By Michael Simkovic and Laleh Jalilian
Coronavirus has caused health care institutions’ precariously balanced finances to deteriorate by requiring the suspension of elective procedures in order to mitigate the spread of disease.
One of us has previously noted that less than 8% of the CARES Act stimulus package may reach the health care system, although there are options available to state governments and the U.S. Secretary of the Treasury to increase this amount. How much additional funding would it actually take to enable the health care system to continue functioning at close to normal capacity?
In the best of times, the provision of health care is a low-margin business. Profit margins (net income as a share of revenue) average less than 5% according to data from Capital IQ. Medicare and private health insurers, which have consolidated through mergers, use their market power to push down reimbursement rates. Relatively few hospitals have extensive cash reserves. Many have debts that they must service and expensive real estate and equipment with accompanying lease payments.
Elective procedures are amongst the most profitable services for hospitals and are essential to ensuring hospitals’ financial viability. Compared to elective procedures, treating COVID-19 patients is more resource- and staff-intensive and is reimbursed at far lower rates, even under provisions of the CARES Act authorizing Medicare to increase its reimbursement rates. Thus, even as Coronavirus is creating a greater need for health care, it is significantly straining the financial capacity of the health care system to meet that need.
A mid-sized hospital network, Quorum Health Corporation, recently filed for bankruptcy. Bond yields suggest that more health care bankruptcies may be coming. Envision Healthcare Corporation, Trinity Health Corporation, and Community Health Systems, Inc. in particular, seem to be among the most likely to default on their debts, according to investors. However, even bankruptcy can provide relief for only a limited subset of health care providers. Bankruptcy can recapitalize a company to reduce debt service payments, but it cannot save a business that would remain unprofitable even if it were funded with minimal debt.
In 2018, the U.S. spent just shy of $2 trillion dollars on hospitals and physician and clinical services. Assuming that health care providers can function on 80% of this revenue — through bringing profit margins down to zero and drastic cost reductions of greater than 15% — this implies that health systems need at least $1.6 trillion dollars in revenue per year. If COVID-19 precautions reduced revenue to half of normal levels, this would imply that health care providers will only have around $1 trillion in revenue and would need an additional $600 billion in funding per year. These back-of-the-envelope calculations match up reasonably closely with separate estimates from the American Hospital Association.
Funding provided under the CARES Act is less than one third of this amount. Making the most of existing health care funding by allocating it prudently could help. However, even with targeted allocations, there will not be enough funding to meet the needs of health care systems if the COVID-19 shutdowns continue for much longer. This is why it is imperative that the Secretary of the Treasury and State governments act to direct more discretionary funding under the CARES Act to shore up health systems, and Congress consider additional funding measures.
MIchael Simkovic is a professor of law & accounting at the University of Southern California Gould School of Law. Laleh Jalilian is a clinical assistant professor of anesthesiology and critical care medicine at the University of California, Los Angeles.
