Last month, we discussed a new phenomenon not previously experienced by healthcare providers. For the first time in almost four decades, providers felt the double-edged sword of fee-for-service medicine. For an industry that had, for the most part, experienced insatiable demand for its services, the COVID-19 pandemic caused the cancellation or delay of most other elective healthcare procedures and visits that resulted in hospital and physician operating revenues plummeting by unprecedented amounts.

Kaufman Hall reported that April 2020 represented the worst monthly financial performance in history for over 800 hospitals nationwide. They reported a median hospital operating loss of 29% for the month, despite $50 billion in relief provided by The CARES Act.1 A June report by the American Hospital Association (AHA) estimated that U.S. hospitals and health systems could lose over $323 billion in 2020, excluding the increased costs associated with COVID-19 patients. Then in late July, AHA released another report commissioned from Kaufman Hall that projected negative hospital margins of -7% in the second half of 2020 without further government support.

More recent anecdotal information appears to indicate that at least some hospitals are recovering that lost volume more quickly than projected. However, the fact remains that for many providers these significant financial losses will not be easily recouped, and their pre-pandemic patient volume levels will not be easily achieved. This illustrates the new uncertainties for the first variable in a healthcare provider’s fee-for-service revenue -- patient utilization. Historically, patient demand has been so strong that healthcare providers have used a “build it and they will come” approach.

Many new inpatient towers, micro-hospitals, freestanding emergency rooms and medical office buildings have emerged in the last decade to keep up with patient demand and to attract a larger share of commercially insured patients. However, healthcare providers will now have to reassess their real estate investments due to the impact of COVID-19; where a large portion of outpatient visits will now be performed via telehealth and where patients may avoid large medical centers for routine procedures.

This brings us to the second variable in a healthcare provider’s fee-for-service revenue – price. Last month, we also described how the fee-for-service payment system has been blamed for being opaque and too complex for healthcare consumers to understand. I was co-author of a November 2018 article for the Healthcare Financial Management Association, which focused on the need for healthcare providers to redesign their fee-for-service pricing models to better align individual prices with cost and to provide better transparency and affordability or face significant disruptive competition.2

Despite all the warning signs, both healthcare providers and public/private insurers have been reticent to redesign the fee-for-service payment system into a more patient-friendly system. Although new payment methodologies such as bundled pricing, population health management and value-based care have begun to proliferate, progress has been slow because most of the patient operating revenue is usually still generated through fee-for-service pricing.

We also mentioned last month that healthcare providers have historically covered losses from uninsured patients and under-reimbursed government programs (e.g. Medicare and Medicaid) by negotiating much higher rates from commercial payers through employer-sponsored health insurance. This commercial subsidy is essentially a “hidden tax” that employers have paid to support the financial viability of healthcare providers in their regions.

That commercial subsidy has grown significantly over time as government sponsored programs have expanded with the growth in both the Medicare and Medicaid populations. Although the uninsured population was initially reduced through the Affordable Care Act (ACA), as of today there are still 27 million newly unemployed due to the COVID-19 pandemic. Whether they become Medicaid eligible, purchase high deductible plans on the ACA exchanges or become uninsured, healthcare providers will likely incur additional fee-for-service losses to serve the healthcare needs of this population.

The difference today is that healthcare providers should not expect the commercial sector to continue to cover these increasing losses, as the commercial subsidy is now at a tipping point. A recent survey by the National Alliance of Healthcare Purchaser Coalitions showed that almost 75% of self-insured employers now favor hospital rate regulation. These employers cited pharmaceutical and hospital prices, lack of price transparency, healthcare industry consolidation and surprise out-of-network bills as the most significant threats to healthcare affordability.3

The Centers for Medicare and Medicaid Services (CMS) recent administrative rule requiring hospitals to disclose their negotiated rates with commercial insurers was also recently upheld by a U.S. District Court. This price transparency rule is a game changer that will not go away whether continued AHA appeals to the ruling are successful or not. An AHA senior vice president was quoted as saying “the proposal does nothing to help patients understand their out-of-pocket costs.” 4

We could not disagree more, as the negotiated rate between any healthcare provider and an insurer is the key starting point for determining a patient’s out-of-pocket costs. Once that amount is known, the patient first needs to compare it to the remaining annual deductible for themselves or their family. This is particularly important for patients with high deductible plans, which in 2016 made up 40% of the privately insured population; many of which have not fully funded a health savings account (HSA).5

Here is a personal example: I am currently covered by an insurance plan with a $6,000 individual and $12,000 family annual deductible. Recently, I had some lab work performed at a hospital-based laboratory, which was not urgent but was recommended by a physician to rule out a certain condition. When my insurer’s Explanation of Benefits (EOB) arrived, it showed gross hospital charges of $1,728.00 and the insurer’s negotiated allowable charge of $945.32, which was ultimately my responsibility since I had not yet reached the annual deductible.

Fortunately, I have the resources to fully fund my HSA which I used to pay for this expense, but it still partially depleted my HSA account balance. An expense of this magnitude is a major issue for most people, particularly those without an HSA account. If this price transparency rule had been in effect, I could have at least known the hospital’s pricing for this lab work, and compared it with other independent reference laboratories; potentially saving money or deciding not to have it done at all.

A recent HealthLeaders Analysis interviewed several healthcare consultants and attorneys which supported price transparency and described ways that hospitals could prepare for the new rule.6 They indicated that potential advantages could be gained by all healthcare stakeholders including hospitals, insurers, and healthcare consumers. Nevertheless, some hospital CFOs evidently indicated that instead of working to comply with the new price transparency rule, they might just pay the modest fine imposed by it. As a former academic medical center CFO and 40-year healthcare finance veteran, I understand all the other financial pressures facing them and their reticence to risk major pricing changes. However…..

Value-based pricing and vertical integration of insurers and providers may be the models of the future. But the bridge to getting there is long and needs to provide a “soft landing” for the healthcare industry. The first step in building that bridge is fee-for-service price redesign and transparency. The technology exists to provide better fee-for-service price transparency, simpler pricing models and more alignment of price to the cost of service. If healthcare providers and commercial insurers want to preserve the fee-for-service pricing system to allow that soft landing, they better acknowledge the fact that reforming it now is a necessity and a cost of doing business.

1. Kaufman Hall, National Hospital Flash Report, May 2020

2. L. Brauner & S. Glasrud, Healthcare Financial Management Association, Reconciling charges and pricing through charge description master redesign, November 2018

3. H. Meyer, Modern Healthcare, Ballooning prices leave employers increasingly open to regulation of rates, February 24,2020

4. S. Armour, Modern Healthcare, Trump Administration Price-Transparency Rule Covering Hospitals Upheld, June 23, 2020

5. M. Brady, Modern Healthcare, Most high-deductible plan members don’t fund HSAs, July 17, 2020

6. J. O’Brien, HealthLeaders Analysis, 4 Ways Hospitals Should Prepare For The Price Transparency Rule Next Year, July 30, 2020