The Financial Peril Facing Healthcare In the Midst of The Covid-19 Pandemic
By Ellis M Knight MD, MBA
Most of our attention in healthcare over the last few months has been focused on the threat to public health manifest by the novel Coronavirus Pandemic. Unfortunately, there is another major threat now looming in front of us …The financial underpinnings of the US Healthcare system may significantly fail as the pandemic persists. This failure could lead to a worsening of the ongoing health and economic crises plaguing our country and push our healthcare system and the patients we care for into a truly dire and catastrophic situation.
The American healthcare system is predominantly built on a fee-for-service (FFS) payment system, where services are reimbursed on a case by case basis and those who can produce the most services — primary care office visits, surgeries, hospitalizations, etc. — receive the most renumeration for their work. While there has been some movement of late, particularly by government payers such as Medicare, toward a more value- based reimbursement system, providers have been slow to make the changes in their operating and financial systems to thrive in this type of payment model and commercial payers have been slow to push them to do so.
Next, it is important to remember that to make the predominant FFS system work more effectively, most employed physician providers are compensated through models which measure production of service volumes — number of patient visits, number of procedures performed, etc. Proxies for actual services and their billing codes, known as work relative value units or wRVUs, are tracked for each provider and then the provider’s compensation is determined by multiplying a contracted dollar amount per wRVU by the number of wRVUs performed. This then serves to align the dominant reimbursement model from payers (FFS) with the compensation model used by most physician employers (wRVU production).
Finally, certain healthcare services, such as surgeries or interventional cardiac procedures, are reimbursed at much higher levels than others, such as primary care or preventive services. This discrepancy results in a cross-subsidization process where highly reimbursed and thus highly profitable services are used to subsidize less lucrative services in order to achieve fiscal solvency across a healthcare organization.
THE LOOMING THREAT
The potential tragedy we are now facing has to do with the fact that the Coronavirus pandemic is growing as a threat to the well-being of the nation and its citizenry. Furthermore, the ability of the healthcare system, particularly hospitals and employed provider networks to meet this threat and remain financially solvent appears to be in great peril.
Despite some outlays of dollars from Congress, most organizations have weathered the initial onslaught of the Pandemic mainly through the courageous work of front-line workers and their willingness to sacrifice personal safety and profit in order to combat this virus and its protean manifestations as a variety of serious illnesses. The question now however is, how long will our healthcare organizations and their providers be able to continue this fight and at what point does the entire system financially collapse, leaving many without the support of medical professionals in a time of major threat to health, wellbeing, and even life?
Most healthcare organizations are now reporting major financial strains as they’ve had to shift resources, staff, beds, equipment, supplies, from their most profitable service lines into those needed to manage patients infected with Covid-19. Many hospitals have had to curtail elective surgical procedures in order to commit more resources to Covid care. As the pandemic grows exponentially it now appears clear that other organizations resilience and their ability to function and remain solvent may be at risk.
Consider, for example, a 200-bed community hospital that employees 100 physician providers in a relatively rural part of the country. In order to manage the number of Covid cases, they are now seeing, the hospital has had to cancel their elective surgery schedule and shift Covid patients into bed space, both general medical-surgical beds and critical-care beds, usually used for surgical or post-procedural patients. The curtailment of elective surgeries, has left them with a 30% shortfall in their revenue stream and a 21% increase in their expense budget, due to increased staff payments for overtime, staffing increases in the patient units which are now running at near capacity, purchase of PPE and other necessary equipment such as ventilators and enhancements to their technology to allow telemedicine visits to replace face-to-face visits in their outpatient ambulatory clinics. Given the above revenue and expense budget variances, this not-for-profit hospital, which usually operates on a slim operating margin of 1%, is now facing an operating margin of -50%. The hospital hopes that some of this loss will be offset by the funds received through the CARES act and other Federal support. This support, however, has not materialized and even if some funding comes through it is unlikely to allow them to realize a balanced budget. Unlike larger organizations, they have no financial reserves to tap into to pay for ongoing operations. To add insult onto injury, the number of Covid cases in their area is growing exponentially and there appears to be no end in sight to the spread of the disease. They, like others in the industry, must wait until an effective vaccine is developed and distributed — (a process which they will likely have to contribute even more resources toward in order to make happen. This hospital is also facing the very real possibility that the small amount of funding they’ve received up until now from government sources is unlikely to continue. Payments for very basic and necessary items needed to combat the virus, such as Covid testing, are being shut down by the Feds and the hospital knows that they will have to bear these costs since private corporations such as large laboratories are unlikely to provide non-reimbursed services. Finally, Governmental (Federal and State) and commercial health insurers have assured patients that they will not be responsible for paying for Covid care and many with this disease are now unemployed and without any coverage at all.
The question then becomes, how long will hospitals like the one described above be able to financially survive and remain open. They are contractually obligated to continue paying their employees including their employed physicians, many of whom can no longer generate much revenue. Their expenses are rising as testing, tracing, and vaccine distribution and delivery are shifted onto them from an already depleted state public health department, whose state funding is limited by a state constitution which mandates a balanced budget. In the end, bankruptcy and closure may be the only viable option, especially for the many hospitals like this in rural areas who are without large cash reserves and were in dire financial straits even before the Covid pandemic.
The other question concerns the proverbial healthcare heroes who up until now have truly lived up to this name, but how long will this line of defense last? While 7 PM serenades and salutes are nice and welcomed, at the end of the day we have to face the fact that even the most committed of these workers have limits and face family and personal responsibilities above and beyond their chosen professions.
Changing the rickety financial framework around which most healthcare organizations are now built will take time. Shifting from a volume to a value-based reimbursement model won’t occur overnight and the resistance to a single — payer, non -FFS, payment model is still high from politicians, providers, and perhaps most importantly, from patients (aka voters).
Will it take a financial calamity on top of the public health calamity we are now facing to finally stimulate long overdue changes in how we finance healthcare in this country? Unfortunately, that seems to be a likely prospect and one we should be considering as we face a very uncertain future.