Covid-19 could teach US hospitals some lessons, if they’re willing to listen

Where do hospitals go from here?
Where do hospitals go from here?
Image: Reuters/Mike Segar
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Covid-19 has been a paradox for US hospitals. They have been both overstretched in some departments, and rendered idle in others, and although in some cases they have seen increases in patient volume due to coronavirus outbreaks, they have by and large suffered significant financial losses.

Typically, the most profitable services hospitals offer are elective procedures, such as hip replacements or knee surgeries. They can be scheduled in advance, aren’t emergencies that require increased staffing or prolonged specialized care, and are often low-risk. These surgeries have a very high profit margin (up to 80%) and, alongside cardiovascular interventions, make up most of the profit for hospitals. On the other hand, infectious diseases and respiratory conditions such as Covid-19 have very little profit margin, particularly when patients require intensive care.

Where did the money go?

There are about 5,500 hospitals in the US. Of these, about 4,400 are privately owned, largely by chains. Most are run as non-profits, but about 1,100 are for-profit businesses. The balance are government hospitals such as those run by the Veteran’s Administration. Both for-profit and nonprofit hospitals are under pressure to make money—the former to turn the profit investors expect, the latter to break even. Money comes essentially from payments from patients—either copays, or bills paid out of pocket—and insurance reimbursements. Insurances set up rates with hospitals, and the margins of profit for providers vary greatly depending on the service offered.

Generally speaking, private insurers pay hospitals more for their services than do public policies like Medicare or Medicaid. So hospitals operating in affluent and urban areas, where patients tend to be younger, wealthier, and covered by private insurers, make more money. This means that when hospitals need to cut losses, their first resort is often to close nonprofitable locations, or cut low-margin services.

As Covid-19 outbreaks began spreading, many hospitals were forced to halt their outpatient services, including elective surgeries, either because they were forced to do so by government regulations, or to redirect their resources to the treatment of coronavirus patients. Even when such services were still available, patients often chose to defer them to avoid the risk of contracting the coronavirus. A study of routine mammograms, for instance, found they fell 58% in 2020 compared to the year prior.

Hospital revenues have also fallen because Covid-19 patients disproportionately belonged to poor and elderly populations covered by Medicare and Medicaid. Even though the government increased its reimbursement rates by 20% for Covid-19, it wasn’t in most cases enough to make up for the losses.

One of the paradoxes of the American medical system is that what is good for the hospital industry isn’t always good for health care. That’s one reason why all wealthy countries except for the US have public systems that provide healthcare even when it isn’t profitable. The fastest way for hospitals to get their finances back on track would be to cut on services that aren’t profitable—such as inpatient psychiatric care—or further reduce personnel (for-profit hospitals are already less staffed than non-profit ones). But that means patient care will suffer right when it is most needed.

There are, however, interventions hospitals can make that align with providing better service to patients, despite the wide range of healthcare facilities across the US. ”Hospitals are so different, if you’ve seen one you’ve seen one,” warns Robert Hansen, a professor of business administration at Dartmouth who studies hospitals. But while it is perhaps impossible to come up with specific recipes that would work for every organization, or even most, there are a few suggestions for what hospitals could learn from Covid-19 to make their business better—and their care better, too.

People would rather not spend time in the hospital

One of the changes that have become especially noticeable in 2020, is that even when hospitals began offering elective surgeries again patients avoid spending nights in the hospital. Whenever possible, people have tended to opt for outpatient services, which are significantly less remunerative for hospitals.

But it would be a mistake to think this is merely a Covid-19 related issue.  On the contrary, the coronavirus merely sped up a trend that was already beginning to pick up speed, says Paul Gardent, a professor of business administration at the Dartmouth Institute for Health Policy and Clinical Practice.

While some of the inpatient business might return after the pandemic, the overall trend is pretty clear, and hospitals should prepare for it, adjusting the services they offer and their revenue strategy so they aren’t as dependent on the (often premium) services they offer patients who spend the night in the hospital.

Increased availability of outpatient services—as well as at-home care—would also prove valuable should there be other situations when checking into the hospital carries a risk of infection.

In fact, they’d rather not go at all

A year ago, telehealth was just a little-used extra perk on a benefits menu. Now, it’s ubiquitous. For many hospitals, offering services via telehealth has been a lifesaver, allowing them to continue patient visits even as they had to halt them in person.

From mental health treatments to dermatology diagnoses, patients have become largely accustomed to seeing their healthcare provider remotely. The use of telehealth has increased exponentially. In March and April alone, according to industry research, at least 28% of healthcare users had accessed a telehealth service remotely, up from a mere 11% from the same period in 2019. Of those who did, 89% were satisfied with the service.

This isn’t going to go away once the pandemic ends. Telehealth is convenient for patients, and a big money saver—that is why projects such as Amazon Care invest so heavily in it.

During Covid-19, regulations on what providers could offer remotely were relaxed, and the healthcare industry is pushing for the government to make expanded access to virtual care a policy beyond the emergency.

But not all hospitals are equally equipped to provide remote visits. While large providers have the infrastructure and resources to switch to virtual care, many small hospitals barely have a digital presence, let alone the kind of set-up that could allow them to conduct their visits remotely. For them, investing in telehealth is imperative.

Move away from pay-per-play

The system of for-profit healthcare rewards volume. The more services and treatments are provided, the higher the bill. For years, the push to base incentives on value rather than on volume—that is, cut the incentives for providing more services—has mostly come from outside the hospital industry.

But Covid-19 has shown that a value-based system can be beneficial for healthcare providers, including hospitals, when predictable crises hit. Ahead of the pandemic, a few hospitals (typically, ones that struggled to keep afloat) had participated in experiments that required them to work with a fixed budget —paid by private insurers as well as Medicare and Medicaid—that wasn’t linked to the number of services they provided. Because of this, they didn’t have as hard a time surviving during a year when they couldn’t offer many outpatient services.

According to Guy David, a professor of healthcare management at the University of Pennsylvania’s Wharton School of Business, the movement from volume to value is inevitable. Yet, while Covid-19 might have shown there can be financial security in a value-based model, it’s too soon to say whether hospitals that weren’t struggling pre-pandemic will try to adopt it, or go back to their old pay-per-play model.

David also warns there is a risk in adopting a value model while merely focusing on the potential financial benefits, because taken to its extreme, it can reward inaction. “‘Volume’ sounds bad and ‘value’ good, but there is a tradeoff in both situations,” says David.

If, for instance, a hospital is guaranteed a fixed payment whether or not it provides services, it has an incentive not to offer them (for instance, by following up with patients who need screenings). Under that system elevating the healthcare of the community the hospital serves isn’t necessarily financially beneficial, at least in the short term. For this, David says, it’s important that the shift to value includes specific incentives, for instance, readmission penalties for people in the care of a hospital who have to go back shortly after being treated.