Another COVID crisis

Gov. Andrew Cuomo’s April 29 decision to lift the monthlong, state-imposed ban on elective procedures was a milestone on the road to recovery for health systems in the Rochester region, which had seen much of their usual practices sidelined by the COVID-19 lockdown. Yet the road ahead could prove to be long.

In a joint press briefing, Rochester Regional Health chief of medicine Robert Mayo M.D. and his UR Medicine counterpart, Michael Apostolakos M.D., hailed the impending resumption of electives as a boon for patients but also as a step that would help the local health systems recover from the steep financial losses they had suffered. 

As a result of the temporary ban, “we have 200 open beds that we haven’t been using. This has caused a financial crisis for us,” Apostolakos explained in a mid-May press briefing on Zoom called by the University of Rochester Medical Center to detail reasons behind its decision to furlough nearly 20 percent of its 18,000-employee workforce.  

The ban on elective procedures had blown a $500 million hole in the medical center’s budget, and had cut revenues to the tune of $130 million a month, URMC chief financial officer Adam Anolik explained. Some $99 million in direct federal aid was helping to cushion the blow as was another $200 million in federal loans. URMC would need to start repaying the loans in August and fully repay them in less than a year, however. Until revenues could be boosted, expenses would have to be cut, with much of the reduction falling on the medical center’s workforce.

In addition to the furloughs, which began in May, URMC said it planned in July to start imposing 10 percent pay cuts on doctors and administrators making $100,000 a year or more. Top administrators, a handful of whom earn more than $1 million a year, volunteered to take a 20 percent reduction in pay. 

In early June, the university informed employees that it was forced to impose additional cost-saving measures, reducing its contributions to workers’ retirement plans in place of the pay cut on high URMC earners.  

Officials say they hope to call workers back as soon as possible. But absent a full federal bailout, how quickly or how completely URMC will recover its financial footing is not clear. House Democrats in Washington are proposing further relief, but Senate Republicans and the Trump administration have pronounced themselves in no hurry to spend more federal dollars. 

Some $72 billion in already allocated federal aid remained undistributed, but whether URMC would get any of was not clear, Anolik told me in a May interview. Thousands of U.S. hospitals that took financial hits also were jockeying for some of those funds. 

RRH has not publicly detailed financial losses it may have suffered since the onset of the pandemic. Through a spokeswoman, RRH chief financial officer Thomas Crilly has declined multiple requests from me to discuss the system’s current financial challenges, saying that he thinks the RRH’s financial picture remains too fluid to comment on at this time. To date, RRH has not announced any plans to impose furloughs, layoffs or pay cuts on its staff or administrators.  

A flawed model

For area health systems, the resumption of high-profit elective procedures like joint replacements is an undeniable plus. But like COVID-19 survivors weakened by days or weeks on ventilators, the systems could face a lengthy recovery period. 

Mical Raz M.D. is a practicing URMC internist who also holds a UR River Campus associate professorship in public policy and health and history of medicine. In her view, seeing resumption of high-cost, high-profit elective procedures as a cure for financial weaknesses the pandemic exposed might be akin to seeing resumption of a donut-and-soda diet as a cure for a heart condition. 

“Many hospitals face a budget crisis that reveals the extent to which their business model is structured to reward high-cost surgeries over the very type of routine care that Covid-19 is demanding,” Raz wrote in a May 11 Washington Post column.    

Raz blames the nation’s fee-for-service model for much of the financial woes hospitals are suffering. 

Fee-for-service is essentially a piecework system that rewards doctors and hospitals for the number of procedures or office visits they log. As currently structured, it also pays significantly higher fees for surgeries like knee replacements and heart bypasses than for routine preventive medicine. 

Fee-for-service creates “a strong incentive for physicians and hospitals to maximize the number of procedures performed. Many physicians have no alternative streams of income, and their clinical work may not translate easily to the inpatient setting,” Raz wrote.

As part of the Affordable Care Act, Medicare introduced measures intended to move U.S. medical reimbursements to a more value-based model. Insurers like Excellus BlueCross BlueShield have followed suit, also offering providers who meet certain clinical and cost-control standards extra payments. Insofar as such efforts essentially maintain the fee-for service model and continue to demand volume and favor high-cost procedures, Raz is dubious of them. 

In her experience as a physician, it is not always easy for hospitals to achieve an optimally profitable case mix under fee for service, Raz told me in a recent telephone interview. 

Amplifying her point in an email, she wrote that as the pandemic continues to affect patients and how care is delivered, “it’s reasonable to assume that people are deferring all kinds of care—care  that is absolutely necessary and will be rescheduled, and care that is not necessary and will not be rescheduled, and perhaps a grey area, for instance procedures that will only be rescheduled and happen if someone continues to have adequate health insurance.” 

Soaring joblessness and the loss of health insurance for many newly unemployed patients will translate to increased financial pressure on hospitals, Raz predicts. Some of the newly uninsured could qualify for Medicaid and thereby maintain access to care, she concedes. But a higher ratio of Medicaid-insured to privately insured patients would ill serve hospitals’ bottom lines.

URMC CFO Anolik confirmed that point to me, stating that both Medicaid, the government insurance program for the poor, and Medicare, the government insurance program for senior citizens, pay providers less than their cost of care. URMC’s nearly 900-bed Strong Memorial, the region’s largest and most clinically diverse hospital, treats a high number of Medicaid patients, Anolik says. Similarly, Eastman Dental Center’s clientele consists mostly of Medicaid and charity patients.    

Higher rates paid by private insurers like Excellus in the past have offset the shortfall in government programs’ reimbursements and continue to do so. The extent to which they will be able and willing to do so going forward is not clear.

The financial cushion traditionally provided by higher rates for private third-party payers to some extent has eroded over the last decade as insurers and employers including URMC and RRH have shifted more of the burden of expensive health insurance to employees.

Private, employer-sponsored health care policies increasingly require enrollees to pay deductibles and other co-insurance amounting to thousands of dollars a year on top of monthly premiums. 

Workers who find such deductibles unaffordable sometimes solve the problem by simply not paying, a trend that forces hospitals and medical practices to write off millions of dollars in bad debt annually. 

In 2017, the most recent year in which UR filed a financial report with the Internal Revenue Service, URMC hospitals wrote off unpaid debts totaling $27.4 million. UR’s Medical Faculty Group wrote off $37.2 million, the university’s IRS Form 990 shows. 

The medical center’s combined $64.6 million write-off amounts to 1.7 percent of the $3.8 billion in expenses UR reported for that for that year and 1.65 percent of the school’s revenues of $3.9 billion. According to Anolik, clinical functions account for some 90 percent of URMC’s budget. 

The pandemic’s impact

The financial pickle the pandemic has put the Rochester area’s health care organizations in is far from unique. Reeling from similar forced shutdowns of elective procedures, hundreds of U.S. hospitals are in similar financial straits to URMC. 

Predicting rough financial times for hospitals nationally, the New York Times in May highlighted many of the same downsides nationally as Raz points to locally.

For hospitals across the country, the pandemic has called their financial future into question, upending what had been “a clear playbook for turning a profit: Provide surgeries, scans and other well-reimbursed services to privately insured patients, whose plans pay higher prices than public programs like Medicare and Medicaid,” the Times article states.

“The Covid-19 outbreak has shown the vulnerabilities of this business model, with procedures canceled, tests postponed and millions of newly unemployed Americans expected to lose the health coverage they received at work,” the article adds.

Ivy Baer is senior director for regulatory and policy affairs for the American Association of Medical Colleges, a Washington, D.C.-based trade association that represents 400 U.S. teaching hospitals like URMC’s Strong Memorial. 

AAMC members have reported pandemic-related losses of $1 million to $2 million a day, Baer says. The red ink only partly stems from hospitals’ cancellation of elective procedures; it also traces to strains on clinical practice groups like URMC’s approximately 1,300-physician Medical Faculty Group, she adds.

Nationally, medical providers saw outpatient visits fall by nearly 60 percent in April and still remain roughly one-third below previous levels in May, a Commonwealth Fund study found. 

U.S. hospitals in the years immediately preceding the pandemic saw their financial situations grow more fragile; with the pandemic, they have reached a near breaking point. 

The health care industry sees hospital operating margins—a metric calculated by subtracting an institution’s total expenses from its operating revenues and dividing the product by operating revenues—as a vital sign of financial health.

Still feeling effects of the 2008 recession, U.S. hospitals’ operating margins dipped in 2018 and rose slightly in 2019. But as COVID-19 spread this year, the margins fell precipitously, a recent report by the health care data analytical firm Kaufmann Hall states.  

“New data from Kaufman Hall quantifies COVID-19’s impact on hospital financial performance for the first time, and the numbers are grim,” the report states, citing a 13 percent drop in general operating margins and a particularly rough road ahead for nonprofits, a category to which the Rochester health systems belong. 

In a March 28 posting, a health care industry research firm, the Advisory Board, predicts some stabilization but still a tough year for U.S. nonprofit hospitals. Among other factors, the report cites predictions by Moody’s Investor Service of falling revenues and increasing expenses.  

Citing Moody’s prediction, the Advisory Board report states that “even after the new coronavirus is contained, there will be lingering effects that can drive lower cash flow. Examples of these effects include a value reduction among hospitals’ investment portfolios and the potential for loss of health benefits among patients, due to growth in unemployment.”

This is the first of two articles. Next: Are Rochester’s health systems better positioned than their counterparts nationwide to ride out the pandemic?

Will Astor is Rochester Beacon senior writer. All Rochester Beacon coronavirus articles are collected here.