Hospitals Face Cash Crunch in 60-90 Days Due to COVID-19: Report

Ken Terry

March 27, 2020

Editor's note: Find the latest COVID-19 news and guidance in Medscape's Coronavirus Resource Center.

Hospitals are facing steep financial challenges on top of the operational and human aspects of coping with the COVID-19 crisis, according to a new report from Strata Decision Technology, a company that analyzes and benchmarks financial data for about 220 healthcare systems across the country.

Because of the high costs of treating patients with COVID-19, plus the cancellation of most elective surgeries, the report shows, many hospitals will not be able to survive the damage to their cash flow for more than 60–90 days.

That calculation included the 20% boost in Medicare payments for COVID-19 that was in the initial Senate version of the $2.2 trillion stimulus bill.

Approved by the Senate on Wednesday and the House today, the legislation includes $100 billion for hospitals on the front line of the COVID-19 crisis, according to the Washington Post . That money is designated to buy personal protective equipment (PPE) for healthcare workers, testing supplies, emergency operation centers, and other necessities.

This emergency funding is part of $280 billion appropriated for building up the healthcare infrastructure to deal with the pandemic. Besides the direct hospital payments, this provision of the rescue package increases funding for community health centers; Medicare payments; telehealth and home service; and public health agencies, such as the Centers for Disease Control and Prevention, the Post reported.

At press time, it was unclear how much Medicare payments to hospitals will be increased, but the Strata report argues that a 20% bump in payments for treating COVID-19 would be insufficient.

According to the Strata model, if COVID-19 cases were reimbursed at the current level across all payers, 97% of health systems would lose an average of $2800 per case. Some of them would lose $8000 to $10,000 per case.

If Medicare boosted reimbursement for COVID-19 treatment by 20%, the report said, the average loss would be $1200 per case, and some facilities would lose $6000 to $8000 per case.

How the Study Was Conducted

Strata based its conclusions on financial data from 32 US health systems representing 127 hospitals that had 1.2 million combined discharges in 2019.

After reviewing research from Italy, China, and the Centers for Disease Control and Prevention (CDC), the Strata researchers selected a proxy group of patients for its modeling study.

These patients had conditions and complications similar to those of patients diagnosed with COVID-19. Their care was covered by eight Medicare diagnosis-related groups (DRGs) that included pneumonia, respiratory infections, acute respiratory distress syndrome, sepsis, and extracorporeal membrane oxygenation life support. The researchers increased the case severity by 25% to account for the greater intensity of COVID-19 treatment.

To model the financial impact, the researchers assumed that the 32 institutions would operate at 110% of normal capacity to handle the surge and that they'd treat a total of 225,000 COVID-19 patients over the course of 30 days.

What the study found is that the costs for COVID-19 patients are significantly higher than those of their proxy DRG counterparts. One reason is that the complexity of the cases causes a decline in nurse staffing ratios. Nurses and staff must slow down to ensure that their PPE is properly fitted. Costs are also higher because of expanded cleaning regimens, PPE shortages, more frequent X-rays and CT scans, and higher costs for supplies and drugs.

In addition, the loss of elective surgery cases, the study notes, lowers hospital margins substantially. The researchers estimated that 90% of hospitals that had canceled all elective procedures would shortly begin to experience negative profit margins from COVID-19 cases.

Steve Lafar, executive director of Strata Data Science, told Medscape Medical News that there are major differences in how much cash various hospitals have on hand.

"Some hospital systems have been making a 5% to 7% margin and have been able to generate a lot of cash and have access to lines of credit," he said. "But after 90 days, almost all the health systems begin to have real difficult cash flow issues. It's not many health systems that are sitting on 180 days or 365 days of cash to sustain these kinds of losses, which are also related to postponing elective surgery."

Outside Views Differ

Outside experts said that Strata's methodology was basically sound, although they differed regarding the implications of the analysis.

Richard Trembowicz, associate principal at ECG Management Consultants, told Medscape Medical News that the projected losses on COVID-19 cases in the Strata report "might be a little bit light. The loss in reimbursement might be a little more significant per case."

In contrast, Christopher Kerns, vice president of executive research for the Advisory Board Co, told Medscape Medical News that some of Strata's assumptions may be overly pessimistic.

For a variety of reasons, including the need to perform some of the canceled elective procedures later on and the possibility of holding down length of stay on COVID-19 cases, hospitals may suffer less financial damage than the analysis suggests, he said.

Trembowicz pointed out that elective surgeries generate about 40% to 50% of revenues in the average hospital. So the loss of most of this revenue will really hurt hospitals, he said.

With regard to the reimbursement for COVID-19 cases, he cited the allowable commercial charges for two DRGs for respiratory illness cases: DRG 193, which includes complications, is reimbursed at $38,000, and DRG 195, which involves few or no complications, brings in $22,000. Medicare, which covers the bulk of those at risk, pays much less than these amounts; even with a 20% increase in COVID-19 case rates, he said, "we don't think it's going to be sufficient" to cover the losses.

The number of people who will get laid off and will lose private insurance coverage is unknown at this point, he noted. It’s also unclear how many uninsured and underinsured people will be treated for COVID-19.

Another major variable in predicting hospital losses, he said, is the eventual prevalence of COVID-19 infections. Estimates range from 20% to 50% of the population, he noted.

"At the high end of range, you're looking at significant under-compensation [of hospitals] eventually. At the low end of the range, [the 20% raise] may be more than sufficient."

Trembowicz agreed with Strata's data that indicate that many hospitals could encounter cash-flow problems in 60–90 days. However, he said, hospitals should look into having insurance companies, which are receiving fewer claims for elective procedures, help finance their future expenses.

Trembowicz and his colleagues are advising clients to propose a "payment on account arrangement with insurance companies, based on historic cash flow. If you got that in the interim, you could build up a cushion so you can reconcile [payments with insurers] down the road. You're just trying to buy time."

Political Realities

In Kerns' view, political realities will probably prevent the cash-flow crunch that Strata and Trembowicz predict.

"That assumes a lot of hospitals will not be able to operate on a negative margin and will have to default on their bond covenants," he said. "But it's very difficult to close a hospital. There are hospitals in every Congressional district, so it's difficult to close them. It's even harder to close them now, because of how essential they are to manage this pandemic. I suspect that you'll find a lot of local and municipal support to keep these facilities open and to prevent them from defaulting on their covenants."

Most hospitals will be able to avoid that predicament, he explained, because of factors that the Strata report doesn't take into account. To begin with, he said, after the epidemic passes through a region, "there will be a massive expansion in operating room capacity and overall throughput. That's because a lot of those elective surgeries that have been postponed, they won't be postponed indefinitely."

Surgeons will ramp up their hours and perform as many procedures as possible, Kern suggests, which will help boost hospital margins.

Some hospitals might actually be able to profit from COVID-19 cases, he said. "If admissions can be kept to 6 days or less — which is the general length of stay for an influenza admission — then hospitals are not likely to see a significant negative downside associated with COVID-19. It will simply be like a standard flu admission. That's not the most profitable thing for most organizations, but when you get a lot of them, they can provide a fairly solid margin."

Tempering this bullish viewpoint, Kerns admitted that some COVID-19 admissions last 14 days. But even if hospitals can get this down to 8 days — and he anticipates a lot of pressure to discharge patients sooner rather than later — their losses will be greatly diminished, he noted.

"Going forward, even if not-for-profit hospitals have to suffer through a period of negative or diminished cash flow, the vast majority of hospitals will able to weather this," Kern said. "It's going to be rough, and it's not the first time they've had to do it. But the vast majority of them will survive."

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