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MGH

Published On May 20, 2021

POLICY

Hard Lessons in Health Care Economics

The economic pinch weakened hospitals and providers. How can we build them up again?

It is now possible to imagine a world recovered from COVID-19. In that future, how will medicine have changed? These 10 essays explore the technical, social and political ripples of the pandemic.

The impact of the novel coronavirus pandemic on the U.S. health system won’t be fully understood for years, but some of its implications are already becoming apparent.

Despite the heroic responses of health professionals and hospitals, we learned that our delivery system is not prepared for pandemics. In recent years, to improve efficiency, we have reduced hospitals’ reserve capacity and streamlined supply chains. That leaves the hospital sector with very little ability to expand services rapidly to meet a surge in demand. For many hospitals, the only way to make room for COVID-19 patients was to stop elective care. That created economic problems for facilities and health problems for patients. Meanwhile, just-in-time supply protocols caused shortages in vital medicines and equipment. 

A further problem is that our decentralized, competitive health care system lacks established mechanisms for collaboration during public health emergencies. Systems for sharing supplies, beds and personnel had to be created on the fly.  The nation also lacks an electronic public health information system, so emergency data sharing had to go by fax. 

COVID-19 also revealed that the way care is paid for leaves providers financially vulnerable during this kind of disruption. The great majority of hospitals and physicians survive on fee-for-service payments, and when the volume of services drops, so does provider revenue. Losing elective procedures, which are compensated more generously than other services, hit particularly hard.    

At one point in April 2020, hospital admissions nationally dropped to 31% below expected levels, and from March through December, admissions lagged by 8.5%. Ambulatory visits plummeted 60% in March and April, and despite returning to normal levels by summer, visits for the full year remained considerably below what had been expected. 

Financial losses have forced some hospitals and physician practices to close, especially in rural areas, and there have been widespread layoffs. Federal aid helped mitigate the damage, but the health care industry has emerged weakened. It has often proved itself to be recession proof, but it clearly is not pandemic proof.

With strong public health leadership and the miracle of vaccines, we hope the worst of the pandemic will be behind us by late summer or fall. Humans being humans, most of us will then feel an overwhelming urge to return to “normal.” For health care, that will probably mean pre-COVID business as usual, though perhaps with a couple of tweaks.  

In the most likely scenario, our system will continue to rely on fee-for-service payment and remain unprepared to collaborate during public health emergencies. In addition, pre-pandemic trends toward consolidation in the health care sector are likely to accelerate, as providers severely weakened by the pandemic either go out of business or are acquired by stronger survivors.

An alternative, and perhaps less likely, scenario would see a thorough reevaluation of pandemic preparedness and require a public-private plan for pandemic resiliency. There would be financing of surge capacity for local health care facilities, protocols for sharing supplies and personnel during health crises—and regular drills to test these protocols—as well as changes in provider payment, with greater use of so-called “prospective payment,” through which health care facilities are paid in advance for the number of patients they serve rather than the number of services they provide. Also critical: national and local electronic public health information systems that permit real-time data sharing to track the response to pandemic threats.

The recently enacted American Rescue Plan Act could support the reforms suggested above. But change will ultimately fall to leaders of our private health care institutions, which are on the front lines of preventing and combating illness in the United States.  Let’s hope we can prepare for future health threats to our national wellness as well as we do for military ones. 

David Blumenthal // President of the Commonwealth Fund, a foundation that promotes a better performing U.S. health care system.