Who Will Save the Hospitals?
COVID has pushed many US hospitals to the brink of financial collapse
It’s no secret that healthcare treatment in the United States is expensive. Drugs are costly — a Kaiser Family Fund survey published in 2019 reported that 79% of Americans considered the cost of prescription drugs to be unreasonable (the average prescription price for a single pill of a specialty drug in 2016 was $324.65, compared to $1 per pill for non-specialty medications). Out-of-pocket (OOP) costs are rising — the AHA reports that OOP expenses more than doubled from 1995 ($150B) to 2016 ($300B+). A knee replacement surgery in the US cost almost $30,000 in 2017, while it costs less than $13,000 in the UK. Overall spending on health has increased by 2.3x from 2000 to 2016 (Source: AHA).
Did you know that US hospitals employ more workers than US grocery stores do? (Source: AHA)
Despite the cost of healthcare, though, hospitals have been struggling to survive long before the coronavirus pandemic. Low overall operating margins kept hospitals barely alive — at least, the lucky ones. An unlucky 30% of hospitals had negative operating margins in 2016, meaning they were losing money. But how could they, if they’re charging so much?
It’s because hospitals don’t keep most of the money they make. Specialist doctors in the United States ($316,000 per year) earn 3.2x more than their counterparts in Sweden ($98,452 per year). Nurses earn about 30% more in the US compared to Sweden, too. US hospitals paid 2–6x more for cardiac implant devices than German hospitals. In other words, hospitals have been spending money as fast as they make it. Some numbers illustrating how hospitals across the nation are doing paint bleak images:
- A third of community hospitals in the United States had negative operating margins in 2018 (Source: AHRQ), meaning they were losing money;
- Things aren’t much better for the other hospitals. In 2016, 30.6% of US hospitals had negative operating margins (Source: AHA);
- If hospitals can’t reduce costs, then the Congressional Budget Office estimates that 60% of them would have negative profit margins by 2025 (this was an estimate done before COVID);
- 170 rural hospitals have closed their doors since 2005 due to the inability to generate enough revenue.
The struggles for hospitals to keep the lights on has gotten worse since COVID-19. For example, the supply of personal protective equipment (PPE) dried up globally — any available masks on Amazon were selling for 10–20x regular prices. The situation became so terrible that even the federal government intervened to prosecute price gougers. Unfortunately, the intervention did little to stop the price gouging, and hospitals were not immune. According to the American Hospital Association, hospitals in the US spent $2.4 billion for PPE between March and June 2020.
“We began ordering [PPE] at a feverish pace. The costs were sometimes 10 or 20 times normal. We were scrounging all over the world for supplies.”
- Kenneth Raske, President of the Greater New York Hospital Association quoted in a New York Times article
Furthermore, once the pandemic reached US shores, response procedures eliminated the most significant source of hospital revenue, and COVID-19 patients inundated hospital ICUs. The financial struggles of these institutions worsened, and many are at risk of shutting doors. Losing hospital facilities has a considerable impact on the United States because access to healthcare would become more limited, if available at all.
An article published in USA Today highlights that impact: “Out of the 2,743 counties with COVID-19 cases, almost half are served by a hospital that reported negative net income in 2017.” Within those 2,743 affected counties, 640 (23%) only have a single hospital to serve their entire community. Out of those 640 hospitals, 532 of them are struggling financially (unprofitable). In other words, eight out of every ten counties that have only a single hospital are at immediate risk of not having a hospital at all.
A Large Source of Revenue for Hospitals
Most hospitals in the United States make a large amount of revenue from elective procedures. An elective procedure is, for example, a surgery that is booked in advance and chosen by the patient. That is different than, say, an emergency procedure, which usually happens when a person comes into the ER — these surgeries are scheduled. They happen when they need to happen.
According to a study published in 2014 by the AHRQ, surgical stays (when a person stays in the hospital due to surgery) accounted for roughly 48% of hospitalization costs. Although surgical stays took up almost half of hospital revenue, only 28% of hospitalizations included a surgical procedure. In other words, they’re expensive.
On an average per-day basis, it was almost twice as expensive to stay due to a hospital procedure ($3,300) compared to staying for other medical reasons ($1,700). When looking at the total average cost of stays, the ones for surgical procedures ($16,700) were 2.25x more expensive than the ones for other medical reasons ($7,400). Calculated out, the surgical patient and the non-surgical patient stayed almost the same amount of days on average — 5 days and 4.4 days, respectively. But the surgical stay costs much more.
COVID Driving Up Costs and Eliminating Revenue
In March 2020, as pandemic-related measures started taking effect across the country, the median hospital operating margins dropped to -8%. Apart from the price gouging of PPE supplies mentioned before, other financial troubles hit hospitals after they started postponing or canceling elective surgeries. Anything unrelated to COVID-19 treatment would be delayed, and hospitals had shifted into socially distanced centers dedicated to a single mission: fighting COVID. Without elective surgeries during this time, a large chunk of revenue disappeared, which made a significant impact on operating margins. Further lost income comes in the form of bad debt. Bad debt is money that the hospital should have made, but won’t because they can’t collect it. In 2018 (before COVID), Sage Growth Partners published a study where 36% of hospital respondents indicated more than $10 million in bad debt. Due to COVID, bad debt has increased by 13%. At least part of this is a ripple effect stemming from the significant job loss felt across the US as a result of COVID.
The cost of care for coronavirus patients is also prohibitive. CNBC reported that the average price to treat a COVID patient in the hospital had been $30,000.
The federal government stepped in with the CARES Act in an attempt to assist hospitals as the nation battled this pandemic. It allocated $175 billion to hospitals and health systems. Large institutions like Cleveland Clinic and Stanford Health Care received over $100 million of that funding. On the other hand, two-thirds of health systems received relief payments that would only supplement less than one week of lost revenue, according to a survey conducted by the American Medical Group Association (AMGA).
“Where are all the patients with heart attacks and stroke? They are missing from our hospitals.”
While hospitals are starting to resume routine services, patients are reluctant to come back. When NBC News interviewed Dr. Comilla Sasson, she provided a quote from one of her patients explaining why the patient wouldn’t come to the hospital: “I would rather die than risk getting coronavirus right now.” Others can’t return because they’ve lost health insurance as a result of losing their job.
All of these variables negatively impact US hospitals. The AHA projects a $323.1 billion financial loss for hospitals by the end of 2020. $202.6 billion of that accumulated just between March to June. Many hospitals are already feeling the pressure of lost revenue. 42 hospitals closed by June 2020 due primarily to COVID-related factors, including the inability to collect on debt and reduced patient numbers.
Those that are still around can better weather the storm, but are nonetheless getting hit hard by the hail. Cleveland Clinic’s consolidated financial statements show that in the first quarter of 2019, it made $36 million. On the other hand, in the first quarter of 2020, it lost $39 million.
The Recovery Process
As the pandemic unfolded across the country, hospitals faced new challenges with an increased cost of supplies and a reduction in revenues. It may take most hospitals three to four years before they recover from this. At the same time, though, the pandemic only placed extra pressure on existing issues with hospitals and health systems, many of which have historically struggled to keep the lights on.
“This pandemic really hit our hospitals and health care systems hard. When this thing shakes out … there are definitely going to be some changes in the landscape.”
The recovery process for hospital systems isn’t one that results in returning to normal. In that situation, 60% of hospitals would have negative operating margins by 2025, according to the Congressional Budget Office. Instead, hospitals must find ways to increase operational efficiency to cut costs and identify additional revenue opportunities.
One untapped area of revenue and cost-cutting potential for many hospitals relies on a resource they already have at their disposal: data. For example, over 5 million patients come through ICUs every year. According to Dr. Brian Pickering, as quoted from an article in STAT News, modern ICUs can capture 2,000 data points per patient per day. With these numbers, the ICU has a wealth of information that can be parsed and analyzed to build predictive models that can optimize ICU operations and ultimately reduce costs for the hospital.
But it isn’t as easy as just analyzing data. Accessing patient data requires the hospital to go through an extraordinarily stringent process, which is even harder for outside parties. HIPAA compliance and general patient privacy concerns have limited many hospitals from pursuing more data-science driven approaches to driving down cost and opening new revenue opportunities. Fortunately, from on the data science side, new technologies like secure enclaves and ML methodologies such as federated learning have been developed to address data privacy issues. A combination of these types of approaches unlocks opportunities for hospitals to build predictive models in a privacy-preserving manner.
With the current financial and operational struggles that many hospitals are going through, the idea of trying to tackle data science and building predictive models falls by the wayside. But if you’re a hospital leader reading this, I implore you to keep it on your radar, because the recovery process for your organization requires a rebuild that is better than what it was before.