“We will make electricity so cheap that only the rich will burn candles.”― Thomas A. Edison
Recently the RAND Corp. released its latest hospital pricing study that uses Medicare as a benchmark for hospital pricing. For many years, pricing and affordability has been top of mind for our patients, and our hospitals and health systems go to great lengths to ensure anyone who walks through our doors at any date or time will receive high-quality care regardless of their level of coverage. Efforts have been made to increase healthcare transparency, including the development of the MHA’s verifymicare.org website, recent federal legislation to establish a dispute resolution process for balanced billing that removes patients from payer and provider disputes, and federal requirements that hospitals post price information online.
Unfortunately, the recent study from RAND does not provide an accurate picture on the relationship between fixed government reimbursement rates, negotiated private insurer rates and financial sustainability for hospitals. We know Medicare does not cover the true cost of care. Hospitals do everything they can to break even, and most operate on razor-thin margins. Just consider that 52 hospitals in the US closed between 2018 and 2020. Nearly all hospitals still lose money on Medicare. In addition, unlike public goods that respond quickly to inflationary pressures, the ability of a hospital to pass cost on to consumers is extremely limited. The drivers of increased cost in the economy are felt by all hospitals, such as through the increased cost of labor and supply chain increases.
The RAND study makes a very broad claim from a cherry-picked data set that looks at claims for just 2.2% of overall hospital spending and inappropriately uses Medicare reimbursement rates as a benchmark. It fails to acknowledge that hospitals are the only healthcare entities in our communities and modern society that are open 24/7/365 to everyone, regardless of their ability to pay. This remains a commitment of ours well into the future.
Hospitals not only have to consider the actual and projected cost of care but plan capital improvements that will be necessary in terms of new technologies or facility renovations. For example, the cost of the workforce is built into negotiations with insurers. The reason we see price increases is that underlying costs for hospitals are on the rise. When contrasting the price of hospital care with the price of many goods and services in this inflationary economy, we do not look out of line. Looking at 2020, the unbudgeted expenses for hospitals exploded due to personal protective equipment and staffing expenses that totally changed the cost of hospital operations. Remember, hospitals are extraordinarily labor dependent, and hospitals must meet workforce sustainability challenges to maintain appropriate staff throughout their facilities and ensure the quality of care is never impacted.
Recent analysis from Kaufman Hall clearly indicates profiteering is not occurring by hospitals. Hospitals have been losing money during the pandemic and, while federal relief funds have made a significant impact, many have still lost money because of the exorbitant staffing and supply expenses they have been forced to absorb. Median operating margins for hospitals fell from 5.6% to -1.4% between December 2021 and March 2022, which includes funding from the Coronavirus Aid, Relief, and Economic Security Act. Hospital labor expenses have increased by more than one-third from pre-pandemic levels while contract labor as a percentage of total labor expenses increased more than five times the rate from pre-pandemic levels. In addition, drug costs have seen the largest increase in expenses for hospitals, up 24% compared to before the pandemic.
We empathize with our patients: no one wants to pay more money for healthcare than is necessary. This is true whether it’s healthcare or gas or milk. Hospitals’ shared goal is providing access to high-quality care in this challenging environment in a cost-effective way. It is a costly enterprise to ensure everyone in the community has high-quality healthcare every minute of every day, but hospitals do their best to keep costs as low as possible for every patient, every time.
The MHA responded to several media requests the week of May 16 on topics including the RAND 4.0 Hospital Price Transparency Study, hospital workforce challenges and the shortage of contrast media from GE Healthcare.
MiBiz and Crain’s Detroit Business published stories on the latest RAND report that includes multiple quotes from MHA CEO Brian Peters discussing the flaws associated with the study, including the use of Medicare as a reimbursement benchmark and the limited data set. The MiBiz story also cites recent findings from the American Hospital Association and Kaufman Hall on significantly increasing hospital expenses.
“So it’s not a comprehensive set. It’s looking very specifically at Medicare reimbursement rates, which we know in Michigan and other states as well does not cover the true cost of care,” said Peters to MiBiz. “Hospitals do everything they possibly can just to break even, at best, and still lose money on Medicare.”
Michigan Radio aired a feature on May 16 following an interview with Peters on workforce challenges impacting hospitals.
“We are losing employees to McDonald’s for a job that pays better and is less stressful,” said Peters. “And we are incredibly limited in our ability to compete with rising wages in other industries.”
Crain’s Detroit Business published an additional article May 18 on the topic that cited the Michigan Radio story and quotes Peters. Laura Appel, executive vice president of government relations and public policy, MHA, also spoke with WZZM-TV Channel 13 for a story on workforce challenges that aired May 19.
The Detroit Free Press and Fox 2 Detroit also reached out earlier in the week on the reported shortage of contrast media from GE Healthcare. A general statement was provided to reflect the varying impacts from the shortage on hospitals throughout the state.
"Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery." — Charles Dickens
The past year has been extremely challenging for everyone across the globe. At the very top of that list: those who have lost loved ones to the pandemic, and those who have suffered from the often severe health consequences associated with COVID-19. At the same time, the financial blow to hotels, restaurants, bars, entertainment venues, and countless other businesses large and small has been well documented. And we all know about the mental health concerns brought about by income and job loss, the need for remote learning for students and the resulting lack of socialization, plus a host of other consequences that have accompanied this pandemic and negatively impacted people for many, many months now.
As a Michigander and a father, I care deeply about all of this. And as the CEO of the Michigan Health & Hospital Association, I have the great privilege of getting to do something about it every single day. After all, our very mission is to “advance the health of individuals and communities.” It is from this perspective that I can tell you how proud I am of our member hospitals and health systems throughout the state — and how concerned I am for the wellbeing of our caregivers and staff, and for the financial viability of the organizations themselves as the dark cloud of the pandemic continues to hover over all of us. Am I biased? Perhaps. But I truly believe that hospitals must be supported and protected at this time more than ever, for the betterment of our entire society.
Our members have now been serving on the front lines for over a year and have experienced significant physical and mental trauma. For those institutions that serve our local communities and employ our healthcare heroes, the last year has also been filled with financial uncertainty at best, and devastation at worst. Early in the pandemic, when elective procedures came to an abrupt halt, the double-edged sword of new, unbudgeted expenses related to ramping up to deal with COVID-19 combined with lost volume and revenue on an order of magnitude that we have never seen in modern times, pummeled our hospitals and health systems financially. For even our largest members, furloughs and layoffs became necessary. And for our smaller, independent or rural hospitals, there were legitimate concerns about keeping the doors open in the face of severe cash flow disruptions.
Just one example of new costs: personal protective equipment (PPE) is a term Americans became all too familiar with last year. Our hospital supply chain leaders can verify that increasing the number of gloves, gowns, respirators, masks and face shields, both for immediate use and for the “new normal” stockpile requirements, is not only more expensive due to sheer quantity, but the prices have soared due to increased demand. To avoid dependence on the global supply chain, many organizations are now diversifying their network of suppliers and contracting with domestic companies. However, doing so comes at a cost, as domestic production is typically more expensive. This is just one of many factors that have driven hospital total expense per adjusted discharge higher by 19.6% over the past year, according to a recent analysis of national data from Kaufman Hall. Our own data and anecdotal evidence show that Michigan closely mirrors this trend.
Coupled with increased expenses is decreased revenue, as total patient volume has yet to recover to pre-pandemic levels. The same analysis from Kaufman Hall found that overall revenue (not including federal aid from the Provider Relief Fund) fell 4.6%, with emergency department visits decreasing 26.8%. As part of surge planning, hospitals have been forced to delay many nonemergency medical procedures. Unfortunately, images of hospitals admitting COVID-19 patients and constructing temporary outdoor facilities also created a misplaced fear among a subset of the public that hospitals were no longer safe places of care. Much work, at both the state and federal level, has gone into correcting this misconception, but there remains a significant number of people who have legitimate healthcare needs who are still delaying care — to their own detriment. The resulting drop in patient volume and procedures has created a gap in hospital revenue that will take a long time to recover.
Lastly, the insurance coverage mix is also continuing to change for the patients utilizing our hospitals, specifically moving toward government programs or no coverage at all. According to the National Center for Coverage Innovation, Michigan had the sixth highest increase in newly uninsured adults, with 222,000 individuals becoming uninsured due to job losses, representing a 46% increase from 2018 levels. We’ve seen the growth borne out in the Healthy Michigan Plan (HMP), our state’s Medicaid expansion program, which has seen enrollment increase from a pre-pandemic level of approximately 650,000 beneficiaries to nearly 900,000 today. While continued coverage for all Michiganders is a top MHA priority, and we are incredibly thankful for the existence of the HMP, this transition from employer-sponsored health plans to government healthcare programs means more patient care is being reimbursed at a lower rate in contrast to the full cost of care.
To directly address all these challenges, the MHA has advocated strenuously for financial relief at the state and federal levels, and our members have been incredibly grateful for it. Federal funds such as the CARES Act helped to alleviate the immediate crisis, while providing a measure of financial stability to all hospitals (and serving as a real lifesaver for some). We have successfully delivered accelerated payments, targeted loans and grants, and more. One item of important relief that was implemented at the beginning of the pandemic was a moratorium on Medicare sequestration, the scheduled 2% cut to all Medicare payments that would have been a significant financial hit to hospitals and health systems at the worst possible time. Recently, legislation that delays these cuts through the end of the year passed the Senate with a bipartisan vote (thank you to our U.S. Sens. Debbie Stabenow and Gary Peters, for their support) and is expected to pass the House of Representatives once Congress returns from Easter recess. All of this is helpful — but none of this is a long-term solution to guarantee the financial viability of hospitals. Our members (even pre-pandemic) are doing their part to be innovative and increasingly focused on cost-effectiveness. But they need our continued support.
There is cause for optimism as we head down the road to recovery. Today, all adults 16 years and older are eligible to receive the COVID-19 vaccine in Michigan. Vaccine supply, which has increased dramatically in recent weeks, is expected to expand in the weeks ahead. In fact, we are very close to the day where the supply and demand curve flips and our efforts will need to focus on reaching vaccine-hesitant populations. The reasons to receive the safe and effective vaccines are many, as most importantly they prevent hospitalization and death and protect loved ones and those around you from contracting the disease. There is no better evidence than recent data the MHA released that shows hospitalizations are increasing the slowest among the age cohorts that have a higher percentage of vaccination.
Collectively, achieving our state’s goal of vaccinating 70% of the population allows our financial recovery to truly begin. To return to some sense of normal, everyone must do their part to mitigate the chance of future outbreaks. That tool is in our toolbox and it starts by scheduling a vaccine appointment. From there, restrictions and protocols placed on in-person office work, education instruction, and entertainment and leisure activities can be lifted. But we cannot trick ourselves into thinking that we can do all these things without reaching our vaccine goals first.
As Michigan hospitals deal with a legitimate third surge of COVID-19 patients, it takes everyone to do their part to put our state and communities on a path to recovery. By doing the right things, practicing preventive measures such as wearing a mask, social distancing, washing your hands and receiving a vaccine, we can protect both our physical health and the financial health of our hospitals that operate 24/7/365 to provide care when we need it. After all, the same hospitals that are needed to fight COVID-19 today are the hospitals that will be needed to treat auto accident victims, cancer patients and countless other loved ones in the future. They deserve our full support.