COVID Why the Economics of Healthcare Will Never Be the Same

good morning i’m going to be talking to

you today about the economics of

healthcare

specifically focusing on covid19

and the profound and i’ll argue lasting

impact

that this pandemic is having on the

healthcare industry

in order to do that i’m going to start

with a little primer

on healthcare economics and i’m going to

use months in healthcare

numbers to illustrate a few key points

so i’ll start with top line revenue so

munson healthcare as a system

generates 1.2 billion dollars in revenue

on an annual basis

we generate this revenue based on the

volume of services that we provide

so for every service we receive payment

that’s called

fee for service reimbursement and it

truly is the basis of our reimbursement

model

for the u.s health care industry when we

look at who pays the bills

for health care for months in health

care specifically you’ll see that 70

percent

of our payments come from governmental

payers

that’s medicare and medicaid and with

governmental payers

we’re unable to negotiate pricing it’s

dictated for us and it’s set based on

state and federal budget line items

so as we think about governmental

reimbursement it is at best flat

and in some cases declining so 70

percent of our reimbursement is either

flat

or declining now let’s look at our

expenses so what do we spend

money on over half of our expenses are

our people so salaries wages and

benefits

the next largest expense over 20 percent

is our supplies

and it’s important to note that both of

those expense line items

increase year over year we have to stay

market competitive with our wages

we also experience inflationary costs

and supplies such as pharmaceuticals

from our vendors so when you think about

our top line revenue being either flat

or declining and our expenses rising on

an annual basis

that makes it increasingly challenging

to generate an operating margin

and at months in healthcare our goal is

to generate an operating margin of four

and a half percent

per year so you may ask you know i

thought months in healthcare was a

not-for-profit organization

why do they need to generate an

operating margin well

our operating margin as a not-for-profit

organization

is 100 reinvested back in our facilities

in our communities

and in a normal year months in

healthcare will spend over 60 million

dollars

reinvesting in our facilities through

improvements

expansions renovations investments in

new and innovative technology

and also investments to enhance our

information technology platforms

and without a margin we wouldn’t be able

to make those investments

we also as a not-for-profit health

system provide significant support

for our community that comes in many

forms

in community support education programs

but it also comes through free and

heavily discounted care

that we provide to members of our

community who are unable to pay

for that service

so with that background i’m now going to

focus on

the health care industry pre-covert and

some of the challenges that we’re facing

as an industry

i’m going to start with a cartoon

because i think it pretty accurately

sums up the us health care industry and

i think most would agree we’re at a

point

that we need more than a couple of

cortisone shots to fix what is wrong

with u.s health

care and why is that fundamentally

our industry and our trajectory is

unsustainable

and that’s for a couple of reasons

number one

health care represents 18 of our gdp

as a country and that is continuing to

grow we spend

two and a half times what other

developed countries spend on health care

and our outcomes are worse we also

um in a number of studies that suggested

that as many as 30

of health care expenditures are actually

unnecessary

and i talked earlier about that fee for

service reimbursement model so we get

paid for every service that we provide

that creates an inherent incentive to do

more

to increase our volumes we do better

financially

when we do and provide more services and

so i’ll argue that that fee for service

reimbursement model

is a large part of why our health care

industry is unsustainable

and cms is the center for medicare and

medicaid services again

our largest payer it’s important to note

that they’re focusing

on how they can fundamentally get rid of

fee-for-service in order to address

the unsustainability of healthcare costs

in this country

now i want to look at this issue of

healthcare costs through a slightly

different lens

through the lens of our families in the

united states and you can see over the

last 20 years

the burden on health and families

in this country has increased

significantly as they shoulder more and

more costs

associated with their care as both

payers

and employers shift that burden to

patients and families we could show a

similar graph

for employers in this country because

employers who provide private health

insurance

they also sear year over year increases

in their costs and insurance premiums to

be able to provide that care

so all around the healthcare status quo

is unsustainable

so where do we go from here i think we

need to take a step back and really ask

ourselves

the question of what is the primary

business of health care

is it to make sick people better is it

to keep people healthy

or it’s both now i’m going to argue that

it’s both but i think it’s important to

note

that our health care system as it stands

today

was based and built on this premise of

making sick people better

and so our fee for service reimbursement

model

rewards volume and really rewards this

concept

of making sick people better when

somebody comes to our doors we provide

care then we get paid for it

our current model does not support this

concept

of keeping people healthy being part of

our core business

now payers are starting to shift and

align reimbursement

to incentivize this behavior and that’s

called

value-based reimbursement which i’ll

talk more about

but as it stands today in order to

incorporate this concept of keeping

people healthy into the core business of

health care

our reimbursement model needs to

fundamentally be overhauled

and shift from this true volume-based

reimbursement model

to more of a value-based reimbursement

model

so let’s talk a little bit about

value-based care

what is it well it starts with a couple

foundational concepts

first it involves at the core a

relationship between a patient

and their primary care provider with

that primary care provider really

serving as

the quarterback for their care so the

primary care provider ensuring that that

patient receives the appropriate

preventive care on a regular basis

and then if they have any chronic

conditions that those conditions are

monitored

and managed appropriately then when that

patient requires

a higher level of care so a specialist

referral or a procedure

that there also be a special specialty

physicians as well as a health system

really partnered with that primary care

physician to be able to deliver

high quality care and in a much more

coordinated way

so that we can avoid unnecessary costly

complications like a patient coming back

to our

emergency room after having a procedure

or a patient coming back to be

readmitted after they’re discharged from

one of our hospitals

and that kind of foundation of primary

care partnered with

high quality collaborative group of

specialists in a health system

i would argue provides not only better

quality and safer care

but at a lower cost so we’re actually

able to lower the total cost of care

and what does that translate into it

translates into

lower insurance premiums it translates

into more affordable care

for patients for employers and for the

government as our largest single payer

it also creates savings that payers are

able to

share with hospitals and physicians and

reward them

for keeping patients healthy and outside

the four walls of the hospital

so it’s a fundamentally different way of

incentivizing

behavior

so what does value-based care look like

as it relates to

the demand for core hospital services

such as the services offered by months

of healthcare well you can see my very

simple bar

graph there we project that over time

our demand for core services is going to

continue

to go down we’ve actually already seen

this occur

and i can give you a couple examples of

those shifts

first a total knee replacement so

several years ago if you received a

total knee replacement

you stayed in the hospital for a couple

of days that was an inpatient procedure

now the majority of our total knee

replacements are done on an outpatient

basis

and just this year medicare made that

same

shift with total hip replacements so we

are going to see this continued shift

away from inpatient

to outpatient settings of care we are

also seeing a shift away from high cost

settings of care to lower cost settings

of care

a great example of that is a shift away

from receiving care in an emergency

department

to lower cost options which include an

urgent care

walk-in clinic physician office or even

a virtual visit

so we are we believe that we are going

to see that trend continue

and at months in healthcare we were

anticipating this we saw on the horizon

that these changes were coming

and that we needed to prepare for these

changes that reduction in volume

and that fundamental paradigm shift and

how we’re paid

from volume to value so that is why it

was a

foundational element to our 2025

strategic plan

and we call that transform care delivery

so before covid we as an

industry were facing an unprecedented

change

so a change in our core business from

not only taking care of

sick people and making them better but

also trying to keep people healthy

and associated with that a paradigm

shift and how we’re paid for those

services

so now you place a pandemic on top of

that and i’m going to talk about the

impacts of kova 19 on the economics of

the health care system

and i’ll start by just illustrating

the unprecedented business disruption

that we experienced associated with

covet 19.

and i like to illustrate with a picture

so i’m going to use a graph

so the graph that you see that red

squiggly line

that represents the impatient census so

the number of patients in the hospital

at munson medical center here in

traverse city on a daily basis

and that is our fiscal year 2019 and

you’ll see

that area circled in yellow that dip

that blip in that red line you might

remember

the polar vortex that occurred in the

winter

of 2019. during the polar vortex

we experienced what we called at the

time a significant

and sustained reduction in our volumes

and that significant sustained reduction

in our volumes

basically wiped away our operating

margin for that quarter

because remember we get paid based on

the volume of services we provide

so when our volume goes down our revenue

goes down our financial performance

suffers

now i’d like to put that in comparison

to

what we saw with covid19 so the graph on

the bottom here

illustrates the same impatient census

for munson medical

center for our fiscal year 2020

and you can see that

the polar vortex looks like but a blip

on the radar

compared to the volume decreases we saw

with covet 19.

so if that little blip had such a

significant impact

imagine the significance of the

financial impact

associated with the bottom falling out

of our volumes

that’s illustrated in that bottom graph

the good news

is that through the cares act and

through other federal

and state grant programs we’ve been able

to stabilize

in the short term and make up for at

least some

of the losses that we have sustained

through covet 19.

so what is the economic impact on that

significant

business disruption on the healthcare

industry i’m going to break it down into

the short term

midterm and long-term impacts that we’re

seeing

in the short term we saw our elective

business

gone overnight we closed services we had

other services whose volumes were down

80 or more percent so the significance

of the impact on our volumes

i can’t underscore enough we also saw

community members afraid to seek

necessary emergency care in our

emergency rooms

they were afraid and we’ve had to do a

lot of work

to try to rebuild the confidence in our

communities they can safely receive care

in any of our facilities

in the midterms if i look out over the

next year

as we reopen our services we are not

anticipating that our volumes are going

to rebound to pre-covet levels

and we’re already seeing this as we call

patients to try to reschedule

care that was either cancelled or

postponed associated with

cobed patients are actually declining

and refusing to reschedule

those services and that’s not unique to

months in health care as we talk to our

colleagues across the state and across

the country

all other health systems are

experiencing that same phenomenon

we also over the next 12 months are

facing

a great deal of uncertainty one element

of that uncertainty is what’s going to

happen with a virus

we know that we’re going to have to care

for both coven and non-covet patients

but are we going to have a second peak

and how is that going to impact

our ability to care for the non-cove

patient population

we also are unsure on the impact of our

unemployment rate and job losses and

insurance coverage

so are we going to see more commercially

insured individuals

shift to either being uninsured or

covered by medicaid

when we look out over the long term and

the one to two year time horizon

we’re still not anticipating that our

volumes are going to rebound to

pre-coded levels

and i’m going to talk about why in just

a minute we also see

on the horizon that due to declines in

tax revenue

as well as all the stimulus spending

that has occurred

that we have an impending federal and

state budget deficit that has to be

dealt with

health care is a significant line item

in both those federal and state budgets

so we’re also anticipating that our

reimbursement is at risk to go

down associated with filling or

addressing

those budget gaps so i’m going to go

back to my simple bar

graph here and talk about now remember

we we thought that there was going to be

a steady decline

in the demand for hospital services as a

result of this concept of keeping people

healthy and outside our four walls

as well as the shift of care from

inpatient to outpatient

and high costs to lower cost settings of

care well that red line

represents what we project to happen

with covet

so essentially what covid has done is

accelerate

that reduction in volume

now what does that mean to the

healthcare industry i think you can

really sum it up in two words

accelerated change i’m also going to

break that down though in the short

mid and long term so in the short term

what we’ve seen across the country

our health care systems making

significant adjustments to their

historic

cost structures to come in line with the

new normal

our new level of volume those reduced

volumes

similar to what other industries are

having to do like the restaurant

industry

associated with lower volumes it’s we’re

not it’s not unique to health care

we’ve also seen a very rapid adoption of

telehealth

and what was thought to take years took

weeks and we know that that is going to

have a lasting impact

on our care delivery model in the

midterm over the next 12 months

we see a great deal of work focusing on

the redesign of care

to improve efficiency as well as quality

and a really accelerated preparation for

value-based reimbursement

and focusing on organizing our resources

not just

on making sick people better but also

on keeping people healthy and in the

longer term

associated with the overall economic

impact to employers

those budget deficits at the fate the

federal and state

government level we are anticipating

that all of our payers are going to be

shifting more

rapidly to value-based reimbursement

arrangements

so the bottom line is that the

healthcare industry

was facing a period of significant

unprecedented change pre-covet a

fundamental

paradigm shift in our core business

model and the way in which we get paid

what kovid 19 did is simply accelerate

that

and i would argue created that burning

platform for

change that we need as an industry

in order to make this paradigm shift so

as a healthcare leader

we have a lot of work to do we have a

challenge ahead of us i’m confident

that we will be able to innovate adapt

and ultimately be successful in making

this change

and that will look back on covet 19 as

truly being the catalyst

that we needed to transform the u.s

healthcare industry

thank you