Unnecessary catastrophe facing US hospitals and health care heroes

U.S. hospitals are facing a perfect storm of consequences from the coronavirus pandemic. Their costs increased as they prepared for a surge of COVID-19 patients and many have had to deal with very sick patients who overtaxed their emergency departments (ED) and ICU’s. They have seen growing numbers of uninsured patients as many people lost their jobs and health insurance after companies across the U.S. laid off workers.  

A Kaiser Family Foundation study estimates that hospitals will admit between 670,000 and 2 million uninsured COVID-19 patients (depending on the assumed hospitalization rate) at an unreimbursed cost of between $14 and $42 Billion. In addition, the pandemic has disproportionately affected lower income people who were already uninsured or covered by Medicaid with its low reimbursement rates.  

The biggest source of financial injury for hospitals has been the loss of profitable elective surgical and diagnostic procedures for privately insured patients. Many fewer procedures were done because capacity was being reserved for COVID-19 patients and people cancelled their procedures for fear of catching the virus. A recent New Yorker article described the impact on patients’ health as well as hospital finances of delayed care and procedures. In addition, ED visits fell by 49 percent between January and April. The American Hospital Association estimated that U.S. hospitals lost $161 Billion in revenue over four months (March-June) as a result of cancelled procedures. A number of hospitals, especially small ones in rural areas, were already struggling beforehand and were further wounded by pandemic.   

Hospitals’ financial woes have had a devastating effect on health care workers. One report tracking furloughs indicated that 266 hospitals had laid off staff due to COVID-19. The Bureau of Labor Statistics reported a loss of 1.4 Million health care jobs in April including offices of physicians, dentists and other health providers as well as hospitals. We call health care workers heroes and salute them with sirens and flyovers, but many have been furloughed or had their salaries or hours cut as their employers attempted to staunch the financial bleeding experienced during the pandemic. This is an awful way to treat dedicated people who we expect to save the lives of others while enduring great personal risk themselves.  

These tragic consequences of the pandemic are totally unnecessary. They are an artifact of how we reimburse most health care based on the volumes of admissions, procedures and outpatient visits. In normal times, payment based on volume drives hospitals and other health providers to do more and higher costs result. When a pandemic or another unusual situation strikes and displaces the profitable elective work, these unfortunate impacts for hospitals and health care workers are profound and inevitable.

It doesn’t have to be this way. Other countries reimburse hospitals based on stable, predictable budgets rather than the volume of work they do. In Canada, for example, hospitals are generally funded through annually negotiated global budgets that set overall expenditure targets or limits. This global budgeting approach is just beginning to be tried in the U.S. Maryland began experimenting with global payment in 2010 and received approval for statewide implementation in 2014 based on its earlier results.  

Maryland’s experience has shown that global payment can save money and also enable higher quality care by helping to reduce potentially preventable complications and hospital readmissions. For example, global payment helped produce $586 Million in savings in Medicare hospital expenditures over the 2014-2016 period after it was adopted. With global payment, hospitals also have the incentive to work with other providers in their communities to prevent illness and reduce utilization, thereby keeping spending within their negotiated budgets. More limited applications of global payment for hospitals are underway in Pennsylvania, Massachusetts and a few other states. A pilot application of global budgeting by Massachusetts Blue Cross has shown promising results in reducing the rate at which health care costs increase and improving measures of quality.

Maryland’s experience with COVID-19 demonstrates how the pandemic’s unfortunate impacts could have been avoided by hospitals in other states. A Modern Healthcare article indicates that Maryland hospitals are doing well financially despite the coronavirus crisis. Even as revenue from elective procedures has evaporated, the state’s hospitals have been able to rely on a steady stream of revenues provided by their global budgets. There is also the potential under Maryland’s global budgeting system for increased payments for costs not under the hospitals’ control such as those entailed in caring for the COVID-19 patients. 

Federal government bailouts have fallen short as a remedy for the damage suffered by hospitals. There have been many complaints about disparities in payments to hospitals in different states and a failure of adequate payments to reach hospitals in COVID-19 “hot spots.” These immediate shortcomings in the federal bailouts need to be fixed, but we definitely need to restructure the way we pay hospitals. 

Global payment can provide benefits in normal times including cost containment and incentivizing collaborative efforts among providers to prevent illness. It will also make hospitals more resilient and health care workers more secure in unusual circumstances such as those we are now going through. Hopefully, this experience with COVID-19 will accelerate movement toward widespread adoption of global payment, a better way to reimburse health care in all circumstances.

Gary Hirsch, SM, is a consultant who specializes in applying System Dynamics and Systems Thinking in the development and program planning for health care organizations as well as educational and news media institutions. He is the co-author of three books and numerous journal articles.