Healthcare may be Recession Proof, but has Proven not to be COVID-19 Proof
COVID-19 took the world by surprise, including the US.
The US Healthcare system, large as it is with over 1 million physicians, almost 3 million nurses, about 5,500 hospitals, and the highest budget in the word for drug research ($80 Billion in 2018), was not ready for such a pandemic.
The impact of COVID-19 on the Healthcare industry
- Most elective procedures have been cancelled – surgeries, diagnostic procedures such as radiology, gastro-enterology, and lab workups. If not “an emergency”, then doctors have chosen to not expose patients and providers to the potential of COVID-19 contamination.
- This has significantly impacted the revenue of hospitals: surgical cases represent approximately 30% of total hospital admissions, but 50% of revenue, and they tend to be more profitable than medical cases.
- Many providers focused on non-emergencies, have been idled, or reduced to minimum activity levels. Furloughs have been drastic, commonly between 10% and 20%, but often 30% or more of hospital employees.
- The front lines have been hit hard by COVID-19:
- Personal Protective Equipment (PPE) has been severely lacking. Normally, the US Hospitals use 22 Million N95 masks per year. At the end of March, a study revealed that the US would need 3.5 Billion N95 masks, and only 35 million masks were available then. A lot of PPE had to be imported, most of which comes from China.
- Treatment equipment has been lacking too. The US Strategic National Stockpile had almost 17,000 ventilators, but just New York City alone estimated that it needed 15,000 ventilators to supplement the existing ones in NYC. GE, 3M and Ford had to adapt their production lines to build ventilators.
- Potential contamination has pushed healthcare workers to separate from their families to avoid the risk of contaminating their loved ones.
- Actual contamination has put many healthcare workers at minimum in quarantine, often in hospital beds, while trying to recover from the various health issues triggered by the virus.
- Finding new frontline workers has not been easy:
- Urgent and emergency care workers have been in high demand, stretching beyond the availability of “traveling professionals”.
- Some states have relaxed license state-crossing restrictions for essential workers (beyond profession compacts that allow healthcare professionals to work within a group of states.)
- Some states are allowing nurse practitioners to operate primary care practices without an attending doctor and leading to retired healthcare practitioners to get back to work, as long as their license is in good standing.
What does this all mean?
- Revenues have dwindled for many Healthcare providers, including facilities (hospitals, care centers, radiology centers, labs) and professionals (surgery or procedure doctors, nurses, and support staff).
- Profitability is turning negative:
- For a hospital, it does not take much to turn the average profitability of 5% to negative. Furthermore, at least minimal surgery capacity, and therefore staffing, still needs to be available for emergency situations, which further erodes the hospital’s profitability.
- The “disadvantaged” population has been hit the hardest, resulting in revenue per case being even lower.
- Surgery/procedure healthcare workers are idle or operating at way below capacity.
- There is pent-up demand for elective procedures, but when is it possible to start scheduling these? Is it safe for patients and for professionals to start doing these?
- Healthcare plans have not been in the news. On one hand, they are covering many COVID-19 victims. On the other hand, they don’t have to cover elective procedures since these have been put on hold. But this may be short-lived.
- Telehealth has enjoyed quite a success – people still get sick, still need to get diagnosed and potentially still need to be given medications or treatments. Even if a patient does not have COVID-19 symptoms, he/she should not go to where the risk of getting a COVID-19 contamination is among the highest, e.g., medical office, emergency room, or urgent care center. Even more so if the patient does have COVID-19 symptoms, thereby potentially contaminating other patients and/or clinicians and support staff. Instead, if available, the patient can request to have a telehealth appointment with his/her physician. Telehealth had been growing steadily over the last few years, but with the COVID-19 pandemic, its use has exploded. Even the government is supporting it, as the FCC has funded a $200 million telehealth program, and has been asked for more funding.
What lies ahead?
It will not be easy for the Healthcare industry to return to a normal state, and the new-normal needs to address several situations.
First, patients who have been on hold for elective procedures are wondering when it will be safe for them to go to a health center. When they go through potential tests (e.g., lab, radiology) prior to the procedure, through registration, then through the procedure itself and recovery, how do they know that all these environments are safe? It is not only the facility (physician office, lab, health center), or equipment and tools used, but also the administrative and clinical staff of the health center, and the other patients. It is therefore essential for the various facilities to implement procedures to avoid contamination:
- Social distancing.
- Segregation of contaminated patients, not only in specifically-designated hospital floors or in separate buildings, but also through the procedure environment.
- Continuous cleaning of the environment.
- Communication to patients about safety.
- Demonstrated performance of no contamination.
Unless a postponed elective procedure becomes urgent or emergent, i.e., significant worsening of the patient’s condition, patients are going to be leery about scheduling and going through a procedure until they know that it is truly safe for them to do this. Here lies the big question that drives a lot of the “getting back to business”: how long will this take? Should a hospital, a surgical center, or a GI lab plan for full capacity right away and hire back all the furloughed staff, or should they wait to see how strong demand will be? Considering the historical shortage of clinicians, if these health centers wait too long, they run the risk of not being able to hire when patients decide that it is safe for them to go for their procedures. After weeks or months of having been furloughed, and in light of an uncertain climate for the speed of the restart of the economy, clinicians and support staff will tend to go for the first job being offered to them.
In addition, supply chains have been heavily disrupted; the health centers may need to wait for some time before they can get supplies and equipment needed for upcoming procedures. As their financial situation may not be great after several weeks of low or no activity (e.g., surgical centers) or of minimal surgeries or procedures (e.g., hospitals), health centers need to start ordering through their supply chains at the same time as they ponder how many staff members to bring back to work.
Let us look at two perspectives of the healthcare industry – the hospitals and the physicians. There are several other healthcare sectors that are impacted, but these two sectors are at the center of the restart conundrum.
In general, as mentioned above, hospitals are in worse shape now as a result of the COVID-19 crisis. Their surgeries and other procedures are almost inexistent. In case of emergencies, hospitals have had to maintain the capability to handle this minimal volume, at an expense greater than the revenue. Their medical beds have been focusing on the COVID-19 patients, and their surgical beds have been empty. They have furloughed a large number of their staff.
Here are some questions the hospitals are going to face while reopening for “normal business”:
- How to isolate COVID-19 patients, not only for their care, but also for the process of diagnosing and admitting (i.e., triage as early as possible, and then totally separate track for COVID-19 patients), and convince other patients that the hospital is safe?
- How to predict the speed of “normal business” coming back, and of the pent-up demand for surgeries and procedures to be scheduled?
- How to work the supply chain for these procedures?
- How to update their policies and processes (P&Ps), especially considering the huge advance of telehealth for pre- and post-procedure activities? How to work with the medical staff on these P&Ps, and modify the environment for the space and technology required? How to include telehealth in the strategic plan and in the revenue & expense model, and how to adjust the budget? Note that telehealth can greatly expand the reach of a hospital and its medical staff, e.g., homecare, nursing homes, skilled nursing facilities, and even joint consultations with multiple specialists for complex cases. In areas of fierce competition between hospitals, the hospital that builds such telehealth capabilities will garner a significant competitive advantage.
- How to cover for these restart expenses while cash has been drained, and while revenue is still down?
Some hospitals, mostly large well-run integrated delivery networks that have leveraged their “systemness” to attain leading-practice efficiencies, will be financially fine to tackle their restart. However, many hospitals are going to struggle and will need to look at joint ventures or at mergers or acquisitions for financial help. Some of the stronger hospitals will be able to join large organizations such as Tenet, HCA, or CHI. However, many other hospitals will need to form alliances of one form or another to:
- Fund their restart, or gain size to pool resources.
- Drive operational design (e.g., telehealth) or reengineering to enhance revenue and/or decrease costs, while making their offerings more appealing to patients.
- Think “system”, rather than stand-alone facilities, and revamp their service offerings. Conceptually, two hospitals in proximity may be able to become one OB Center and one Cardiology Center, rather than each being a jack of all trades. This will require significant work not only with their facilities and their combined medical staff, but also with the health plans for contracts, and with the community at large to communicate the patient-focused changes.
- Following the combination of stand-alone facilities into a “system”, it is also vital to keep in mind the medical effectiveness to attain leading practices of demonstrated quality at the lowest cost possible. It has been proven time and again that, in healthcare, high quality and low cost often go hand in hand. Also, it is vital to standardize to the extent possible, and merge the supply chains to leverage size and therefore strength to renegotiate vendor contracts.
- While hospital administrators are going to look at their operations and cash situations, they also need to strengthen their relationships with their medical staff. Many physicians are struggling through the COVID-19 crisis, financially for most, and physically and mentally if they are serving the needs of COVID-19 patients with a dearth of personal protective equipment. It is extremely important to communicate with the physicians, let them know you understand their situations, form committees to address concerns, and be ready to help, if possible. Without a medical staff (e.g., if physicians move en-masse to a competitor that offers them “a good deal” in terms of financial help or telehealth implementation), or without a strong sense of partnership from the medical staff, hospitals will face an uphill battle to reengineer processes or to drive for clinical excellence. Change is best addressed through a strong partnership.
Which hospitals are the most vulnerable? Even before the pandemic, some 800 rural hospitals were facing serious financial issues. The COVID-19 virus has stretched these small hospitals in terms of not only capacity, but also reimbursement as many patients are either uninsured, or covered by Medicaid which is known for its low level of reimbursement. Up to 100 of these hospitals are deemed at risk of closing within one year. Tennessee-based Quorum Health, which operates over 20 rural hospitals in 13 states, filed for bankruptcy in April 2020. This demonstrates that, even if these small rural hospitals organize under a corporate structure to garner the benefits of a larger system, it might not be enough. The communities where these hospitals are located, are not able to financially shoulder them. Two potential solutions exist: a special state or federal aid, or a reliance on a geographically distant hospital combined with telehealth for diagnosis, care, and follow-up.
As we inch toward an economic restart, cash is king. Alas, for many hospitals, cash is running out. And a strategy for a joint venture or a merger will take time – perhaps too much time considering today’s cash realities. Regardless of their situation and of their strategy moving forward, hospitals need to look everywhere to “squeeze cash out” wherever possible:
- Renegotiate contracts with payors, especially for their COVID-19 patients who may be staying in the hospital much longer, and with care needs (e.g., ventilator) much higher, than a normal patient with respiratory distress. Many contracted payments are per case, which do not compensate hospitals for the consistently longer length of stay or higher level of care for these patients.
- Work with payors to accelerate payments on accounts receivable, to obtain a cash deposit toward future cases, and/or to reduce denial rates considering the pressures of the pandemic.
- Look for grants, or low- or no-interest loans, from local, state, or federal governments.
- Negotiate an extension of late payments with no penalty with their supply chain vendors.
- Put all expansion or renovation plans on hold.
- Work with workforce (including employed physicians) to agree to temporary salary reductions.
It is quite difficult to draw conclusions for the impact of the COVID-19 virus on physicians – each physician might have a different situation in terms of employment or contracts (e.g., fee for service, capitation, or work-units for employment) that he/she has with hospitals and/or with payors. There is a myriad of arrangements that will determine the impact of the virus on physicians. However, at a high level, the situation for physicians may seem to differ depending on two main dimensions:
- Whether they are employed or in private practice.
- Whether their specialty is surgical / procedure driven, or medical.
Most medical, non-procedure driven physicians are on overload, whether employed or in private practice. They see patients in the hospital during their rounds, they diagnose or follow-up with patients over telehealth (COVID-19 patients or not) and continue to be very busy. However, like the hospitals, their financial well-being depends on the payor-mix of their patient populations, and on the contracts that they have with the various payors. If a patient is covered by a commercial payor, the attending physician has a better chance of getting a decent payment for his/her services. However, if a patient is uninsured or covered by Medicaid, then reimbursement will be minimal. With the underserved population having been hit particularly hard by the COVID-19 virus, most medical and primary care physicians are going to be experiencing a decrease in the ratio of reimbursement over their higher-than-normal level of services.
If a physician is of a surgical specialty, then his/her level of activity has been reduced to a minimum potentially to take care of urgent or emergency situations (e.g., surgery due to conditions such as cancer or following an accident), or to address upcoming patients’ needs (e.g., patient will need to have a hip replaced), most likely via telehealth. Most contracts in employed physician networks, or in physician employment by hospitals, tie compensation to each physician’s level of activity.
Overall, medical physicians are most likely faring much better financially than their surgical or procedure-driven counterparts, regardless of whether they are employed or in private practice. So, what can all physicians do, in preparation for the lifting of the lockdown?
- Ensure that their contracts are properly updated for telehealth activities, with proper reimbursement levels for telehealth visits now that telehealth has surged so much so quickly. For many physicians, telehealth will no longer be a small part of their practice.
- Work with their hospitals (employment or affiliation) to secure financial support to the extent possible, and support for telehealth to be set up or enhanced both in their practices and/or in the hospitals depending on their set-ups and on their specialties.
- Continue to seek patients that will need a surgery or procedure to be performed after the lockdown is lifted. Establish strong wait lists, and communicate with patients on a regular basis to let them know that you are thinking about them – and to enquire whether their condition has worsened, which may push them into the urgent or emergent category.
Certainly, both mainstays of the Healthcare delivery industry, hospitals and physicians, have been heavily shaken by the COVID-19 virus; in particular, their financial situation has been severely impacted, sometimes to the point of bankruptcy. In addition, the restart is not as easy as flipping a switch, but it is important to realize that there are many opportunities to clearly identify and follow upon in the restart, such as:
- Can hospitals and physicians plan their futures together in a more tightly woven partnership that addresses immediate (cash) and longer term (leading practice) needs?
- Can hospitals offer loans to physicians?
- Can hospitals buy the physicians’ practices?
- Can hospital partner with physicians on building a telehealth network?
- Can physicians support hospitals to become centers of excellence in terms of care quality and costs?
- How can a specific hospital, and its committed medical staff, strengthen their position in the marketplace?
- Can a merger or a joint venture make a facility available to COVID-19 patients now, and later for infectious patients?
- What other healthcare sectors can be connected through a comprehensive telehealth strategy?
- How can contracts with payors be renegotiated to secure adequate payment for future situations including telehealth?
Certainly, at a time of financial crisis, there is a lot to think about – and quick action may be needed. With creativity and hard work, thought leaders and consultants can help hospitals emerge from this crisis, potentially stronger than ever.
About the Author
Patrick Bastar has 30 years of diverse Healthcare experience. Patrick builds strong relationships with his clients in order to understand their needs, and thrives on delivering quantifiable results in line with these needs. As a management consultant, he helped hospitals and IDNs re-engineer operations to reduce costs (5% to 12% of operating budget), improve quality of care, and enhance service to patients and families. Also, he worked closely with clinicians including physicians and nurses to collaboratively bring significant change to their organizations, e.g., staffing, resource utilization, length of stay. He assisted two health plans to reach and demonstrate to DHHS their readiness for managed care Medicaid service delivery. He worked with a Diabetes Disease Management organization to define their strategy and prepare for operational readiness to deliver to multiple payor contracts. Mr. Bastar also led the development of a PMO service within a large IT vendor, including hiring and training up to 40 program managers and ensuring the quality of their services. Mr. Bastar holds an MBA and an MS Engineering, both from UC Berkeley.