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Column | Payment, Reimbursement, and Managed Care

Will the CARES Act actually reduce hospital financial stresses?

Column | Payment, Reimbursement, and Managed Care

Will the CARES Act actually reduce hospital financial stresses?


President Trump signed HR 748, the Coronavirus Aid, Relief and Economic Security (CARES) Act, into law on March 27, 2020, and almost immediately, concerns started being raised as to whether the $2 trillion stimulus package, with its more than $100 billion for hospitals, would be enough to protect hospitals from the increased demand for services resulting from COVID-19.

Normally, government payment to cover increased demand for healthcare services would be regarded as helping a hospital’s bottom line. But in this case, many hospitals were forced to cancel most or all their elective procedures, on which hospitals with very low margins typically rely to be able to maintain positive margins.

The forced cancellation or postponement of these procedures could have serious fiscal consequences. Median operating margins for hospitals stood at only 1.7% in 2018, a level described as “anemic” by one industry expert.[a]  Yet the prospect for continuing positive margins at any  percentage is likely not to hold in the current environment.

What’s in the act for providers

The CARES Act represents the third large-scale Congressional effort to combat the effects of COVID-19. The largest portion of the funding, $100 billion, is to reimburse eligible providers for healthcare-related expenses directly attributable to COVID-19. An additional $27 billion will be available through FY24 for activities that help develop and purchase vaccines and diagnostics and to provide for greater surge capacity. The CARES Act also eliminated $8 billion in previously legislated Medicaid disproportionate share hospital payment cuts ($4 billion that were scheduled for FY20 and $4 billion that were to occur in FY21).

Additional provisions to help hospitals include:

  • A waiver of the requirement for a face-to-face visit before telehealth can be used.
  • An expansion of the Medicare hospital accelerated payment program, which allows hospitals to request Medicare payments to be paid in advance based on payments in prior years, to be paid back over a 12-month period.

Although the latter provision doesn’t change the actual amount of funds received, it should help hospitals handle some of the cash flow challenges that they are currently experiencing.

Why the nation has been challenged by COVID-19

Questions have been raised about why a country that spends $3.5 trillion on healthcare is experiencing the challenges being reported. The most obvious answer is that healthcare systems in most countries, including the U.S., are simply not geared to respond to a pandemic that has the sweep to affect tens of thousands, if not hundreds of thousands, of people simultaneously.

Also, because the virus is so new, scientists are only beginning to learn about its nature, the conditions under which it spreads most quickly and which populations are the most vulnerable. Some of the answers seem obvious. For example, the elderly and those with underlying health conditions are the most vulnerable because their immune systems are frequently weakened by chronic diseases. Recently, however, young adults have demonstrated vulnerability to this virus — perhaps because they have been less inclined, on average, to follow guidelines on social distancing.

Where COVID-19 has had the greatest impact

As of March 31, half of COVID-19 hospitalizations were in New York. One reason is that New York has a disproportionate share of the people who were infected outside of the nation. It also is the largest, most densely populated city in the U.S., with twice the density of Chicago and Philadelphia and more than three times the density of Los Angeles, increasing the risk of contracting COVID-19 due to proximity to infected individuals. In addition, New York has a high number of people who have been tested for the virus because it ramped up testing at labs, hospitals and drive-through settings, so it can better document who is affected than other parts of the country. 

It has been charged that Andrew Cuomo, governor of New York, and Bill de Blasio, mayor of New York City, were slower to shut down schools and social gatherings than some of the other states. Although schools were closed in New York by March 18 and non-essential workers were told to stay home March 20, California responded somewhat more quickly to a similar early outbreak. By March 16, the Bay Area had a shelter-in-place order and a statewide stay-at-home order by March 19 when the state had seen far fewer cases than New York. Although these dates seem relatively similar, apparently even a relatively small delay can have a big impact in allowing for greater spread of the virus.

At the time this article was being prepared for publication, it was predicted that hospitalizations would peak nationally by April 16, and that many more beds would be needed than were available. Cuomo requested hospitals to increase bed capacity by 50% and in some cases by as much as 100%. Obviously, the distribution of the caseload is at least as important as the absolute number. 

How to ensure we have bed capacity for the future

Some have wondered whether the recent trend to reduce the number of hospital beds currently available has had unintended consequences. That trend has occurred over the past several decades both as a matter of policy and because patients were increasingly opting to have procedures performed out of the hospital. This issue and strategies the country should consider to be prepared for future pandemics are likely to be hotly debated.

The world has faced several pandemics in the past 100 years. The one that seems most similar is the Spanish influenza of about 100 years ago.  But the world has also experienced the HIV/AIDS pandemic, the 1968 flu pandemic and the Asian flu pandemic of the mid-1950s. 

Knowing that we can expect from time to time unusual spikes in demand makes the idea of developing surge capacity seem more practical than keeping excess capacity constantly available. The surge capacity being provided by the naval hospital ships, the Comfort and the Mercy, and the pop-up facilities being constructed by the Army Corps of Engineers appear to represent effective responses to COVID-19. Having plans in place for such approaches may be exactly the kind of response capability we would want to have going forward. 

Footnote

[a] Kacik, A., “Operating margins stabilize, but not-for-profit hospitals still vulnerable,” Modern Healthcare, April 26, 2019.

About the Author

Gail R. Wilensky, PhD,

is a senior fellow at Project HOPE; a former administrator of the Health Care Financing Administration, now CMS; and a former chair of the Medicare Payment Advisory Commission.

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