Like almost every part of the U.S. economy, healthcare providers have faced unprecedented challenges over how to operate during the COVID-19 pandemic. Rising costs and shrinking revenue have left many healthcare providers in a dire financial situation.
The direct medical costs of COVID-19 patients are substantially higher than those of patients with other common infectious diseases. COVID-19 patients are more likely to require longer inpatients stays and more resources including intensive care, ventilator care and personal protective equipment. COVID-19 also requires more staff time for infection control. And staff require additional resources including overtime and hazard pay.
On the revenue side, most elective procedures stopped in March and April to allow for increased COVID-related capacity. For example, elective hip and knee surgeries were not even among the top five orthopedic procedures in April—a dramatic shift from pre-pandemic operations. Elective procedures are rebounding strongly, but the lost revenue left a deep hole.
COVID-19 also has ripple effects across the entire continuum of care including post-hospitalization services such as nursing homes, home health, and inpatient and outpatient therapy. Many COVID-19 patients are uninsured or underinsured and thereby constitute uncompensated care for providers.
Healthcare payers have a responsibility to ensure providers are adequately reimbursed for expenses. On behalf of federal payers, Congress has taken some positive actions toward this goal. In March, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act into law. The CARES Act provided $100 billion to the Public Health and Social Services Emergency Fund. In April, the president signed the Paycheck Protection Program and Health Care Enhancement Act into law adding an additional $75 billion to the emergency fund.
In mid-April, the federal government began distributing the emergency fund—$30 billion—using a formula dependent on a providers' 2019 Medicare billings. This formula translates into roughly 36% of those funds supporting short-term acute-care hospitals and 3.6% supporting post-hospitalization providers. This level of financial support would suggest the pandemic has hit hospitals 10 times worse than any other provider, but we know that has not been the case for America's nursing homes.
The reasons for this disparity in economic support are varied, but historically speaking, reliance on the use of general "funds" creates inequities. For example, the Affordable Care Act established a prevention fund that was usurped and redirected to increase physician payments. History has proven that unencumbered funds are rarely used in ways Congress intends. There is a better way to put pandemic relief where it is needed—pay providers for their COVID-19 costs.
Prior to 1983, the Medicare program used cost-based reimbursement. Due to the inability to contain spending, Congress mandated a shift from cost-based reimbursement to the current prospective payment system. The key tenet of prospective payment is that it is based on a system of averages—in some cases you win, in some cases you lose; but everything averages out in a given year. The COVID-19 pandemic is the very definition of a situation where averages do not apply. Prospective payment does not work in the current environment.
Cost-based reimbursement should be considered by policymakers in the context of COVID-19. Providing payments based on the actual cost of care would avoid the inequities created by the emergency fund. It would use empirical data to solve a real problem and avoid the guessing game around how much money needs to be put into an emergency fund.
Cost-based reimbursement has its flaws—which is why Congress did away with it. But unprecedented times require unprecedented solutions. Massive revenue shortfalls under COVID-19 call for cost-based payments to provide adequate short-term support for healthcare providers. Such payments would be a real lifeline.