we issued the report “Puerto Rico Hospitals Fact Sheet – Financial Impact Analysis under COVID-19”. The report outlined an estimate of the financial losses to be expected for local hospitals during the first lockdown period mandated by the Governor of Puerto Rico, from March 16, 2020, to May 3, 2020 (48 days).
In our updated report, we highlighted that acute care hospitals reported a 34% utilization (a 24% decrease from FYE 2018) and noted that, due to a variety of factors, hospitals in Puerto Rico had been experiencing a significant decrease in utilization since 2014, when the utilization was reported at around 80%; five years later (by the end of 2018), utilization was reported at roughly 58%.
Since May 3, 2020, there has been a gradual reopening of business activities across the island, and hospitals have had an opportunity to resume their operations, seeing an increase in utilization rates of up to 50%, as of June 30, 2020. Unfortunately, this level of utilization is not enough to cover a high volume of operating expenses, out of which 60% to 70% are considered fixed expenses. This report, however, also sheds light on the incoming financial aid obtained through the CARES ACT.
All 52 private hospitals in Puerto Rico were surveyed regarding their operational statistics and financial information for the six-month period ended on June 30, 2020. To analyze the effects of the COVID-19 emergency in the financial results of hospitals in Puerto Rico, each organization was asked to provide certain financial information for the six-month period ending on June 30, 2020. The most remarkable findings include:
- The $350 million in unearned revenue represents an unearned net margin of approximately $10.5 million in only six months, using the average profit margin of 3% reported by the hospitals during the last five years.
- In April 2020, hospitals in Puerto Rico received much-needed grants through the CARES Act. These grants/funds were equivalent to 2% of the revenue reported by hospitals in 2018.
- At the moment of publication of this, there are no clear guidelines as to how such funds will be accounted for in the financial statements. Therefore, the effect in the financial statements of hospitals, as a result of grants, could not be measured at present.
- Loss of employment is a big factor in the economic detriment of healthcare organizations.
- Hospitals in Puerto Rico currently maintain financing facilities with local and external institutions that exceed $1 billion, where approximately 70% to 80% of that amount is placed in financing with local lending institutions. For these lending institutions, the EBITDA indicator is the key to measure the feasibility of the hospital to repay loans. Continuous decreases in the EBITDA margin of the hospitals may also jeopardize the financial reporting of the lending institutions that hold significant amounts borrowed to this sector.
Based on the data analyzed in this study, the grants have been instrumental for all hospitals to maintain optimum conditions, and have provided a lifeline to overcome the financial distress created by the pandemic. The aid also provides resources to prepare to receive a wave of patients that could be expected as COVID-19 cases in Puerto Rico continue its increase. Unless there is a pivot in these trends for the remainder of 2020 and without further financial assistance, there will be a large number of hospitals facing mission-critical challenges to continue in operations. Looking at the utilization rate of roughly 50% reported by hospitals as of June 30, 2020, it becomes evident for several hospitals that they will not be able to operate sustainably if fiscal conditions don’t change soon. Meanwhile, it is extremely difficult at this moment to make informed predictions regarding the remaining months of the year. Maintaining the lockdown conditions continues to make hospital visit numbers dwindle, largely due to fear of contracting COVID-19.
The next six months will be crucial for the hospitals and the key factor for improvement will be to at least regain the utilization levels that they reported during the previous years. However, keep in mind, as we mentioned before, that healthcare organizations were experiencing a significant decrease in utilization and also in EBITDA during the last five years.