February 23, 2023

Last in Line: Hospitals Brace for a Chilly 2023

As they emerge from the COVID pandemic, US hospitals have a terrible case of Long COVID.  They experienced the worst financial performance in 2022 in this analyst’s 47 year memory.  As the nation recovers from the worst inflation in forty years, hospitals will find themselves locked in conflict with health insurers over contract renewals that would reset their rates to the actual delivered cost of care.  “Last in line” in the US battle with inflation, hospitals will be exposed to public criticism when they attempt to recover from pandemic-induced financial losses. 

Hospital payment rates for commercial payers are backward looking. Commercial insurance contracts between hospitals and health insurers were multi-year contracts negotiated before the pandemic.  They continued in force during the pandemic, despite explosive rises in people and materials costs.    As a consequence, health costs were conspicuously missing from the main drivers of the 2021-22 inflation surge– food, housing, energy, durable goods, etc.    

Hospitals’ operating costs blew up during COVID due to a shortage of clinicians, the predations of temporary staff agencies, shortages of supplies and drugs and crippling cyberattacks that disabled their IT systems.   Hospital losses worsened during 2022 because they are unable to place patients who are no longer acutely ill but who cannot be placed in long term, psychiatric or home-based care (a problem shared by Britain’s disintegrating National Health Service).   Thousands of patients are stuck in limbo in hospital “observation” units, for which government and commercial payers do not compensate them adequately or at all.   

Hospital Finances were Damaged by the Pandemic

Hospitals were, effectively, partially nationalized during 2020 by government mandated or voluntary suspensions of elective care to accommodate COVID patients.   In partial compensation for the resulting losses, hospitals received massive federal assistance from the CARES Act.  The disruption in normal hospital operations was severe enough that CARES funding accounted for a shocking 43% of hospital operating cash flow during 2020, according to Moody’s Investor Service    As the pandemic continued in 2021 and 2022, and federal aid dried up or needed to be repaid, hospitals experienced widening operating losses.

In contrast, health insurers were big financial winners during the pandemic.  The cessation of normal caregiving produced multi-billion  windfalls for health insurers, particularly in the spring of 2020, as their medical expenses fell sharply.  Health insurers profited while hospitals were on the federal ”respirator” and have neatly avoided the post-pandemic cost surge with fixed price contracts. 

Healthcare Cost Pressures Did Not Abate During the Pandemic

Overall, healthcare price increases , and hospitals’ prices in particular, have trailed the Consumer Price Index for almost two full years.  Healthcare spending will likely end up 2022 at around 17% of GDP, the lowest level in fifteen years.  Hospitals actually accounted for a smaller share of US health spending in 2021 (31.1%)  than they did a decade earlier.  By comparison, In 1980, hospitals were over 41% of US health spending!  

Costs, however, are very high.  Half or better of those costs are people costs, which people are in increasingly scarce supply.  Most health systems today are reducing their non-clinical staff but remain desperately short of clinicians.  They have no choice but to pass those higher people costs onto those who pay for care. Otherwise, we will see hospitals close, and if the historic patterns hold, those closures will be concentrated in areas we can least afford them- rural areas and small towns, and the nation’s inner cities.  

The US is not over supplied with hospital capacity.  Indeed, some observers argued that bed capacity was dangerously low for societal needs during the pandemic.   At 2.4 beds per thousand, the US hospital system is far below the bed capacity target of 4 beds per thousand set in the 1970’s US health planning law, and less than half of bed capacity in Germany and France. And despite concerns about excess utilization,  at about 565 bed days per thousand in 2021, hospital utilization in the US is the among the lowest in the OECD countries and is continuing to fall as more care migrates into outpatient settings and the home.  

Hospitals Must Do a Better Job of Telling their Story

The grim reality is that  hospital systems were basically all we had for public health infrastructure during the pandemic and we will certainly need them again in future crises, whether another pandemic, mass shootings or hurricanes.    If hospitals are to obtain higher rates from the government and commercial payers, they must justify them by sustained and aggressive cost containment activity.

 Hospitals must also demonstrate the value of the public service they perform and the value for money relationship of the care they provide for their patients. And-a point of emphatic agreement with the critics-  there is no valid excuse for non-profit hospitals not putting back into their communities tangible benefits that exceed the value of their tax-exemption. Above all, their leadership must remain humble and constructively focused on the communities they serve.  They have to do a much better job of explaining, in accessible and human terms, what they do,  why their care costs so much, and what they are doing to make care more affordable.

Originally published on STAT.

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