The COVID-19 Pandemic: For-Profit Health Plans Win, Hospitals Lose Adam E. Block, Ph.D. Kevin van Dyke, M.P.P. Leah Dillard
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?
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.
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 nonemergent spending as has been implied in the financial reporting of 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
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