Covid-19 Hit: Picking Up the Pieces of American Healthcare

June 18, 2020

Some hospitals were overwhelmed. But for many providers, COVID-19 has meant the absence of patients - and major drops in revenue. And now there is a possible economic downturn. COVID-19 has hit American healthcare and hit it hard.   

Healthcare is seen as a safe harbor in many economic downturns. People still get sick and go to the doctor or hospital; in fact, there may be even more sick people to care for. Job loss means people lose their employer-based insurance, but to some extent, public payers pick up where private ones leave off. 

But the COVID-19 pandemic is toppling this conventional wisdom, along with many others. The outbreak of the infectious disease has led to an unprecedented drop in the use of healthcare services, and those services generate revenue in the healthcare sector, which still largely runs on fee-for-service payment.

Now everyone involved in healthcare is trying to figure out what will happen next. There’s the fundamental question of whether demand for services will bounce back - and how fast. Many healthcare economists see a near-term future of even more consolidation of providers, as doctors and hospitals with small financial reserves go out of business or get absorbed by larger providers. Consolidation usually leads to higher prices. Access to care may become even more difficult in rural and underserved areas if providers with weak balance sheets close their doors. 

The situation is far less acute for payers, who haven’t seen their revenues contract. Meanwhile, their expenses have dipped for the same reason that revenues of providers have fallen. But this doesn’t mean it’s going to be smooth sailing. Massive unemployment may lead to far less employer-based insurance and a major shift toward Americans covered by Medicaid and ACA health insurance exchange plans. The public dollar stands to become even more important to insurers, but the influx may put even more strain on state budgets - and reshape the politics around healthcare coverage.  

But there may be some winners. Value-based care with some aspect of capitation may hold more appeal to providers who have seen what happens when the spigot of fee-for-service revenue gets turned off. François de Brantes, senior vice president of Signify Health, says that employers and other payers may be able to get some price discounts from providers who are hungry for business. Patients may get some financial benefit if providers decide they need to offer some incentives for people to come back in to get routine or preventive care. And hardly a minute goes by without someone trumpeting telehealth - and remote care generally - as healthcare’s future.

Worst Month Ever for Hospitals

“You can’t even use the word historic because it is beyond historic,” says James Blake, managing director at Kaufman Hall, a management consulting firm in Chicago. “It was the worst month ever for hospitals.” Blake is referring to Kaufman Hall’s April 2020 National Hospital Flash Report on the financial health of hospitals, based on a representative sample of 800 hospitals. Some numbers behind Blake’s “worst month ever” assertion include a 61% drop in operating room minutes and a 50% drop in outpatient revenue compared with April 2019, and minus 23% in EBITDA operating margin. Meanwhile, hospital executives could not  cut back on expenses because they had to be ready for COVID-19 cases, even though in many parts of the country the onslaught never quite materialized. “They did the right thing,” says Blake. “They didn’t manage to the margin. They managed to being clinically prepared.”

Todd Rothenhaus, M.D., CEO of Cohealo, a Boston health technology company, notes that, “Healthcare, including hospital care, is high-cost, low-margin work. While a few health systems have fared well, most hospitals operate on incredibly thin margins. 

“The pandemic has only exacerbated these financial challenges. Health systems rely on elective surgeries to maintain a positive margin. Cancellation of these procedures means significant margin pressure and, for some hospitals, going out of business entirely.” He says health care executives will need to operate leaner, more efficient operations while not stinting on preparing for future pandemics. Going into this pandemic, hospitals had moved to just-in-time purchasing and “that all broke down within weeks of the pandemic,” says Rothenhaus. “The lack of a robust disaster-preparedness infrastructure in health care - one that should have augmented the supply of (personal protective equipment) or ventilators - will absolutely need to be addressed.”

Some commentators - David Blumenthal, M.D., president of The Commonwealth Fund, among them - have argued that large hospital systems with large financial reserves can weather the COVID-19 financial crisis and don’t need bailing out. In late May, The New York Times published a story about fund distribution of the coronavirus relief bill with the headline, “Wealthiest Hospitals Got Billions in Bailout for Struggling Health Providers.” But Blake at Kaufman Hall says if there are too many more months like April, “those great balance sheets will no longer be great balance sheets.” Blake also says some small hospitals were in good financial shape pre-pandemic. “They might not have a fancy fountain in front, but they have saved their money and they have a good balance sheet. To say that they should be penalized for having a good balance sheet coming into this ...”

Squinting into the future, one of the most immediate questions is just how soon demand for routine medical services will snap back. Blake notes that the April drop-off in hospital care, revenue and operating margin was universal and not confined to COVID-19 hot spots or states with stay-at-home orders. He sees a slow recovery and one that will depend on people’s perceptions. “How do hospitals make sure that they can protect both their employees and their patients and their visitors - and what are the procedures for that?” Blake asks, noting that, “This is true whether you are a restaurant owner or a store owner, but it is particularly true for hospitals.”  

H. Mallory Caldwell, Ernst & Young LLP transaction advisory services principal and U.S. healthcare strategy and operations leader, says health systems are preparing for a potential influx of patients and for a “new normal.” But because of the financial hit this spring, some are executing furloughs and layoffs and cutting executive compensation. 

The larger, perhaps quite bleak, economic situation will also have an effect, Caldwell observes. “The post-crisis economy will still be constrained, with elevated unemployment and decreased disposable income,” he predicts. And that, Caldwell adds, will mean a different payer mix: More patients covered by public payers (which pay at lower rates) or people possibly deferring care because of copays and higher deductibles.

Expect to see some tension between labor and management if the hospitals that are in financial trouble pare budgets, says Lyndean Lenhoff Brick, J.D., president and CEO of Advis, a healthcare consultancy outside of Chicago. “There’s going to be a real push and pull between the real need for healthcare providers to continually cut expenses and staff demands, which the response to the crisis warrants,” she says. “Labor will likely demand compensation for what they’ve been through and might face again at any moment.” Brick also foresees healthcare workers suffering from post-traumatic stress disorder if they were working in facilities with COVID-19 patients. Executives and managers will need to factor in
their need for mental healthcare and support. 

At the same time, many hospitals are, for the most part, emerging from COVID-19 with their reputations intact -and then some - as the front-line responders to the infectious disease that has taken more than 100,000 American lives. Blake says Congress and the federal government can get a “two-fer” by supporting hospitals.

“They can both have us be better prepared for the clinical (needs) - if we get a second wave in the fall. And it helps economically because in many communities, the hospital is the largest employer, and the last thing you want them to doing is laying off employees.”

Insurers Not Hit as Hard

The massive reduction in the utilization of healthcare services meant that in the short term, health plans had fewer claims to pay, although many have stepped up various advance payment efforts to help providers. And like providers, they are watching and waiting to see if utilization springs back. If it doesn’t, medical-loss ratio rules may kick in. The surge in telehealth and the relaxation of reimbursement rules may offset the drop-off in conventional utilization and claims. But there’s little question that, financially and otherwise, the payer side of the street has not been hit as hard as the provider side.

However, industry insiders predict that payers are facing challenges like everyone else. In hot spot areas, claims related to COVID-19 could present
operational challenges to even the most efficient organizations from a resource and staffing standpoint. “The payers will be under tremendous pressure to prioritize COVID-19 payments,” Rothenhaus says. “This will almost certainly result in delays in payments for routine and elective surgical procedures, which will have a downstream impact on the operating margins of hospitals and physician practices.” 

Caldwell says that insurers “have been bracing for a potential swell of COVID-19-related claims, as well as for the potential backlog of deferred care.” 

But payers are also looking ahead to an economic slump that, depending on its length and depth, could have a major impact on their revenues. “With an economic downturn,” notes Caldwell, “fewer employed individuals means a decrease in premiums and a decrease in per-employee fees for administrative services among commercial insurers.” In a mid-May report, the Congressional Budget Office (CBO) said the labor market during the second quarter of this year “is projected to see the steepest deterioration since the 1930s” with an unemployment rate of 15%, an increase from a rate of less than 4% in the fourth quarter of 2019. But CBO economists also saw some stabilization in the months ahead and economic conditions improving; for example, they projected a slight increase in the number of payroll jobs in the third quarter. According to a Kaiser Family Foundation projection, nearly 17 million more Americans may be eligible for Medicaid next year and another 6 million for ACA exchange plan subsidies, based solely on the job losses in March and April.

John Langenderfer, a senior vice president at Huntington National Bank in Cincinnati, notes that earnings reports from the publicly traded health insurers were generally positive for the beginning of the year. “Longer term,” he says, “their revenues may be impacted due to the loss of 30 million jobs, but for now, several of the public names have discontinued guidance of revenue and EBITDA, while others have guided to remain relatively flat.”

Brick at Advis expects a real outcry if relatively well-off payers don’t respond to the crisis. “The anger generated by Ruth’s Chris Steak House and Shake Shack taking the bailout ahead of the little guy is something payers should take note of and may have to face themselves,” she says. “They might see fewer insured, but there will be pressure on them to support the hospitals. That means reimbursement rates don’t get cut. They can’t hide behind the pandemic with claims of reduced profitability. A public demand will grow, forcing insurance companies to become social companies.”

The among the payers, the burden of COVID-19 may fall especially hard on public payers, Medicare and Medicaid. Age and socioeconomic status are two risk factors for COVID-19 and, of course, Medicare covers older adults and Medicaid, those with no or low income. 

“With a downturn in the economy and an increase in unemployment, Medicaid and other government insurance will be the recipient of many new ‘covered lives,’ adding extra strain to an already challenging set of economics for the government,” Caldwell says.

Brick believes providers may become more hesitant about participating in full-risk Medicare and Medicaid plans. “The depletion of the Medicare trust fund has likely been hastened. It was scheduled to run out of money in seven years, and now it will likely see lower payroll tax revenue, further slowing its replenishment,” she says. “The government was counting on reaping savings from provider participation in risk sharing. Providers are likely to conclude they’re already shouldering sufficient risk. On the plus side, telehealth may save the system some money provided that Medicare continues to allow its widespread use and doesn’t repeal the new relaxed regulations.”

De Brantes, though, thinks there are  some silver linings. Despite the further consolidation of providers that many expect, he sees a chance for more competition occurring, not less. “If you’re an ACO today, you’re going back to payers and saying, ‘Send me more (patients). I want more.’ And by the way, the deals that I made last year for the total cost of care for those patients, I’ll give you 10% off if you send me more patients.” The COVID-19 pandemic has laid bare the deficiencies of fee for service, and this competition de Brantes envisions (and lower prices) may nudge American healthcare toward payment that is more closely aligned to good results. “When you actually have to compete for value, you have a different mindset,” says de Brantes. 

Back to a Sound Economy 

Ashraf Shehata, partner, KPMG, says COVID-19 has generated a great deal of disruption in the healthcare and life sciences space and the broader economy overall, with some sectors laying off millions of people who are now seeking unemployment benefits. 

“The government is spending trillions to help the economy adapt to several industries being devastated by a loss of demand,” he says. “There are a lot of questions about what it will take for people to come back to work and what new reality will emerge.”

The availability of COVID-19 testing and standards for how frequently people need to be tested to return to work will be important. “We also need to know more about the virus itself, such as whether a patient has lifetime immunity from it or whether it can return,” says Shehata. Health systems, he continues, will be an integral part of the effort to help the communities disproportionately affected by COVID-19: “It will be a challenge as health systems themselves will face a high degree of employee difficulties and financial challenges.”

Government, academia and pharma companies need to work together proactively to reduce the impact of future pandemics, in Langenderfer’s opinion. “Vaccines have been historically underfunded with low margins and use technology that is difficult to produce and deliver quickly.”

It’s important to recognize that we’ll be emerging from this pandemic into an environment that is quite different from the pre-COVID-19 world. Health consumers will behave differently, healthcare economics will be challenged and everyone should have a shared interest in evolving the system of care.

“This health crisis has forced us to ‘unfreeze’ old ways of working,” Caldwell says. “We will have a limited window of time to reset our approach before we refreeze into a new normal. Healthcare and industry at large should take full advantage of this window to make fundamental improvements in our healthcare system, for both greater efficiency and effectiveness.” 

 

Keith Loria a freelance writer based in northern Virginia.

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