Financial Impacts for Hospitals from COVID-19

Although the CARES Act provides some relief for hospitals, they still face large financial losses.

As the US continues to grapple with the medical and economic repercussions of the COVID-19 pandemic, hospitals are facing an unprecedented financial strain from the costs of mobilizing to treat COVID-19 patients. At the same time, they are virtually halting such revenue-generating activities as elective procedures and routine care. Further pressuring hospital finances, government and commercial reimbursements for COVID-19 cases will likely fall below the average payment that hospitals received per bed before the pandemic.

While the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) contains several provisions that have directed new funding and resources to hospitals, these amounts are insufficient to cover hospitals’ added costs and revenue shortfalls.

Hospitals have experienced losses from delay of elective procedures

One large financial blow to hospitals is that many states have ordered or urged them to halt elective procedures, and other hospitals have voluntarily delayed some elective procedures. Hospitals often rely on revenue from elective procedures to fund operational costs; in fact, a 2011 study showed that nearly half of hospital stays involving an operating room were for elective procedures.¹

As a result of the near-elimination of this revenue source, some hospitals have temporarily closed outpatient facilities, furloughed nonessential health care workers, and withheld or reduced compensation for medical staff.² While furloughing workers and taking other-cost saving measures have helped mitigate losses – and, as of this writing, elective procedures have rebounded in some states – researchers still estimate that 90% of hospitals that halted elective procedures will face negative profit margins.³

Government policies promoting telemedicine are offering a small boost to medical providers. Medicare – and many commercial payers – have expanded coverage for telemedicine, and on April 2 the Federal Communications Commission approved a $200 million program to help defray medical providers’ costs for connecting with patients.⁴ Furthermore, many states have waived in-state licensing requirements for medical professionals, meaning that, for example, a doctor in Texas can now treat a patient in Vermont.

As a result of these changes and an increase in demand from patients, a May 2020 survey by McKinsey found providers reporting that telehealth visits increased by 50 to 175 times pre-pandemic levels.⁵ However, much of the revenue from telemedicine does not accrue directly to hospitals, as facility fees are lower and there is no opportunity to charge for ancillary services, such as laboratory services.

In the end, even though more patients may receive care with telemedicine and some hospitals are rescheduling elective procedures as COVID-19 restrictions are lifted, even a temporary delay of appointments reduces a hospital’s profits in the short term. While most hospitals will not report their finances until 2021, analyses of payers’ claims data provides evidence of a reduction in claims volume. For example, an analysis by FAIR Health – a provider of commercial claims data – found large facilities experienced a 32% reduction in discharge volume in March 2020 compared to March 2019, while large facilities in the Northeast (which includes New York City, which both is a locus for medical services and was among the urban areas hit hardest in the early days of the pandemic) had a reduction of 40%.⁶

Hospitals will receive smaller payments per bed for COVID-19 cases than for providing other types of care

As hospitals experience a decline in admissions for elective and even trauma procedures, it is important to consider the economic implications of a patient population that will skew heavily toward COVID-19 patients.

Medicare – and many commercial payers – determine how much to reimburse for hospital inpatient visits using diagnosis-related groups (DRGs). Under this system, hospitals receive a fixed payment amount regardless of how long the patient stays at the hospital (although for lengthy visits, the hospital may also receive an outlier or stop-loss payment). According to the Centers for Medicare & Medicaid Services (CMS), COVID-19 inpatient visits generally fall within one of five DRGs, with more moderate inpatient visits reimbursed at the same level as other respiratory infections and inflammations (DRGs 177 to 179) and more severe cases that require mechanical ventilation grouped either as DRG 207 or DRG 208. (See Figure 1.)

 

As hospitals receive a set payment from Medicare per hospitalization, they may make money on shorter visits and lose money on lengthy, more resource-intensive visits. It is then worth asking how COVID-19 hospitalizations compare to other types of hospitalization.

Even four months into the crisis in the US, different studies have observed large variations in the average length of stay for COVID-19 patients; in part, these differences may result from differences in hospitalization practices or patient mix. For example, one study of 1,840 patients in the Western US found the median length of stay for an inpatient visit was 9.3 days among survivors and 12.7 days among non-survivors.⁷ Another study focused on New York found an average length of stay closer to 5 days, and that 12.2% of admitted patients received mechanical ventilation.⁸

The CARES Act, which was signed into law on March 30, 2020, contained several provisions affecting hospitals. For example, Medicare payments for COVID-19 hospitalizations were increased by 20%, and the Medicare sequester that reduces Medicare payments by 2% was suspended from May 1, 2020, through December 31, 2020.⁹

So, for example, the average Medicare payment for DRG 177 shown in Figure 1 would increase from $2,220 per day to $2,708 per day. Even with this increase, however, hospitals would still receive $490 less per day for DRG 177 than the average Medicare payment per day. Moreover, these amounts likely do not cover the costs of purchasing additional personal protective equipment and converting hospital wards into ICU levels of care.

The financial situation is even bleaker for hospitals with above-average lengths of stay for COVID-19 cases. As shown in Figure 1, the average Medicare length of stay for DRG 177 is 4.6 days, and even for cases requiring a modest amount of ventilator usage (less than 96 hours), the average length of stay is only 5.0 days. Therefore, if the average length of stay exceeds the average for the relevant DRGs, hospitals are essentially financially responsible for any incremental costs because Medicare provides a set payment.

Put simply, a hospital full of COVID-19 Medicare patients will likely generate substantially less revenue than a hospital full of the typical mix of Medicare patients.

It is challenging to project commercial payers’ total payments for COVID-19 hospitalizations

The financial implications for hospitals with commercially insured patients is less clear. Several organizations and researchers have published models predicting the average payments hospitals are receiving for COVID-19 patients, but with wildly varying results.

To begin, it is useful to consider how commercial insurers reimburse hospitals for care provided to their members. While some commercial insurers use Medicare methodologies and pay a multiple of Medicare, other insurers either pay proportionally to the length of stay using a per diem methodology or pay proportionally to charges. Even among these different methodologies, the exact reimbursement mechanisms can vary quite a bit between contracts, depending on the procedural codes that are billed for a claim. As a result, the payment that one insurer pays for a certain type of claim can be very different from what another insurer pays, even if, on net, both insurers reimburse hospitals at similar levels.

Neither hospitals nor commercial payers publish detailed information on payments for specific types of claims, which makes it difficult for researchers to estimate payments for COVID-19 hospitalizations. Covered California, the Affordable Care Act (ACA) exchange for California, was the first organization to publish projections of the financial impact of COVID-19 for hospitals and insurance companies. The authors estimated an average inpatient payment of $72,000 per commercial payer, based on an extrapolation from likely Medicare payment rates.

Later studies estimated lower commercial payments for COVID-19 hospitalizations. While Covered California estimated an average inpatient stay of 12 days, a FAIR Health study estimated an average length of stay of only six days, while limiting the analysis to inpatient admissions that do not involve mechanical ventilation. As a result of these differences, FAIR Health estimated hospitals and professionals would receive a combined $38,221 for commercially insured COVID-19 patients.¹⁰

Similarly, a Brookings Institution study estimated hospitals would receive $34,890 for commercially insured COVID-19 inpatient hospitalizations without a ventilator, but the same study estimated payments of $114,842 for inpatient visits requiring a ventilator.¹¹

Finally, a fourth study by Rae, et al. (2020) using a proprietary dataset (IBM MarketScan data) estimated average commercial payments of only $20,292 for hospitalizations not requiring ventilator support and $88,113 for hospitalizations with ventilator support for more than 96 hours.¹²

The differences between these four studies highlight the challenges in projecting the financial implications from COVID-19. While some states, such as California, require hospitals to report financial data to state agencies, the data typically are aggregated, so researchers are unable to determine how much private payers are reimbursing for specific services. Although some researchers do have access to proprietary databases with commercial claims data, the lack of reporting and standardization in fees makes it challenging for researchers to make accurate forecasts of the financial impact of health crises.

Finally, even if researchers had accurate data on commercial payments for different types of hospitalizations, projections would still be hampered by evolving estimates of the acuity mix of COVID-19 hospitalizations.

Summary

The US health care system faces unprecedented physical and financial demands from treating a surge of COVID-19 patients. Hospitals face new costs, such as purchasing additional personal protective equipment and converting hospital wards into ICU levels of care. Payments from Medicare and private payers are unlikely to cover all of these additional costs.

While the CARES Act has directed additional resources to hospitals, these added resources are likely insufficient for hospitals to make up financial shortfalls resulting from halting nearly all elective procedures and routine care, and having their patient mix shift to a large proportion of COVID-19 patients. ■

---

Bruce Deal, Managing Principal
Mark Gustafson, Managing Principal
Phil Hall-Partyka, Vice President

The authors have updated this article from their previous article, “COVID-19's Strain on Hospitals May Necessitate More Relief” on Law360.com (May 26, 2020).

Endnotes

1. Audrey Weiss, et al., Characteristics of Operating Room Procedures in U.S. Hospitals, 2011, Healthcare Cost and Utilization Project Statistical Brief #170 (2014).
2. Alia Paavola, “256 hospitals furloughing workers in response to COVID-19,” Becker’s Healthcare (April 7, 2020).
3. Strata Decision Technology, Report: Hospitals Face Massive Losses on COVID-19 Cases Even with Proposed Increase in Federal Reimbursement (2020).
4. Federal Communications Commission, In the Matter of Promoting Telehealth for Low-Income Consumers COVID-19 Telehealth Program, WC No. 18-213 (2020).
5. Oleg Bestsennyy, et al., Telehealth: A quarter-trillion-dollar post-COVID-19 reality? McKinsey & Company (2020).
6. FAIR Health, Illuminating the Impact of COVID-19 on Hospitals and Health Systems (May 12, 2020).
7. Joseph Lewnard, et al., “Incidence, clinical outcomes, and transmission dynamics of severe coronavirus disease 2019 in California and Washington: prospective cohort study,” The BMJ (May 22, 2020).
8. Safiya Richardson, et al., “Presenting Characteristics, Comorbidities, and Outcomes Among 5700 Patients Hospitalized With COVID-19 in the New York City Area,” JAMA (April 22, 2020).
9. H.R. 748, CARES Act, Public Law 116–136, § 3709 (2020).
10. FAIR Health, The Projected Economic Impact of the COVID-19 Pandemic on the US Healthcare System (March 25, 2020).
11. Matthew Fiedler and Zirui Song, Estimating potential spending on COVID-19 care, The Brookings Institution (May 7, 2020).
12. Matthew Rae, et al., Potential costs of COVID-19 treatment for people with employer coverage, Peterson-KFF Health System Tracker (2020).