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The Plight of Rural Hospitals (Part 1)

Even before the Covid-19 pandemic hit Iowa and the U.S., rural hospitals were confronted with their own pandemic of sorts – a financial crunch that could determine business survival. As we know, all rural communities rely on having viable access to a broad spectrum of essential health care services. Iowa is no exception.

Critical Access Hospitals (CAHs)

For decades, rural hospitals in the U.S. have experienced poor financials due to a number of reasons. One large reason is the gradual exodus of people leaving rural communities for urban areas, primarily for seeking more promising career opportunities. Over time, this migration resulted in an older, lower-income population remaining in rural communities, heavily relying on Medicare and Medicaid for their health coverage. On top of this, rising patient deductibles have contributed to the overall rise in bad hospital debt.

Unfortunately for rural providers, specifically hospitals, government reimbursement levels are often below the cost of providing these services. To help offset this revenue shortage, private payments through commercial insurance carriers and self-insured employers, largely due to cost-shifting, are considerably higher than government reimbursements.

To rescue rural hospitals from the ‘death spiral’ during the 1980s and early 1990s, Congress created the Critical Access Hospital (CAH) designation (Balanced Budget of 1997 – Public Law 105-33). The CAH designation was designed to reduce the financial vulnerability of rural hospitals and improve access to healthcare, thereby keeping essential services in our rural communities. CAHs receive certain benefits, such as cost-based reimbursement for Medicare services.

Over the years, additional legislation has been amended to the CAH designation and related program requirements. As of July 19, 2019, there were 1,350 CAHs located in the U.S. According to the American Hospital Association, there are 5,198 community hospitals. Iowa has 119 community hospitals, with 82 being CAHs.  A July 2020 map shows the locations of each Iowa CAH.

In 2019, the Iowa Hospital Association (IHA) developed a proposal to reform rural health care to help address the growing financial challenges of rural hospitals using a three-pronged approach. The outcome of this initiative is unknown at present.

Arrival of the Covid-19 Pandemic

Just before the pandemic arrived in mid-March, the Cedar Rapids Gazette published an article reporting that rural Iowa hospitals are at risk of closing. The article cites a 2019 national report by Navigant, a Chicago-based consulting company, that found nearly 18 percent of Iowa’s rural facilities (about 17 hospitals) “are at high risk of closing unless their financial situations improve.” Navigant also reported that 21 percent of all U.S. hospitals (430 total) are facing a similar fate.

When the pandemic tsunami arrived, the financial hit to hospitals, specifically small, rural hospitals, became even more acute. The primary reason – due mostly to the suspension of elective procedures in clinics and hospitals, including ambulatory surgeries, inpatient surgeries and inpatient discharges.

In June, the IHA reported that audit firm, CliftonLarsonAllen, through financial modeling, projected a potential ten-figure loss for hospitals statewide due to the pandemic, jeopardizing several rural hospitals. The modeling showed that 89 Iowa hospitals may lose more than $1.4 billion by the end of September, and possibly a worst-case scenario showing more than a $2 billion loss by the end of 2020.

A new analysis by Epic Health Research Network and the Kaiser Family Foundation found that, if recent pandemic trends continue through the 2020 calendar year, total hospital admissions will be down by at least 10.5 percent of predicted levels for the entire year. If this prognostication comes close to reality, loss of revenue will adversely impact many rural hospitals that were merely holding on during the pre-pandemic era. According to an October 16 article from Becker’s Hospital CFO Report, at least 47 U.S. hospitals have closed or entered into bankruptcy in 2020.

Kirk Norris, the CEO of IHA, commented that Iowa hospitals have received millions in federal support from stimulus bills, CARES act and Paycheck Protection Program, but not enough to cover predicted losses.

According to IowaWatch, 77 Iowa hospitals collected $928.3 million in accelerated and advance Medicare payments as a government stimulus to cover expenses in the Covid-19 pandemic’s early days last spring. These funds, however, allowed health care providers to receive, in advance, three months of anticipated Medicare billings that must be paid back to Medicare and Medicaid Services. This program was separate from the CARES Act and other Covid-19-related emergency plans – such as a 20 percent add-on payment by Medicare for inpatient hospital Covid-19 patients. All told, 77 Iowa hospitals applied and received accelerated Medicare payments, including 44 critical access hospitals, who could seek ahead-of-time up to 125% of their anticipated Medicare payments for a six-month period. CMS suspended the accelerated program on April 24 to re-evaluate the other revenue sources being made available to healthcare providers.

Nationally, stimulus efforts included $175 billion in two initial rounds of CARES Act funding, with another $10 billion for rural hospitals and other distributions based on high Covid-19 admissions, etc.

Public Health Plan Option Under Biden

Another storm that could potentially hit rural Iowa hospitals will first depend on the upcoming election results. Joe Biden and the Democrats are proposing to create a public option to compete with private insurance companies. This public option would allow individuals to purchase a public option plan from marketplaces in addition to allowing employees to elect a public option plan through their employers. This would mean the payment mix received by Iowa hospitals would further erode because more Iowans would now have health coverage that reimburses hospital care at a lower rate than private insurance.

The key question, however, is just how much different will the public option reimburse healthcare providers when compared to the current Medicare arrangement? If Biden is elected and the Democrats control Congress, this will be a critical piece to watch when the public option is debated.

The process of culling out the eventual mayhem of rural hospitals under a public option approach began last year. In August 2019, Navigant released an analysis finding that Iowa’s rural hospitals could lose more than $476 million dollars under a public option, putting dozens of rural hospitals at risk for closure. Using three different scenarios, the study suggests that between 25 and 52 of Iowa’s rural hospitals would be at high financial risk for closure due to a loss of revenue.

It must be noted, however, the Navigant study was funded by an industry coalition, Partnership For America’s Health Care Future, an alliance consisting of pharmaceutical, insurance and hospital lobbyists whose desire is to fight off the expansion of Medicare and any government-driven payment system. According to IHA CEO Norris, Medicare is a low payer in Iowa relative to other parts of the country. Again, the big unknown is the reimbursement level a public option would have if passed by Congress and signed by the President. The devil will be in the details.

Transparency in Hospital Financial Reporting

In the U.S., hospitals account for the largest expenditure of healthcare dollars, comprising about 33 cents of each dollar spent. It is imperative, therefore, that to effectively address rising healthcare costs and assure financial viability of all types of hospitals serving Iowa communities, state policymakers and the public will need appropriate financial information necessary to assess and understand the financial health of hospitals.

Each state has disparate reporting requirements for hospitals to report audited financial information – with some states being more comprehensive than others. In addition to the IHA providing some hospital data on their website, Iowa does ‘require’ hospitals and healthcare facilities to report a balance sheet detailing assets, liabilities, net worth, income and expenses and “other reports of the costs incurred in rendering services as the department (of Public Health) may prescribe.” This requirement comes from Iowa Code, Section 135.75.

But is this information adequate?

According to my contact at the Iowa Department of Public Health (IDPH), Iowa hospitals submit their yearly balance sheets and capital expenditures to the IDPH, but not every hospital participates, and the IDPH does “not have the time to track down the ones that do not (report).” This statute does not have a template for hospitals to use when reporting, nor is the information collated when received by IDPH. Hospital financial information is not shared outside IDPH unless it is requested. On an as-needed basis, the financial data is reviewed for “future projects that may trigger a Certificate of Need (process)” In short, “We do not have the staff to do much more with the information and have not had for many years.”

If the fate of each rural hospital is truly critical to our communities and state – and it is – how can Iowa and other states successfully address the needs of each hospital and the communities being served?

Next week’s post will discuss an interesting initiative that a national organization has designed to help state officials assess the financial viability and transparent practices of hospitals.

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COVID-19: What Will Happen to Future Private Health Insurance Premiums?

As of April 6, COVID-19 cases have surpassed 1.35 million globally, with more than 75,000 fatalities…and counting. The U.S. accounted for 367,000 infections and almost 11,000 deaths. The world economy is spiraling disastrously downward with no clear consensus when the bottom will be reached.

While watching the evening news recently, my wife asked me how insurance companies will remain financially sound if the scenarios of COVID-19 cases and fatalities reach doomsday projections. This is a logical, yet difficult, question worth some exploration.

In the U.S., most healthcare is privately provided – except for the elderly (Medicare) and for the poor (Medicaid). The key issue in the U.S. and most countries is to enable rapid testing of people in vulnerable populations, such as the elderly and individuals with health conditions who may have compromised immune systems.

Overview on Treatment Cost, etc.

Most countries, thanks to government-directed health systems, will provide free testing and treatment, but in the U.S., when appropriate tests are available, it is largely dependent on whether each private insurer (and self-insured employers) will cover COVID-19 testing and treatment. However, the Families First Coronavirus Response Act that was recently passed by Congress mandates that Medicare, Medicaid, other government plans, and most private plans cover the entire COVID-19 testing.  It must be noted that ‘surprise’ billing issues could develop under some scenarios.  There are no curative treatments for the COVID-19 virus itself, so the treatment mentioned in this blog addresses the complications from COVID-19-related illnesses.

According to the Peterson-Kaiser Family Foundation Health System Tracker, the potential costs of COVID-19 treatment for Americans covered by employer health plans will vary greatly by location and insurance plans – in addition to complications and comorbidities. The average hospital stay for admissions due to pneumonia, a relatively similar comparison to treating COVID-19, with or without complications or comorbidities is 3.2 days – with a median total cost of treatment being about $13,000. Patients with respiratory conditions who require a ventilator (requiring less than 96 hours) will average 5.8 days – with a median cost of over $34,223. Finally, patients on ventilators for more than 96 hours will average 22.6 days – with a total median cost of over $88,000.

It is important to note that the actual number of patients and the medical efforts required will ultimately determine the true medical costs, both in Iowa and across the country. Medical costs in Iowa tend to dip below national average costs mentioned earlier.

As of April 5, a research center at the University of Washington estimated that 420 Iowans will die of COVID-19 by August 4. This figure is based on a moving target of assumptions, as it will be greatly dependent on a number of variables such as stay-at-home adherence by Iowans practicing social distancing, number of Iowans affected by the virus, healthcare workforce capacity and availability of medical supplies, adequate number of ventilators, etc. Just three days earlier (April 2), this Iowa estimate was 1,488 fatalities. Facts and assumptions are clearly very fluid at this time. The number of Iowa residents testing positive in the upcoming weeks is expected to peak in late April or early May. The Iowa Department of Public Health provides the latest update on the COVID-19 cases, including the number of Iowans currently hospitalized, discharged and recovering, never hospitalized and deceased.

The majority of people with COVID-19 can be managed at home, but as the cases in China have demonstrated, about 15 percent required hospitalization and another five percent ended up in critical care.

Postponed Medical Visits and Elective Surgeries

Hoping to free up more hospital beds and staff to deal with the COVID-19 surge of patients, many Iowa and U.S. hospitals have postponed elective surgeries and procedures. It is important to note that these ‘elective’ procedures cover many different areas, and in some cases, are still considered urgent, such as cancer, organ transplants and heart conditions, while other procedures, like joint replacements, are not considered to be a medical ‘priority.’ Elective surgery is any surgery that is scheduled.

Certain types of elective surgeries may be postponed for a long time – such as hip and knee replacements – but sometime later this year, or in 2021, there will be a pent-up demand for those types of surgeries. In fact, some procedures could develop into more serious medical conditions, including compromised mental well-being of having prolonged pain and discomfort.

Insurance Companies – Wellmark Blue Cross and Blue Shield of Iowa

On March 20, Wellmark Blue Cross and Blue Shield of Iowa, the state’s largest private insurance company, indicated that it is offering virtual healthcare visits for all appropriate medical and behavioral health visits at no cost to members until June 16. Additionally, Wellmark is covering diagnostic testing for COVID-19 at no cost-share to members. Early refills of prescription drugs are also permitted.

Wellmark then announced on April 1 they will retroactively waive members’ cost-share related to the treatment of COVID-19 – including copays, coinsurance and deductibles – when members seek care from an in-network provider, effective February 4 through at least June 16. By eliminating cost barriers to their fully-insured business and Medicare Supplement members, the desire is to ensure members seek the necessary testing and care regarding COVID-19. Self-funded employers that are administered through Wellmark will decide separately whether to replicate Wellmark’s policy or implement something different.

What Will COVID-19 Mean to Future Private Premium Costs?

How the COVID-19 medical costs will impact private Iowa medical insurance premiums is unknown at this time. Insurance companies, such as Wellmark, establish a ‘reserve’ for claims that are incurred but not yet paid. Additionally, certain statutory requirements for reserves are set aside to help cover unique medical situations that we are currently experiencing. If the COVID-19 claims erode the reserves, insurers may actually have a legal obligation to increase rates to build up those reserves for the next ‘emergency’ sometime later. This is a sound actuarial practice.

Insurers may need to price their 2021 premium rates upward to anticipate a surge in elective surgeries because people have delayed less urgent medical services. On the other hand, the decrease of elective procedures this year may help insurers financially weather the COVID-19 medical costs; their reserves may hopefully be stronger than expected when heading into 2021. A new report from Covered California, the Affordable Care Act marketplace in that state, projects that commercial carriers and employers could face between a $34 billion to $251 billion bill for COVID-19 testing and treatment in 2020, requiring insurers to increase premiums between four percent to 40 percent. Whether the federal government would help mitigate premium growth due to this pandemic is too soon to speculate.

All of this will largely depend on controlling the pandemic as soon as possible. If insurers have to dig deep into their capital reserves, then all bets are off on just how much higher health insurance premiums will need to be in 2021.

As one insurance professional mentioned to me last week, “Reserve adequacy is a function of rate adequacy.” In other words, rates will need to be adjusted upward to ensure the claims and reserves are adequate for future emergencies.

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