Influenza, the commonly known name for a sometimes deadly group of ever-mutating viruses, is for the U.S. healthcare industry the annual little nest egg that can boost hospital admissions and potentially nurse a sick balance sheet through a long, bitter winter.
Clinicians say only the most fragile patients--the very young and the very old--are hospitalized for flu, and most frequently they are admitted with complex diagnoses that extend hospital stays and thin margins. Yet when well-managed, there is some profit to be made.
But all bets are off in the event of a pandemic. Experts warn that a virulent avian flu strain in its worst scenario won't discriminate between victims, stretching hospital capacity with normally healthy patients. From a financial standpoint, that could mean a positive bottom line only if a hospital is fully prepared. More likely, hospitals fear, a pandemic will create a surge in admissions that ultimately breaks down an already overstretched and unprepared healthcare system.
With three pandemics in the last century, epidemiologists say the world is overdue for another and the most threatening virus is the so-called avian influenza A virus, also known as H5N1. The virus occurs naturally among birds, but there have been several cases since 1997 in which the virus spread from birds to humans, who have little or no immune protection against it, according to the Centers for Disease Control and Prevention. Cases of human-to-human transmission have been rare, but if the virus were to mutate, the world could have a new and devastating pandemic on its hands.
That would present a stark new challenge for the hospital industry, which has had mixed results in cost-effectively treating influenza year after year. Still, in the winter months, hospital financial experts almost count on an outbreak.
"Influenza is one of the biggest predictors of hospital utilization and occupancy rate. It is the driver in the winter months," said Dale Schumacher, a physician and president of the Rockburn Institute in Baltimore, a health services research and consulting firm. "What we don't know is when the flu season will hit so we can adjust staffing."
In a typical flu year, most influenza patients are chronically ill people "that would otherwise be managed outside the hospital" had they not been bitten by the flu bug, Schumacher said. "Any time you can function at optimal occupancy rates, you ought to be able to put dollars on the bottom line. ... Whether it leads to profitability depends on the individual hospital capacity and the kinds of patients."
Publicly traded hospital companies would not explicitly say that their profit margins rely on the coughing, wheezing and fevers of the public, but winter season financial reports frequently note the acuity of the past flu season to justify volumes. For example, in its quarterly financial report in May, Universal Health Services, King of Prussia, Pa., noted revenue growth in its hospital division "resulted primarily from admissions growth and an increase in revenue per adjusted patient day." The admission growth was attributed in part to "a busier flu season."
Similarly, last February, HCA reported in its quarterly financial report that a strong fourth-quarter flu season in 2003 raised the bar for admissions growth in the fourth quarter of 2004, when flu-related or pulmonary admissions decreased by approximately 18.3%. Emergency room visits decreased 5.4% during the fourth quarter of 2004 from the year-ago period, "primarily due to higher flu-related volumes during the fourth quarter of 2003," while flu-related or pulmonary emergency room visits declined by approximately 31.7%, HCA reported.
"The biggest thing flu does is make volume numbers go up," said Frank Morgan, a research analyst for investment banking firm Jefferies & Co. Typically falling in the fourth quarter and sometimes stretching into the first quarter of the new calendar year, flu season is not necessarily a huge profit-maker, he said. A labor-intensive medical condition, reimbursement for this tends to be lower than it would be for high-margin services like surgery. Although the profits are smaller, treating flu patients is not generally money-losing and "stocks seem to react at least in the short term to whatever the level of flu season is," Morgan said.
In 2003, hospitals nationwide discharged 54,944 flu patients who stayed an average 3.5 days, according to the Agency for Healthcare Research and Quality. The majority of those patients--nearly 60%--were admitted from hospital emergency rooms. That compares with the 1.3 million pneumonia patients who were discharged from hospitals the same year, staying an average 5.7 days and totaling up aggregate charges of $26 billion. More than 70% of those patients were admitted from hospital emergency departments.
More recently, in the year ended September 30, 2004, 24,679 Medicare patients were discharged from hospitals nationwide with a principal diagnosis of influenza, according to Solucient, a healthcare business information company. Those patients stayed an average 5.3 days, racking up charges of over $15,000 per case. The hospital was reimbursed on average $4,300 per case, but the average cost per case was a little over $6,500--a negative margin.
Also, in terms of cost, in the year ended March 1, there were 8,816 cases of influenza combined with other diagnoses and 5,182 cases of influenza alone at 370 hospitals in Premier's hospital alliance Perspective database. The average length of stay for the more complex flu cases was 5.3 days with an average cost per case of $7,420.32, according to Premier. When influenza was the only diagnosis, patients stayed an average 4.3 days at an average cost per case of $5,383.33.
No one seems to be asking whether an avian flu pandemic will be profitable for healthcare providers, but then not many hospitals are asking themselves if garden variety influenza is a money-losing or profit-making proposition as it stands.
"We haven't taken a look at the book of business on flu," said Teri D'Agostino, a spokeswoman for the University of Rochester (N.Y.) Medical Center. "The reason is it's kind of a secondary diagnosis. Most of the time they are older patients with chronic underlying conditions." Rochester is one of four medical sites nationwide where the National Institute of Allergy and Infectious Diseases is testing the safety of an experimental avian flu vaccine manufactured by Sanofi Pasteur on 450 healthy people between the ages of 18 and 64. Vanderbilt University Medical Center, Nashville, Tenn., another participant, administered its first vaccine on Nov. 1 to a physician.
The tipping point
A bad bout of flu can be the tipping point that robs such patients of their last vestiges of independent living, sending them to the hospital and then a nursing home. Waiting for available beds at a nursing home inevitably extends the length of a hospital stay, racking up more costs, she said. Rochester officials know that medical patients tend to stay longer than surgical patients--8.3 days for medical patients versus 7.9 days for surgical. Meanwhile, reimbursement for medical patients on average is just half the amount for surgical patients, D'Agostino said. "I would call it a thinner margin and in extreme cases, it certainly is money-losing," she said. In the winter months, the hospital assumes there will be a higher number of patient days, so "staffing does flex up ... and this is undoubtedly contributed to by the flu," D'Agostino said.
At Crozer-Keystone Health System, Springfield, Pa., where Schumacher consults, respiratory distress seems to be the diagnostic group that spikes during flu season. Such patients flood the system's four hospital sites, doctor offices and emergency rooms, said Kathy Scullin, a Crozer-Keystone spokeswoman. One day in December 2004, inpatient admissions jumped from 700 to 825 patients systemwide. "In our health system, we look at it as a strain on our resources," Scullin said. "Flu puts stresses on our system, and it's difficult to anticipate that."
In 1999, researchers at the CDC investigated the potential economic impact of pandemic influenza in the U.S. That study by Martin Meltzer, Nancy Cox and Keiji Fukuda projected that in 1995 dollars, hospitalization of patients 65 years and older would cost a mean $6,856 per case plus or minus $3,200--a great deal of variability as there always is in hospital care, Meltzer said. The average outpatient visit for the same segment of the population would be an average $102 plus or minus $60, according to the study.
The authors estimated that the next influenza pandemic would cause as many as 207,000 deaths, as many as 734,000 hospitalizations, and up to 42 million outpatient visits. The estimated economic impact would be as much as $166.5 billion, excluding commercial and societal costs, the authors said.
According to HHS' Pandemic Influenza Plan released last week, the annual flu season in the U.S. results on average in 36,000 deaths, 226,000 hospitalizations and between $1 billion and $3 billion in direct medical costs--much of the impact because of secondary complications such as pneumonia and heart problems. In projecting the impact of a pandemic, HHS extrapolated data from the severe pandemic of 1918 and the moderate pandemics of 1958 and 1968. Based on the assumption that 30% of the population will fall ill, HHS projected that a moderate pandemic would generate 865,000 hospitalizations and a severe pandemic, 9.9 million hospitalizations. Under both scenarios, half the infected population--45 million--would require outpatient medical care.
Approximately $6.1 billion of $7.1 billion in federal money promised to fuel the national strategy against avian flu was earmarked for vaccine development, production and stockpiling, as an effective and timely vaccine is widely considered the best weapon against the scourge.
In 2000, Highmark Blue Cross and Blue Shield in Pittsburgh studied 186,000 of its members enrolled in its Medicare HMO product to see if it was cost-effective for the health plan to give flu shots away, said Denise Grabner, a Highmark spokeswoman. The analysis found that members who were vaccinated against flu saved the plan 15%, or $54, in costs every month.
The federal allocation for vaccine development would represent "a huge boost for novel production techniques" as well as for technologies to screen for and identify flu outbreaks, said Geoffrey Porges, senior biotech analyst for Sanford Bernstein, an institutional equity research firm. That kind of money "is not going to make or break any pharmaceutical company," Porges said. The market for flu antivirals is about $1.5 billion worldwide with the bulk of that being Roche's Tamiflu, he said. Flu vaccines constitute an estimated $1.3 billion worldwide market. That's not much in the pharmaceutical world; the $2.5 billion worldwide market for influenza preventives and treatments is equal to just one-fifth of the market for cholesterol-lowering drugs, Porges noted.
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