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May 7, 2020

Avoiding a Health Care Financial Meltdown

Author Affiliations
  • 1Philip R. Lee Institute for Health Policy Studies, University of California, San Francisco
JAMA Health Forum. 2020;1(5):e200591. doi:10.1001/jamahealthforum.2020.0591

The coronavirus disease 2019 (COVID-19) pandemic has revealed gaping holes in the US health care system. Hospitals and physicians are struggling to address the rapid shift in the demand for services while hemorrhaging financial resources because in most cases, the primary business model anticipated a steady flow of fee-for-service payments.

Hospitals and physicians are already feeling the pain. Despite a rapid increase in the demand for services related to COVID-19, most other aspects of health care delivery have come to a standstill. Some of this was intentional, resulting from cancelation of elective procedures to create hospital surge capacity for those seriously ill with COVID-19. The reduction of services affects not only those physicians who directly provide these procedures, but also those involved in ancillary services. For example, use of imaging is projected to decrease by 50% to 70% over the coming months in association with COVID-19.

Less anticipated has been the decline during the COVID-19 pandemic in medical service use related to what is considered nondiscretionary care, such as that for myocardial infarctions and cerebral vascular accidents. The assumption, supported by reports of higher than usual in-home death rates, is that individuals are doing all they can, and even risking death, to avoid going to the hospital in the midst of the pandemic.

Health care practitioners have been resourceful, quickly shifting service delivery to telehealth where they have been able to obtain reimbursement from Medicare and other payers. But on a volume basis, it has not fully replaced pre-COVID-19 levels of ambulatory care services. Across the country, about 30% of ambulatory care visits are now furnished via telehealth, but the combined volume of in-person and telehealth visits is about 40% of what it was before the pandemic.

Losses and Layoffs

Health systems were rapidly expanding prior to the emergency of COVID-19 by buying physician practices, but now—during a public health crisis when physicians would seemingly be in high demand—health systems are laying off physicians and other health care workers to reduce expenses and address financial losses. Financial losses are resulting from significant reductions in patient volume combined with increased costs for supplies to support heightened demand for ventilators, telehealth, and personal protective equipment.

The situation is no better for physicians working in independent practices. According to a national survey conducted in early April 2020, 97% of the 724 responding physicians report a negative financial effect related to COVID-19. More than half of surveyed practices expected to lay off staff by early May 2020.

The federal government has taken some action to try to prevent a financial meltdown of the health care delivery system. As a part of a series of new federal laws, there are public funds directed toward hospitals and physicians. The largest amount was included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law on March 27, 2020. It created a $100 billion Public Health and Social Services Emergency Fund. On April 23, 2020, Congress voted to add another $75 billion to the fund.

Some of these funds are designated for the excess costs related to the treatment of COVID-19, but most of it is for financial losses hospitals and physicians are incurring by not being able to generate fee-for-service income from what had been their usual activities. Within 1 month of states issuing shelter-in-place orders, $30 billion was distributed from the Public Health and Social Services Emergency Fund to hospitals and physicians on a proportional basis (distributed according to their 2018 Medicare fee-for-service claims). There were no past or future service requirements for the receipt of these funds. To some extent, this initial outlay from the fund replaced much of what Medicare would have spent for a month of fee-for-service claims had COVID-19 not occurred. As the shelter-in-place orders are extended, the US Department of Health and Human Services has outlined plans to make additional outlays from the fund. In addition to using the prior expenditure patterns in Medicare, future outlays will target hospitals and physicians most affected by COVID-19, as well as those in more rural areas. Pediatricians, obstetricians, psychiatrists, and those who are part of the medical safety net whose reimbursement is less tightly associated with the Medicare program have largely been excluded from the federal support to this point.

While the public sector is attempting to stabilize the health care delivery system, private insurers have been notably absent. Like public programs, private insurers have absorbed unexpected costs related to COVID-19, but they must also have substantial savings related to the reduction in elective procedures and the widespread decreased demand for medical care outside COVID-19. By not maintaining their anticipated flow of funds to hospitals and physicians, private insurers are contributing to the risk of a health care delivery system financial meltdown.

A Fundamental Flaw of Fee-for-Service

Paying clinicians and health care facilities regardless of whether they provide services is a reasonable short-term strategy to stabilize the financing of the health care delivery system, but it is not sustainable and will not correct a fundamental flaw of fee-for-service payment. Fee-for-service depends on volume, not the value it delivers in meeting the needs of a population. The delivery systems associated with Kaiser Permanente and the UK’s National Health Service are not overwhelmed to the same degree as the US health care system as a whole. These systems may require additional funds to treat an unanticipated epidemic, but there is not the extra burden of having to bail out hospitals and physicians who rely on fee-for-service payments. Hospitals and physicians in these systems have already received budgeted funds based on the size and characteristics of their patient populations.

The allocation of funds from the Public Health and Social Services Emergency Fund untethered to actual service delivery is a step away from fee-for-service and toward a budget. Rather than retreating to a fee-for-service payment system after COVID-19, the time may be ripe to take additional steps toward a population-based payment system.

As a next step, all payers, not just public payers, should immediately contribute their fair share to ensure the financial health of the health care delivery system. Once payments are separated from services, payers should work to create aligned expectations for how to responsibly grow these budgets over time and to have hospitals and physicians demonstrate that they are using budgeted funds to furnish necessary services for a defined population of patients.

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Article Information

Open Access: This is an open access article distributed under the terms of the CC-BY License.

Corresponding Author: Andrew Bindman, MD, Philip R. Lee Institute for Health Policy Studies, University of California, 3333 California St, San Francisco, CA 94118 (andrew.bindman@ucsf.edu).

Conflict of Interest Disclosures: None reported.

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    4 Comments for this article
    Time For Implementing Widespread Payment Changes
    Stephen Shortell, PhD | UC Berkeley School of Public Health
    Spot-on commentary. Covid-19 has shown in stark relief the continuing perversity of fee-for-service payment. We need a "glide path" to risk-adjusted population-based payment in the form of full capitation or global budgets for care provided to defined population of patients. Some providers may not yet be ready to assume such risk but this is changing through a portfolio of technical assistance programs to prepare them with the care redesign and patient engagement strategies and skills to succeed under population health payment models.
    FFS Medicine may be ready
    Theodore Levin, MD | The Permanente Medical Group, Inc
    Fantastic commentary. The inertia around embracing new payment models has been as much due to physician reluctance as insurer resistance. The pandemic may finally tip the scales toward value-based capitated payments as the fee for service (FFS) model is unable to adapt to a global crisis. If short lived, there will be a strong pull to return to FFS. As the slow down drags on, more stakeholders will call for a change. Auto insurers are returning money to their insured as claims decrease. We don’t see health insurers doing the same thing.
    We Need Single Payer Improved Expanded Medicare For All
    Johnathon Ross, MD, MPH | Toledo Lucas County Board of Health
    If we had passed a Medicare for All system at any of the key opportunities that we had over the past 100 years, we would not be facing the issue of hospital or health care system financial instability. We could easily adjust to whatever disaster might befall us since the system would be adequately funded based on operating and capital budgets for hospitals and no co-pays, deductibles, narrow networks, and no one uninsured. The Covid-19 pandemic has shown us the folly of market forces as a method of financing basic human services like health care. Now is a time for caregivers to demand a health system based on public accountability and public health principles instead of greed and the profit motive. The current system has proven dangerous to front line caregivers and the rest of us.
    Value Base Care-Population Health
    Robert Schreiber | VP and Medical Director of Summit ElderCare
    This pandemic is providing the grounds for a sea change in our health system which may require a new Normal  healthcare system. Primary care provides and specialists have been moving toward value-based population health and now is the time to jump into this arena full force. As a PACE (Program For All-Inclusive Care for the Elderly) program in Central Massachusetts, we have global budgets and have been able to reverse engineer care for our community-dwelling older adults who are nursing home-eligible. Since we are globally capitated, we have been able to redeploy staff in novel and creative ways as we meet the needs for our population of frail and complex older adults. This cataclysmic disruption in our Fee for Service system of care is going to be permanent and this is going to force medical group and health care systems to go down an uncertain path around global budgets since there is no way to go back based on the public's concerns that hospitals, emergency departments, nursing homes and other sites need to be avoided until a system of care is in place that will protect staff and patients alike.

    It is not clear how healthcare providers and organizations will be able to survive without committing to going down this path.