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