The U.S. health care industry has often been referred to as “recession-proof.” 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.
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.
First, the scale of job loss is greater. By mid-April, 55% of Americans reported losses in income due to pay cuts or job loss. The imperative to shelter in place has taken a tremendous and disproportionate toll on small businesses, which employ approximately 50% of the private-sector workforce. Many of these firms are in severe financial distress, and surveys suggest that a majority may never reopen if social distancing continues into the summer.
Second, the 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% to 30%.1 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.
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.
This model of disproportionately relying on private insurance has evolved gradually over the past 20 years and grown substantially since the Great Recession. In 2000, the American Hospital Association estimated that private payers compensated hospitals at 116% of costs.3 By 2008, the same group reported that such compensation had reached 128% of costs. A new report based on 2017 claims data from private employers in 25 states suggests that hospital systems charge commercial insurers an average of 208% of costs, with many charging substantially more.4 These changes mean that shifting 10% of privately insured patients to Medicaid would result in a loss of revenue of 3.2%, whereas in 2000 it would have cost hospitals only 0.8%.
Although the Affordable Care Act has expanded health insurance coverage, the increases have not cushioned hospital finances. First, the share of hospital expenses from uncompensated care has decreased by less than 2% since 2000.3 Second, hospitals report that increases in utilization by Medicaid patients often do not add to hospital margins. And third, marketplace plans reimburse at a level more consistent with public insurance than with their employer-based counterparts.
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.
Hospital Profit-Margin Sensitivity to Changes in Insurance Source.
Estimates assume that any reductions in private-payer market share correspond to increases in Medicaid share if the reductions result from job losses, whereas reductions in market share due to cost aversion result in lost revenue. We assume an initial profit margin of 7.8%.3 Initial shares of each insurance type are from American Hospital Association data.3 Relative reimbursement rates of private and public insurance were obtained from a Rand survey.4
Overall, we estimate that hospitals will lose $95 billion in annual revenue because of the shift from public to private 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 (see chart).
Our estimates are independent of any short-term loss of revenue from the care of patients with coronavirus, restrictions aimed at preventing the spread of the virus, and lost investment income. Many more patients will delay obtaining care, fearing that hospitals will be sites of exposure. In addition, hospitals may have to compete for patients who have become accustomed to telemedicine for certain services and may lose associated revenue from facility fees and ancillary services. This new price sensitivity may require hospitals to adopt new practices in the short term, such as eliminating cost sharing or providing coupons to restore revenue from insured patients.
Though the current crisis is unprecedented in terms of its scale and cause, the underlying economic issues would have surfaced with any substantial perturbation of the economy. We are not entering this crisis with the same health care system we had during the Great Recession. Even with more people insured today, the increasing prevalence of high–cost-sharing plans and the widening gap between private and public payers each threaten access and create cracks in a previously recession-proof industry. As the financial crisis grows throughout the health care system, policymakers will have to grapple with the question of whether it’s in the public interest to bail out organizations that adopted anticompetitive strategies that put hospitals in this financial situation in the first place. It’s hard to imagine creating the conditions for thoughtful policy analysis in the middle of this crisis, but that will be essential to achieving a sustainable health care system in the post-Covid world.
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July 02, 2020 at 04:00AM
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