As they recover from the COVID pandemic, US hospitals are dealing with a severe case of Long COVID. In 2022, they had the worst financial performance in this analyst’s 47-year career. As the country recovers from the worst inflation in forty years, hospitals will be at odds with health insurers over contract renewals that would reset their rates to the actual delivered cost of care. As the “last in line” in the United States’ battle against inflation, hospitals will face public scrutiny as they try to recover from pandemic-related financial losses.
Hospital payment rates for commercial payers are retrograde. Commercial insurance contracts between hospitals and health insurers were multi-year contracts negotiated before the pandemic. They remained in place throughout the pandemic, despite massive increases in people and material costs. As a result, health costs were conspicuously absent from the main drivers of the 2021-22 inflation surge, which included food, housing, energy, durable goods and so on.
Hospital operating costs skyrocketed during COVID due to a shortage of clinicians, the predatory practices of temporary staff agencies, supply and drug shortages and crippling cyberattacks that rendered their IT systems inoperable. Hospital losses will worsen in 2022 because hospitals will be unable to place patients who are no longer critically ill but cannot be placed in long-term, psychiatric or home-based care (a problem shared by Britain’s disintegrating National Health Service). Thousands of patients are held in limbo in hospital “observation” units, for which government and commercial payers do not adequately or at all compensate them.
The Pandemic Harmed Hospital Finances
Government-mandated or voluntary suspensions of elective care to accommodate COVID patients effectively nationalised hospitals in 2020. The CARES Act provided hospitals with massive federal assistance to compensate for the resulting losses. According to Moody’s Investor Service, the disruption in normal hospital operations was severe enough that CARES funding accounted for a startling 43% of hospital operating cash flow in 2020. As the pandemic continued in 2021 and 2022 and federal aid ran out or had to be repaid, hospitals saw their operating losses grow.
Health insurers, on the other hand, made a lot of money during the pandemic. The cessation of normal caregiving produced multi-billion windfalls for health insurers, particularly in the spring of 2020, as their medical expenses fell sharply. Health insurers profited while hospitals were on the federal “respirator,” and fixed-price contracts allowed them to avoid the post-pandemic cost surge.
Healthcare Cost Pressures Persisted During The Pandemic
Overall, healthcare price increases, particularly hospital prices, have lagged behind the Consumer Price Index for nearly two years. Healthcare spending is expected to be around 17% of GDP in 2022, the lowest level in fifteen years. In fact, hospitals accounted for a smaller share of US health spending (31.1%) in 2021 than they did a decade earlier. In 1980, hospitals accounted for more than 41% of US health-care spending!
However, the costs are prohibitively expensive. People’s costs account for half or more of those costs and people are becoming increasingly scarce. Most health-care systems are reducing non-clinical staff while desperately lacking clinicians. They have no choice but to pass on those higher costs to those who pay for care. Otherwise, hospitals will close and if historical trends hold, those closures will be concentrated in areas where we can least afford them—rural areas, small towns and the nation’s inner cities.
The United States does not have an excess of hospital capacity. Indeed, some observers argued that during the pandemic, bed capacity was dangerously low for societal needs. The US hospital system, with 2.4 beds per thousand, is far below the bed capacity target of 4 beds per thousand set in the 1970s US health planning law and less than half the bed capacity in Germany and France. Moreover, despite concerns about overutilization, hospital utilisation in the United States is among the lowest in the OECD countries, at around 565 bed days per thousand in 2021 and is continuing to fall as more care moves to outpatient settings and the home.
Hospitals Need to Improve Their Storytelling
The harsh reality is that hospital systems were essentially all we had for public health infrastructure during the pandemic and we will undoubtedly require them again in future crises, whether they are pandemics, mass shootings or hurricanes. If hospitals want higher rates from government and commercial payers, they must justify them through sustained and aggressive cost-cutting efforts.
Hospitals must also demonstrate the value of the public service they provide as well as the cost-effectiveness of the care they provide to their patients. And, as the critics have pointed out, there is no valid reason for non-profit hospitals not providing tangible benefits to their communities that outweigh the value of their tax exemption. Above all, their leaders must maintain a humble demeanour while remaining constructively focused on the communities they serve. They must do a much better job of explaining what they do, why their care is so expensive and what they are doing to make care more affordable.
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