Are Hospitals Making Money Treating COVID-19 Patients?

September 15, 2020

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Source: Modern Healthcare, by Tara Bannow

On HCA Healthcare’s second-quarter investor call, an analyst asked the for-profit chain’s chief financial officer an intriguing question: What’s the profitability of COVID-19 patients?

Posed to most other health systems, such a query would have sounded absurd. But the Nashville-based hospital giant had just posted $1.1 billion in profit, up 38% from the prior-year period, even as elective procedures were largely shut down.

Finance chief Bill Rutherford responded that coronavirus tends to prompt longer lengths of stay and higher acuity than typical hospitalized patients. “It’s too early to convert that to profitability,” he said. “Our focus is making sure we’ve got all the resources we need to care for those patients.”

Examples of wealthy health systems reporting higher 2020 profits, anecdotes of sky-high bills for COVID treatment and billions in federal grants have raised the question of whether a subset of well-performing hospitals are making money on their COVID books of business.

Most hospitals, though, appear to be losing money on COVID care, and that’s not counting the pandemic’s most detrimental effect: the plunge in profitable elective procedures. Hospitals’ divergent reimbursement experiences underscore the pandemic’s role in deepening the split between wealthy systems and their financially vulnerable peers.

Now, as the country heads into an expected second wave of the pandemic, hospital administrators need to keep trimming expenses while revenue lags and the federal government makes tough decisions about how to allocate aid with little information to go on.

Some experts are hoping HHS will consider financial need when allocating the remaining $57 billion in federal Coronavirus Aid, Relief, and Economic Security Act grants. So far, a little over half the Provider Relief Fund grants distributed have been based on prior revenue, with large, financially secure systems amassing hundreds of millions in aid.

“There is clear evidence that many hospitals that have done financially well historically, have good overall margins and hundreds of days cash on hand are getting millions in cash disbursements due to the revenue-based formula,” said William Schpero, an assistant professor of health policy and economics at Weill Cornell Medical College. “That money might be better used elsewhere, whether among hospitals that have been particularly hard-hit or that are financially vulnerable.”

A hospital’s true margin on COVID care will probably remain a mystery, experts say. That’s because the pandemic, unlike any other crisis that’s hit the industry, has come with a number of confounding factors that make it impossible to isolate the margin on treating seriously ill coronavirus patients. Most importantly, hospitals’ biggest source of revenue—nonurgent procedures—dropped out from under them, and there’s no telling when, if ever, it will completely return.

The crisis has sunk the margins of large systems like Mass General Brigham in Boston and Sutter Health in Northern California, but others, like Kaiser Permanente in Oakland, Calif., and ProMedica in Toledo, Ohio, are doing better than ever.

The 20% bonus

Aside from the grants, CMS is tacking on an additional 20% to its reimbursement for treating hospitalized Medicare patients with COVID. Medicare-age adults have seen the highest rates of COVID hospitalization. The bump has prompted conspiracy theories about hospitals wanting more COVID cases on their books to increase Medicare reimbursement.

“The COVID-specific impact is very, very difficult to quantify,” said Ge Bai, an associate professor of accounting and health policy and management at Johns Hopkins University.

One factor that makes determining margins so tricky is that so much of hospitals’ costs are tied up in fixed overhead expenses that would be difficult to allocate to a specific patient. Almost half—48%—of hospitals’ total operating expenses were overhead and capital costs in 2018, according to a recent Journal of General Internal Medicine study of about 3,500 hospitals.

Health systems prefer to discuss the pandemic’s effects in aggregate, without isolating the COVID book of business.

“They’re all unprofitable because we lost so much elective business and we have such a high fixed-cost infrastructure,” said Robin Damschroder, CFO of Detroit-based Henry Ford Health System. “You really have to look at the totality of the clinical operations of any health system.”

In normal times, there would be enough reimbursement to cover a hospital’s high overhead costs. But during the pandemic, the loss of volume and the added supply and labor costs associated with responding to the crisis has created “stranded overhead” that has nowhere to be liquidated, said Rob DeMichiei, a strategic adviser with data and analytics technology provider Health Catalyst and former CFO of UPMC.

“With that volume gone, there is all that overhead with very few cases to cover it,” he said. “There is really no amount of reimbursement on an individual case that’s going to be able to cover the direct costs, which it does cover, but also all this overhead.”

Experts are divided on the question of whether hospitals are generating a margin on their COVID patients. The point they agree on, though, is that no one can know for sure except maybe the hospital CFO, and even then, there’s a good chance he or she can’t be certain.

For Kevin Holloran, who covers not-for-profit hospitals at Fitch Ratings, the answer is an easy no. COVID is a “completely different animal” from other conditions, with some patients hospitalized for weeks or months. “I can’t see a way that anyone would say, ‘COVID patients are profitable for me’ in any way, shape or form,” he said.

When it comes to treating COVID patients who are uninsured or who rely on Medicaid, hospitals are unlikely to make money, as is their typical experience with those payers, said Dr. Ross Nelson, the head of KPMG’s healthcare strategy group.

Medicare’s 20% add-on payment for COVID patients could bump that margin into the black, Nelson said. But since Medicare pays a flat case rate per DRG, length of stay will be a big determinant of profitability. “My hypothesis is that the COVID patients that come in and stay for a week to a week and a half, at least on the Medicare and commercial side, they probably make some money on,” Nelson said. “As length of stay starts to extend beyond a week and a half or so, I think it’s too early to tell on that.”

Hospitals faced with more unknowns

Maimonides Medical Center, the largest hospital in Brooklyn, has treated north of 2,300 COVID patients. Leaders believe they broke even on commercial patients, using an estimated cost per patient, CEO Kenneth Gibbs said. Even with the 20% add-on, Medicare reimbursement covered about 90% of the cost of care. Medicaid covered about two-thirds the cost of COVID care, he said.

Gibbs said the struggle is just as much in front of providers as it is behind them. That’s because there will continue to be volume declines, and patients will still need to be isolated according to infection status. Basically, the cost per patient will be higher for the foreseeable future. “I think the challenges are unknown because the hit is ongoing,” Gibbs said. “The stress on the system may actually sort of be building, even though we’re past what feels like the core surge.”

For Henry Ford, the 20% Medicare add-on culminated in an additional $8 million on its Medicare claims related to COVID. Of the more than 10,000 COVID patients Henry Ford treated, 32% were covered by Medicare, including Medicare Advantage. But the bigger impact from Medicare was waiving the 2% sequestration, a reduction that usually happens annually, and postponing cuts to disproportionate-share hospital payments.

All told, that amounted to roughly $40 million for the health system, in addition to $328 million in federal relief grants in the first half of 2020. “Is it compensating for everything related to the cost of COVID? That’s a question yet to be answered,” Damschroder said.

Henry Ford reported $224 million in operating income in the first half of 2020, a 165% increase from the prior year and a strong 7% operating margin.

Private insurance payment rates are more than twice Medicare rates for the services most likely to be used by patients hospitalized with COVID, although Medicare’s 20% add-on payment will narrow that gap, a July analysis from the Kaiser Family Foundation found. With the 20% add-on, the average Medicare reimbursement for patients on a ventilator for more than 96 hours would have increased from $40,218—the average payment in 2017—to $48,262. Private rates would be roughly double that even with the 20% add-on, ranging from 1.8 to 2.1 times those of Medicare.

Federal aid allocations

Of the $175 billion originally allocated for Provider Relief Fund grants, a little over half has been distributed according to prior total patient revenue, suggesting HHS tried to replace revenue lost from suspending procedures. Another $22 billion went to hospitals that saw large numbers of COVID patients. Smaller amounts were targeted at safety-net hospitals, rural hospitals, skilled-nursing facilities and children’s hospitals.

Karyn Schwartz, a senior fellow with the Kaiser Family Foundation, said she agrees that knowing whether hospitals’ reimbursement for COVID treatment covers their costs could be helpful information for policymakers in determining how the remaining roughly $57 billion in Provider Relief Fund grants would be best allocated. “I think knowing how costly it is to treat these patients is important in terms of understanding how important it is to allocate the money that way versus something else,” she said.

Matt Hutt, an accountant who heads AAFCPAs’ healthcare division, said by his estimation, in order for Medicare’s 20% add-on payment to cover the cost of COVID care, it would have needed to be a 35% add-on. Going forward, he said it’s important to tie Provider Relief Fund grants to the losses providers are seeing on COVID care.

“That’s really what the funds should be used for: the impact that COVID had on your business,” he said.

The problem with that, however, is the numbers used to calculate margin can be “warped,” Johns Hopkins associate professor Bai said. While revenue from COVID treatment is clear-cut, the cost component is open to interpretation. Large, well-connected providers would likely hire savvy consultants to make their margins look worse than they are, she said. Instead, Bai said the decline in charges or outpatient claims would be a more objective way to distribute the money.

Even if, hypothetically, systems were making money on COVID patients but still losing money in every other aspect of their business due to lower demand, that would put the healthcare system in jeopardy, said Rick Kes, healthcare industry senior analyst with RSM. “The sustainability of our healthcare system is maybe the overriding issue.”

Opinions abound on how the remaining federal aid should be allocated. Michael Abrams, managing partner and co-founder of healthcare consultancy Numerof & Associates, said tying the disbursement to fee-for-service revenue, as has been done with much of the money so far, rewards providers who haven’t shifted toward value-based payment models. He thinks HHS should offer incentives for value-based payment with the remaining money.

“I just hate the idea of bailing out an industry that is increasingly on a course that departs from what the country needs,” Abrams said.

 

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