By Adam Block, Ph.D., Kevin van Dyke, MPP, and Leah Dillard
On April 27, 2020, the Supreme Court of the United States handed down an 8-1 decision granting health insurers $13 billion owed by the Federal government in risk corridor payments, a commitment made as a part of the ACA and then later defunded. On top of this ruling, the preliminary evidence shows that we are seeing the first hints of what is likely to be the most profitable year in health plan history. At the same time, hospital earnings are declining. Since preliminary numbers are only through March 2020 and shutdowns were only in full effect in most places by the last week in March, we expect the effects on hospital earnings to be substantially deeper going forward. The average net income of insurers increased by 20% while the hospital net income decreased by 11% on average across the four publicly traded hospital systems.
What is happening to hospital income?
In a worldwide pandemic, where hospitals are publicly scrambling for adequate staff, beds and equipment, one would expect hospitals and provider offices who are treating patients to be in good fiscal health.
However, the opposite is true. Although in certain hotspots, like Seattle and New York, many of the hospitals are full of patients, all non-acute visits and procedures, including hip replacements, interventional cardiology and even a portion of oncology treatments, are being delayed to minimize risks to patients and staff. The US GDP dropped about 5% in 1Q2020, nearly half of the economic decline was due to reduced national health care utilization.
As a result, we have seen 1Q20 net income of four publicly- traded hospital systems dropped, an average decline of 11%, and these are the hospitals most able to handle the financial strain expected in the second quarter. The financial performance of other hospitals is following a consistent pattern. Becker’s Hospital Review reported in April that in one hospital Oregon, discharges dropped 40% to 70% and 191 hospitals are furloughing workers., Some hospitals are already experiencing very real fiscal problems and are considering extreme options in spite of being in the middle of a pandemic.
Where is the revenue going?
Hospital foregone revenue is revenue that is not going from health insurers to hospitals. This revenue is accumulating as a huge windfall at health insurers in their fully insured plans (with employers funding self- insured plans retaining reduced spending in these plans) with five health plan showing an average of 20% higher earnings in 1Q20 relative to 1Q19. Health insurers are admitting this, at least to their investors. Humana said during their 1Q20 call on April 29, 2020 that most of their earnings for the entire year would come in the 2nd quarter. Health plans are continuing to collect full monthly premiums, but for most of March and all of April into early May, have very little in non-emergent spending as has been implied in the financial reporting fo the large for-profit health insurers.
How are hospitals, health plans, and other stakeholders reacting?
A few responses from health plans will likely be that:
- COVID-19 brings in revenue.
While this is true, but COVID-19 peaks in hospitals are short-lived and afterwards, hospitals beds are empty for long periods as elective procedures remain delayed.
- Patient care is being delayed, not cancelled, and there will be pent up demand coming back in later months.
While the magnitude is unclear, Milliman projected a reduction in health care expenditures of $75 billion to $575 billion in 2020 as a result of the pandemic, with commercial insurers seeing a net reduction of $100 billion to $300 billion in nearly all scenarios. Others agree, an article in the New England Journal of Medicine cited, “a substantial fraction of care that has been ‘deferred’ may never happen in the future, depressing revenue for many months to come.” Therefore in 2020, a large percentage of visits will not occur and health plans keep all of those dollars.
- Health plans are accelerating payments to help shore up hospitals.
Accelerating payments is necessary but insufficient because it is merely an advance on revenue, not new revenue. This is like telling an unpaid intern you’ll double their pay. It has essentially little long-term impact on total revenues for providers or the windfall insurers will be receiving. This is very different than the CARES Act revenue that Medicare is providing directly to hospitals.
Instead of distributing windfall profits as dividends to shareholders from the safety of their own home while watching providers who selflessly treat COVID-19 patients at great personal risk also suffer financially, health plans can volunteer to do more to help. A few things health plans can elect to do are:
- Provide monthly payments to network providers based on payments from the prior year until revenue.
- Subsidize COBRA for the newly unemployed for three months. This will reduce Medicaid expenses, improve customer loyalty and improve physician finances because commercial plans pay better than Medicaid.
- Provide a premium refund to fully insured employers based on quarterly earnings in excess of prior year, something mentioned by United CEO during an investor call.
What does this mean going forward?
Hospitals are suffering financially; revenue is half of what it normally is for many hospitals and health plans are retaining much of that gap. Health plans will not just give money to providers unless they fear regulatory action. Health plans will not fear regulatory action unless the public knows these plans are quietly profiteering off of the pandemic while America’s lauded health care institutions, reduced the pay of physicians, lay-off nurses, furlough medical assistants, and slash benefits of the medical sanitation staff.
Adam E. Block, PhD is currently an Assistant Professor of Public Health in the Division of Health Policy and Management at the School of Health Sciences and Practice at New York Medical College. He is a health economist with deep experience in the hospital, health plan and government sectors. He has research interests in how individuals make decisions in health care markets and his research activities focus on patient selection of hospitals, patient selection of insurance plans and diffusion of innovation in the market, as well as evaluations of medical technology.
Kevin Van Dyke is the Principal Lead in IMPAQ Health’s Insurance Access and Value-Based Care Practice Area. Leah Dillard is a Health Policy Analyst at IMPAQ International.