A new analysis published in The New England Journal of Medicine predicts dramatic revenue losses this year for U.S. hospitals, as much as $128 billion, because of a combination of an anticipated shift from private to public health insurance, and “cost-aversive behaviors, by the privately insured.” In an article entitled “Are U.S. Hospitals Still ‘Recession-proof’?” Ben Teasdale, M.Phil., and Kevin A. Schulman, M.D. looked at a complex web of elements combining to make hospitals in the United States uniquely financial vulnerable during the ongoing COVID-19 epidemic.
“The U.S. health care industry has often been referred to as ‘recession-proof,’” the researchers write. “Historically, this characterization has held true. During the Great Recession, the numbers of health care jobs and national expenditures rose consistently, despite substantial cuts in other sectors. But the current economic crisis brought on by Covid-19 is clearly different: 1.4 million health care jobs were lost in April alone. It is tempting to attribute the industry’s current fiscal position to unique threats imposed by the virus: the economic consequences of delaying ‘nonessential’ services, for example, undeniably stem from this recession’s infectious origin. Yet a focus only on the novelty of this pandemic ignores key changes within hospitals’ cost structures that have led us to this economic precipice. Hospitals were vulnerable to economic downturns before the first cases were detected in Wuhan and, barring a correction, will remain so long after the epidemic runs its course.”
Importantly, the authors emphasize, “One of the factors that held health care spending constant through past recessions is that patients were insulated from costs, which made demand for care what economists call “price inelastic.” The assumption that this dynamic holds true today underpins the widespread optimism that volume will rebound once facilities are reopened. The health care industry’s resilience during past economic downturns, however, relied on comprehensive insurance coverage. On that front, the world has changed substantially since 2007.”
Among other factors, the researchers note, is the scale of the loss of jobs and income, with 55 percent of Americans having reported income losses due to pay cuts or job loss; what’s more, they note, “[T]he percentage of firms offering their employees high-deductible health plans, which discourage people from accessing care by requiring higher out-of-pocket payments before the benefit kicks in, has increased from 5 percent to 30 percent. Even people with continued coverage will find it financially challenging to use health care services under these plans. With widespread income loss, an insurance landscape in which patients are increasingly asked to share in the cost of care (even for more traditional types of coverage), and the threat of surprise medical bills from out-of-network providers, it’s not clear whether health care utilization will remain constant.”
Perhaps even more significantly, the researchers note, “Further effects of the Covid-19 crisis stem from the financial implications of shifting a substantial portion of the U.S. population from employer-based private insurance to Medicaid, which provides lower reimbursement per patient. Whereas the government sets payments for public insurance on the basis of the cost of providing care at an “efficient” hospital, private payers must negotiate their prices. Since the outcomes of these negotiations are largely determined by competition, practice consolidation has allowed hospitals to drive substantial price increases.2 Hospitals in many markets have become highly leveraged businesses, built to thrive on the margins available from commercial health insurers for elective procedures (rather than for primary care). Many have developed cost structures for clinical services that ignore the ‘efficient’ price of care set by public plans, driving a wedge between hospital costs and public payments.”
Alarmingly, the authors write, “Since the pandemic began, 40.8 million Americans have lost their jobs. Available data on employer-based coverage suggest that this increase in unemployment could represent a loss of up to 20% of the commercial insurance market—32 million of 157 million people. Calculating the exact effect of job losses on insurance coverage is challenging: although not all employees rely on their job for insurance, others rely on their job for covering their family as well as themselves. If all people who have lost their private insurance instead enroll in Medicaid (an optimistic assumption, since some states still have not expanded Medicaid and some may place restrictions on the program because of their own financial crises), and if use of privately funded health care services declines because of cost aversion (price elasticity), hospitals will find themselves with a long-term financial challenge.”
As a result, the researchers note, “Overall, we estimate that hospitals will lose $95 billion in annual revenue because of the shift from private to public insurance and $33 billion owing to cost-aversive behaviors by the privately insured (assuming a 5% decrease in utilization).5 Combined, these losses will lower profit margins from their previous 7.8% to −1.7%.3 Furthermore, hospital executives have already responded to short-term impacts with layoffs, furloughs, and pay cuts. If these are the main responses to losses in revenue, we predict that an additional 190,000 jobs could be cut in order to regain positive margins, or 1,050,000 to maintain current profit margins (assuming a rate of $100,000 per full-time equivalent). Given the uncertainty involved in predicting insurance coverage and patient demand, we have provided a two-way sensitivity analysis showing how hospital finances are affected by the loss of private health insurance and price elasticity.”
