Our research team breaks down this week’s top healthcare news.
In an age of unprecedented change, staying current has never been more important. Our team at Chartis is curating news most relevant to the healthcare industry and tracking the topics that are trending on seven key issues: high reliability care, digital and advanced technology, financial sustainability, health disparities, the health ecosystem of the future, partnerships, and the provider enterprise. Each week, we break down what’s happening and why it matters.
Last week the Biden Administration announced they will not extend the Next Generation ACO (NGACO) model for 2022. The NGACO model sought to reduce cost and improve patient outcomes with entities taking on upside and downside risk at greater thresholds than are available through the Medicare Shared Savings Program (MSSP). According to analysis from the Centers for Medicare & Medicaid Services (CMS), while the ACOs were successful in reducing beneficiary spend, after shared savings and incentive payouts, net spend went up slightly. While the National Association of ACOs disagreed with the decision and felt the program should not have been benchmarked only against MSSP and other Innovation Center participants, the group was pleased that participants in NGACO are being granted a limited exception window to apply for 2022 participation in the new value-based model, Global and Professional Direct Contracting model (GPDC), which will be in its second year.
The GPDC model builds on many elements of the NGACO model but also has some key differences. Participants in the model are called direct contracting entities (DCEs), and similar to previous iterations of value-based care programs, the goal is to test whether participants can improve health outcomes and reduce cost of care for Medicare beneficiaries. Like NGACO, GPDC will have upside and downside risk. The program will have two tracks: the Professional track will offer 50 percent risk-sharing of savings and losses, and the Global track will offer 100 percent. GPDC also requires either primary care or total care capitation, which was an optional payment mechanism under NGACO. Both programs add benefit enhancements, like expanded telehealth services, enhanced home care, and chronic disease management. But GPDC will augment home health benefits further and allow for concurrent care while a beneficiary is receiving hospice services. Other key differences include:
The NGACO model may be coming to an end this year, but value-based care models with providers managing risk are likely to continue their upward trend for Medicare out of necessity to more aggressively reduce cost. The Medicare Hospital Insurance trust fund expenses, which include Medicare Part A benefits, such as inpatient stays, skilled nursing, some home health, and hospice, have exceeded tax revenues since 2018. As the baby boomer generation ages, that depletion will accelerate more quickly. CMS actuaries and the Congressional Budget Office project that by 2026 the trust will have insufficient funds to cover payments if nothing changes. As part of the response to budget concerns, CMS has a stated goal of tying nearly 100 percent of Medicare reimbursement to value-based contracts in just four years, which would require a momentous shift since only 20 percent of Medicare payments are currently in value-based arrangements. As healthcare delivery continues this move to value, it will be imperative for providers to be able to manage risk. Providers and health systems must develop capabilities to manage risk if they have not done so already, and then deliberately seek contracts to capture the value they are creating.
COVID-19 may also spur some providers to re-examine their contracting strategies beyond Medicare. Providers and health systems who received a significant proportion of value-based reimbursement managed better through the first waves of the pandemic as they were not fully dependent on fee for service revenues from elective procedures that were delayed or canceled.
The future viability of safety net hospitals has been called into question this week in a Frontline piece called “The Healthcare Divide,” created in partnership between Public Broadcasting Service (PBS) and National Public Radio (NPR). The piece examines the crucial role safety net hospitals play in the healthcare fabric of our nation, accompanied by chronic underfunding that makes it difficult for these hospitals to operate, and which has been exacerbated by the impact of COVID-19.
Safety net hospitals are defined as those that serve a high proportion of low-income, disadvantaged, under- or uninsured patients, often with a high proportion of people from ethnic minority and/or non-English speaking communities. Interestingly, many hospitals consider themselves to be safety net hospitals. There is an industry trade group called America’s Essential Hospitals that considers its members to be safety net hospitals, but there is no official federal safety net hospital designation. This week’s Top Reads piece focuses on urban hospitals that serve the communities described above; in a subsequent piece we will focus on rural hospitals that serve those types of communities — just as important, but with slightly different dynamics at play.
The economics of all hospitals are challenging. Patients insured by government-sponsored insurance programs (Medicare and/or Medicaid) reimbursed hospitals less than the cost of care. Uninsured patients typically pay nothing or a very small percentage of costs. Commercially insured patients, whose health benefits pay more than $2.50 for every $1 that Medicare pays, must make up for the losses on these patients in order for a hospital to achieve a positive margin. Because of this, not-for-profit hospitals and for-profit hospitals often seek to maximize the proportion of commercially insured patients to compensate for the margin-losing patients. They do this by building sites in and hiring physicians from more affluent communities, building programs aimed at the commercially insured, working directly with employers to secure contracts with their employee base, refurbishing facilities often, and marketing to their target communities.
Safety net hospitals, in contrast, have a mission to serve anyone, regardless of their ability to pay. They are typically located in non-affluent communities and often serve patients who have nowhere to go after a hospital stay, and therefore may stay for months or years at the hospital, taking up capacity that could otherwise be filled with a patient generating new revenue. On average, per America’s Essential Hospitals, three-quarters of a safety net hospital’s patients are covered through government programs or are uninsured. While these hospitals make up only about 5 percent of all U.S. hospitals, they deliver 25 percent of all charity care and 17 percent of uncompensated care (as of 2019). As PBS noted in their overview of the Frontline piece, “[Safety net hospitals] won’t turn away patients who can’t pay… [this] means safety-net hospitals typically depend on public funding and operate on thin profit margins.”
COVID exacerbated the financial pressures on safety net hospitals. All hospitals suffered revenue loss when the pandemic arrived because they had to reduce or shut down inpatient and outpatient services. But because COVID disproportionately impacted individuals from communities that safety net hospitals serve — low-income and minority communities and people who are uninsured or covered through a government-sponsored insurance program — safety net hospitals saw a large portion of the nation’s COVID cases. COVID required additional costs for personal protective equipment, supplies, and additional staff, increasing the losses that would already have been incurred from those patients. This created a greater gap between the “haves” and “have-nots” across the hospital landscape.
The first round of government hospital COVID relief funds was distributed based on a hospital’s historical revenue, benefitting hospitals with a better payor mix that were able to garner higher payment rates — not safety net hospitals. Subsequent rounds of funding were more targeted at COVID “high-impact” hospitals and safety net hospitals, but in general these relief funds still did not make up the gap, as has been outlined in a recent Robert Wood Johnson Foundation and United Hospital Fund Study. By July of 2020, some for-profit hospital chains were showing positive margins — higher than 2019 in some cases per the recent Frontline piece. By contrast, safety net hospitals continued to struggle. In October 2020, Moody’s issued a warning to urban counties: operating a public safety net hospital during COVID was financially risky. Several safety net hospital systems (e.g., in Chicago, Miami, Los Angeles) were down to two months of days cash on hand — a balance sheet metric that on average hovers around six to seven months for all hospitals.
While COVID-19 intensified the financial pressure on safety net hospitals, these hospitals have chronically struggled to operate “in the black.” The unsustainable economics are not a pandemic problem, but an endemic, persistent structural problem with the nation’s reimbursement system and how the U.S. prioritizes funding for underserved communities.
Some safety net hospitals have closed or have come close to closing in recent years, including Westlake Hospital (Chicago), Providence Hospital (District of Columbia), Hahnemann University Hospital (Philadelphia), and Olympia Medical Center (Los Angeles). When these hospitals close, there isn’t always a “back-up” healthcare safety net. Other hospitals nearby may not be able to bear the capacity needed to serve those who would have otherwise been seen at the safety net hospital. Other area hospitals may be located farther away in more affluent areas, and patients in the underserved communities may not have the ability or means to travel there to receive care. Still others do not carry the same mission to treat all patients regardless of the ability to pay, and aside from stabilizing all trauma and emergency patients (which they are required to serve through the Emergency Medical Treatment and Labor Act, or EMTALA), they may prioritize commercially insured patients throughout their healthcare network. The result: already underserved communities have even greater barriers to accessing healthcare, and the safety net cannot fully function. A secondary but arguably more important impact: health disparities between these communities and the more affluent communities increase. The payment structure leading to the “haves” and “have-nots” in the hospital world translates into creating “have” and “have-not” communities in terms of healthcare access and health status.
How should this be addressed? Because a primary contributor to the problem is the reimbursement system in the U.S., it is very difficult to imagine a complete redesign of that system that would be easy, timely, fair, and approved by our polarized lawmakers. But something must be done or our healthcare safety net risks fraying and failing. In a July 2020 Health Affairs blog, authors suggest that “future payment reform should focus on refining the algorithms used to target funding to facilities that provide essential care for vulnerable populations. Without these changes, safety-net hospitals that survive the COVID-19 pandemic will remain highly susceptible to financial crises.”
The Lown Institute recently released an index assessing hospitals’ success at serving the people of color living in their communities. It is no coincidence that most of the top 50 ranked hospitals are considered safety net hospitals. Establishing adequate support for these hospitals is not only about sustaining those institutions; it reflects on this nation’s commitment to underserved communities, minority populations, and the reduction of health disparities and health inequities. These are commitments that many have made verbally, but it remains to be seen whether policy, efforts, and dollars will follow.
Non-traditional entities are capturing the value void through innovative models, partnering with funding entities to receive compensation for addressing needs. What activities and strategies should health systems consider?
What does the path to financial stability look like? We have identified five imperatives organizations must address, along with tactics leading healthcare organizations have deployed to respond to the ongoing financial, operational, and emotional challenges of the pandemic.
Health system leaders must pull the right levers to build back the balance sheet. Resizing the enterprise to new volumes, restructuring costs, realigning operations, and establishing the right infrastructure to support and monitor change will be required to return margin.