When Jeff Goldsmith and Ian Morrison talk, people listen (apologies to E.F. Hutton…Goldsmith and Morrison are old enough to get that reference, anyway). These two lions of health policy and strategy came together recently to pen an editorial in Health Affairs examining the impact of large integrated health systems on the nation’s response to COVID-19. Morrison and Goldsmith admit to often finding themselves on opposite sides of consolidation issue, but looking back over the past year, both agree the scale systems have built over decades has been foundational to their effective and rapid response to the pandemic, which they rate as “better than just about any other element of our society”.
Larger health systems were able to mobilize the resources to secure protective gear as supplies dwindled.They responded at a speed many would have thought impossible, doubling ICU capacity in a matter of days, and shifting care to telemedicine, implementing their five-year digital strategies during the last two weeks of March.
This kind of innovation would have been impossible without the investments in IT and electronic records enabled by scale—butsystems also exhibited an impressive degree of “systemness”, making important decisions quickly, and mobilizing across regional footprints. Given the financial stresses experienced by smaller providers, consolidation is sure to increase. And the Biden healthcare team will likely bring more scrutiny to health system mergers.
Morrison and Goldsmith urge regulators to reconsider the role of health systems. The government should continue to pursue truly anticompetitive behavior that raises employer and consumer prices. But lawmakers should focus less on the sheer size of health systems and rather on their behavior, considering the potential societal impact a combined system might deliver—and creating policy that takes into account the role health systems have played in bolstering our public health infrastructure.
Many physician practices weathered 2020 better than they would have predicted last spring. We had anticipated many doctors would look to health systems or payers for support, but the Paycheck Protection Program (PPP) loans kept practices going until patient volume returned. But as they now see an end to the pandemic, many doctors are experiencing a new round of uncertainty about the future. Post-pandemic fatigue, coupled with a long-anticipated wave of retiring Baby Boomer partners, is leading many more independent practices to consider their options. And layered on top of this, private equity investors are injecting a ton of money into the physician market, extending offers that leave some doctors feeling, according to one doctor we spoke with, that“you’d have to be an idiot to say no to a deal this good”.
2021 is already shaping up to be a record year for physician practice deals.Butsome of our recent conversations made us wonder if we had time-traveled back to the early 2000s, when hospital-physician partnerships were dominated by bespoke financial arrangements aimed at securing call coverage and referrals. Some health system leaders are flustered by specialist practices wanting a quick response to an investor proposal. Hospitals worry the joint ventures or co-management agreements that seemed to work well for years may not be enough, and wonder if they should begin recruiting new doctors or courting competitors, “just in case” current partners might jump ship for a better deal.
In contrast to other areas of strategy, where a ten-year vision can guide today’s decisions, it has always been hard for health systems to take the long view with physician partnerships.
When most “strategies” are really just responses to the fires of the day, health systems run the risk of relationships devolving to mere economic terms.Health systems may find themselves once again with a messy patchwork of doctors aligned by contractual relationships, rather than a tight network of physician partners who can work together to move care forward.
On Thursday, President Biden signed the American Rescue Plan (ARP) Act of 2021 into law, committing nearly$1.9T of federal spending to boost the nation’s recovery from the coronavirus pandemic. In addition to direct payments to American families, extension of unemployment benefits, several anti-poverty measures, and aid to state and local governments, the plan also contains several key healthcare measures.
Approved by Congress on a near party-line vote using the budget reconciliation process, the law includes thebroadest expansion of the 2010 Affordable Care Act (ACA) to date. It extends subsidies for upper-middle income individuals to purchase coverage on the Obamacare exchanges, caps premiumsfor those higher earners at a substantially lower level, and boosts subsidies for those at the lower end of the income scale.
The Congressional Budget Office (CBO) estimates that expanded ACA subsidies in the ARPwill result in 2.5M more Americans gaining coverage in the next two years. Fully subsidized COBRA coverage for workers who lost their jobs due to COVID is also extended through the end of September, which the CBO estimates will benefit an additional 2M unemployed Americans.
The ARP also puts in place new support for Medicaid, enhancing coverage for home-based care, maternity services, and COVID testing and vaccination, and providing new incentives for the 12 states which haven’t yet expanded Medicaid eligibility under the ACA to do so. In addition to the ACA’s 90 percent match for those states’ Medicaid expansion populations, the lucky dozen will also receive a 5 percent bump to federal matching for the rest of their Medicaid populations should they choose to expand.
Three policy changes of keen interest to providers were left out of the final version of the bill. First, while a special relief fund of $8.5B was created for rural providers, there was no additional allocation of relief funds for hospitals and other providers, similar to the $178B allocated by the CARES Act, despite initial proposals of up to $35B in additional funding. (Around $25B of the initial round of provider relief is still unspent.) Second, the ARPdid not extend or alter the repayment schedule for advance payments to providers made last year, in spite of industry pressure to implement more favorable repayment conditions. Finally, the new law does not extend last year’s pause on sequester-related cuts to Medicare reimbursement, although the House is expected to consider a separate measure to address that issue next week.
Notably, the coverage-related provisions of the ARP are only temporary, lasting through September of next year. That sets up the 2022 midterm elections as yet another campaign cycle dominated by promises to uphold and protect the Affordable Care Act—by then a 12-year-old law bolstered by this week’s COVID recovery legislation.
Ann Arbor-based Michigan Medicine will start construction on its $920 million hospital in the coming months, after delaying the project last year amid the COVID-19 pandemic, according to a March 8 health system update.
Michigan Medicine said its planning team has resumed design work on the facility.
The 12-story, 690,000-square-foot hospital is expected to house 264 private rooms, 20 operating rooms and three interventional radiology suites.
Citing a financial loss exacerbated by the COVID-19 pandemic, the academic health system delayed the project in May 2020.
With the delay, the new hospital is slated to open in the fall of 2025.
The following four health system credit rating downgrades occurred in the past three months. They are listed in alphabetical order.
1. Mercy Hospital(Iowa City, Iowa) — from “Ba3” to “B1” (Moody’s Investors Service) “The downgrade to B1 reflects the near term challenges that Mercy will face following the large operating loss in fiscal 2020, narrow headroom to the debt service covenant in fiscal 2020 and the pronounced December COVID surge, creating headwinds to retire to historical levels of stronger financial performance,” Moody’s said.
2.NYC Health + Hospitals — from “AA-” to “A+” (Fitch Ratings) “The downgrade of the NYCHCC bonds is tied to the downgrade of the city’s IDR to ‘AA-‘ from ‘AA’, and reflects Fitch’s expectation that the impact of the coronavirus and related containment measures will have a longer-lasting impact on New York’s economic growth than most other parts of the country,” Fitch said.
3. The Methodist Hospitals (Gary, Ind.) — from “BBB” to “BBB-” (Fitch Ratings) “The downgrade to ‘BBB-‘ is based on continued operating constraints after significant losses in 2017 through 2019. Interim nine-month fiscal 2020 operating income results, despite the pandemic, reflect an early stabilization trend but at weaker levels that are more consistent with the prior three years,” Fitch said.
4. Tower Health (West Reading, Pa.) — from “BB+” to “BB-” (S&P Global Ratings); from “BB+” to “B+” (Fitch Ratings) “The two-notch downgrade reflects our view of Tower Health’s continued significant operating losses through the interim period ended Dec. 31, 2020, which have been higher than expected, coupled with recent resignations of members of the senior management team,” said S&P Global Ratings credit analyst Anne Cosgrove.
The likelihood that U.S. hospitals will default on debt within the next year fell significantly since the 2020 peak amid the early days of the pandemic, according to a March 10 report from S&P Global Market Intelligence.
In 2020, the median default odds jumped to 8.1 percent. However, as of March 8, the probability of default rate fell to 0.9 percent.
Samuel Maizel, a partner from law firm Dentons, told S&P Global that many hospitals operate on razor-thin margins, and they are seeing less cash flow amid the pandemic as patients shy away from receiving care, but stimulus funds should help avert a tidal wave of hospital bankruptcies in the next year.
“They’re sitting on a lot of cash, which gives them a cushion, even though they’re continuing to lose money,” Mr. Maizel told S&P Global.
S&P said that as stimulus funds dry up other pressures may challenge healthcare facilities.
The financial challenges caused by the COVID-19 pandemic forced hundreds of hospitals across the nation to furlough, lay off or reduce pay for workers, and others have had to scale back services or close.
Lower patient volume, canceled elective procedures and higher expenses tied to the pandemic have created a cash crunch for hospitals, and hospitals are taking a number of steps to offset financial damage. Executives, clinicians and other staff are taking pay cuts, capital projects are being put on hold, and some employees are losing their jobs. More than 260 hospitals and health systems furloughed workers in the last year, and dozens of others have implemented layoffs.
Below are six hospitals and health systems that are laying off employees in the next 2 months. Some of the layoffs were attributed to financial strain caused by the pandemic.
1. Sacramento, Calif.-based Sutter Healthis laying off hundreds of employees, most of whom work in information technology. In a filing with the state, Sutter said it plans to lay off 277 employees on April 2. The 277 jobs being eliminated include 92 analysts, 43 engineers and 28 project managers, according to the Sacramento Business Journal, citing the system’s filing with California’s Employment Development Department.
2. Plattsburgh, N.Y.-based Champlain Valley Physicians Hospitalplans to cut 60 jobs. The hospital, which is facing a $6.5 million deficit in fiscal year 2021, said the cuts include 10 people who were laid off or had permanent hour reductions, 12 people who are planning retirement, and the rest are open positions that will not be filled.
3. Hialeah (Fla.) Hospital is closing its maternity ward and laying off 62 employees April 5, according to a notice filed with the state. Most of those affected by the layoffs are registered nurses.
4. The outgoing owners of Providence Behavioral Health Hospitalin Holyoke, Mass., are laying off the hospital’s 151 employees, effective April 20, according to MassLive. Trinity Health of New England, part of Livonia, Mich.-based Trinity Health, is selling the hospital to Health Partners New England, which plans to take over the hospital April 20.
5. Olympia Medical Center in Los Angeles is slated to close March 31. The closure will result in the layoffs of about 450 employees.
6. Minneapolis-based Children’s Minnesota is laying off 150 employees, or about 3 percent of its workforce. Children’s Minnesota cited several reasons for the layoffs, including the financial hit from the COVID-19 pandemic. Some layoffs occured in December and the rest will occur at the end of March.
A San Francisco Superior Court judge has granted preliminary approval of the $575 million settlement agreement Sutter Health reached in the antitrust case that alleges it drove up healthcare prices in Northern California through anticompetitive practices.
A hearing for final approval of the settlement has been set for July 19, according to the judge’s order issued Tuesday.
Now, class members, or certain self-funded payers in California, will be notified of the preliminary approval and may object to part or all of the settlement agreement.
Dive Insight:
This preliminary approval comes more than a year after Sutter Health first agreed to settle the case with the plaintiffs, including California Attorney General Xavier Becerra, now nominee for HHS secretary, and a grocer’s union.
To put the settlement and all its elements in motion, it must first be approved by a judge. Tuesday’s order moves the case one step closer to final approval.
That 2019 settlement came on the eve of a court case that was supposed to lay out in open court how the regional powerhouse’s practices led to higher healthcare costs.
Even though the settlement averted a trial, it was designed to force Sutter to change some of these practices. As part of the settlement, Sutter agreed to stop “all-or-nothing” contracting and instead allow insurers and other payers to contract with some, but not all, of Sutter’s facilities.
The settlement is also designed to limit what patients pay out-of-network in an effort to shield them from exorbitant, surprise medical bills.
Sutter Health has tried to delay the $575 million antitrust settlement, citing the fallout from the novel coronavirus that has squeezed providers, including Sutter.
The health system, though battered by the pandemic’s fallout, was still able to post net income of $134 million for 2020, in part thanks to investment income. However, it did report an operating loss of $321 million as expenses outpaced revenue. Sutter said it was launching a sweeping review of its finances and operations as a result.
The litigation was first initiated in 2014 when the grocer’s union, joined by other plaintiff’s, filed suit against Sutter’s practices. It ultimately drew the attention of Becerra’s office.
Providence Health posted a $306 million operating loss for 2020 as the system’s patient service revenue declined by nearly $1 billion due to COVID-19.
Providence struggled with a major decline in patient volumes, which were down 9% compared to 2019 and led to a 5% decline in net patient service revenue.
While volumes have recovered since an initial decline at the onset of the pandemic, “operational recovery continues to be variable and market-specific as the pandemic continues across our footprint,” the 51-hospital system said in its earnings report released late Monday.
Providence generated $25.6 billion in operating revenue in 2020, slightly above the $25 billion that it generated the year before. However, Providence’s expenses shot up to $25.9 billion, a major spike from the $24.8 billion it paid for in 2019. This led to an operating deficit of $306 million.
A major reason was the system’s response to the COVID-19 pandemic, which Providence got a jump start on as it was the first U.S. hospital system to treat a patient with the virus.
“The impact included a significant reduction in revenue, coupled with an increase in costs incurred for [personal protective equipment] and pharmaceuticals, and increases in labor costs for staffing to serve those impacted by the virus,” Providence’s report said.
Net patient service revenue was $19 billion for 2020, down by nearly $1 billion from the $19.9 billion it posted in 2019.
Providence’s non-operating income totaled $1 billion in 2020 compared to $1.1 billion the previous year. The non-operating income, which is made up of investment gains, helped to “recoup operating losses resulting from the pandemic and offset reimbursement shortfalls from Medicaid and Medicare coverage, allowing us to serve vulnerable populations while balancing our financial standing,” the report said.
Providence’s operating earnings before interest, depreciation and amortization (EBITDA) was $1.1 billion, or 4.4% of its operating revenues. This was a decline from the $1.6 billion (6.2%) in EBITDA for 2019.
The system also got $957 million in relief funding under the CARES Act, which partly offset the losses from lower volumes, the report said.
Providence is an outlier among other larger for and not-for-profit systems that ended 2020 in the black. For instance, Mayo Clinic posted a net operating income of $728 million, helped by $587 million in donations and a massive increase in business from its lab division to help provide COVID-19 tests.
University of Pittsburgh Medical Center also posted a $1 billion profit for 2020 thanks to a boost of enrollment in its insurance business.
The COVID-19 pandemic has accelerated the pace of artificial intelligence adoption, and healthcare leaders are confident AI can help solve some of today’s toughest challenges, including COVID-19 tracking and vaccines.
The majority of healthcare and life sciences executives (82%) want to see their organizations more aggressively adopt AI technology, according to a new survey from KPMG, an audit, tax and advisory services firm.
Healthcare and life sciences (56%) business leaders report that AI initiatives have delivered more value than expected for their organizations. However, life sciences companies seem to be struggling to select the best AI technologies, according to 73% of executives.
As the U.S. continues to navigate the pandemic, life sciences business leaders are overwhelmingly confident in AI’s ability to monitor the spread of COVID-19 cases (94%), help with vaccine development (90%) and aid vaccine distribution (90%).
KPMG’s AI survey is based on feedback from 950 business or IT decision-makers across seven industries, with 100 respondents each from healthcare and life sciences companies.
Despite the optimism about the potential for AI, executives across industries believe more controls are needed and overwhelmingly believe the government has a role to play in regulating AI technology. The majority of life sciences (86%) and healthcare (84%) executives say the government should be involved in regulating AI technology.
And executives across industries are optimistic about the new administration in Washington, D.C., with the majority believing the Biden administration will do more to help advance the adoption of AI in the enterprise.
“We are seeing very high levels of support this year across all industries for more AI regulation. One reason for this may be that, as the technology advances very quickly, insiders want to avoid AI becoming the ‘Wild Wild West.’ Additionally, a more robust regulatory environment may help facilitate commerce. It can help remove unintended barriers that may be the result of other laws or regulations, or due to lack of maturity of legal and technical standards,” said Rob Dwyer, principal, advisory at KPMG, specializing in technology in government.
Healthcare and pharma companies seem to be more bullish on AI than other industries are.
The survey found half of business leaders in industrial manufacturing, retail and tech say AI is moving faster than it should in their industry. Concerns about the speed of AI adoption are particularly pronounced among small companies (63%), business leaders with high AI knowledge (51%) and Gen Z and millennial business leaders (51%).
“Leaders are experiencing COVID-19 whiplash, with AI adoption skyrocketing as a result of the pandemic. But many say it’s moving too fast. That’s probably because of current debate surrounding the ethics, governance and regulation of AI. Many business leaders do not have a view into what their organizations are doing to control and govern AI and may fear risks are developing,” Traci Gusher, principal of artificial intelligence at KPMG, said in a statement.
Future AI investment
Healthcare organizations are ramping up their investments in AI in response to the COVID-19 pandemic. In a Deloitte survey, nearly 3 in 4 healthcare organizations said they expect to increase their AI funding, with executives citing making processes more efficient as the top outcome they are trying to achieve with AI.
Healthcare executives say current AI investments at their organizations have focused on electronic health record (EHR) management and diagnosis.
To date, the technology has proved its value in reducing errors and improving medical outcomes for patients, according to executives. Around 40% of healthcare executives said AI technology has helped with patient engagement and also to improve clinical quality. About a third of executives said AI has improved administrative efficiency. Only 18% said the technology helped uncover new revenue opportunities.
But AI investments will shift over the next two years to prioritize telemedicine (38%), robotic tasks such as process automation (37%) and delivery of patient care (36%), the survey found. Clinical trials and diagnosis rounded out the top five investment areas.
At life sciences companies, AI is primarily deployed during the drug development process to improve record-keeping and the application process, the survey found. Companies also have leveraged AI to help with clinical trial site selection.
Moving forward, pharmaceutical companies will likely focus their AI investments on discovering new revenue opportunities in the next two years, a pivot from their current strategy focusing on increasing profitability of existing products, according to the survey. About half of life sciences executives say their organizations plan to leverage AI to reduce administrative costs, analyze patient data and accelerate clinical trials.
Industry stakeholders are taking steps to advance the use of AI and machine learning in healthcare.
The Consumer Technology Association (CTA) created a working group two years ago to develop some standardization on definitions and characteristics of healthcare AI. Last year, the CTA working group developed a standard that creates a common language so industry stakeholders can better understand AI technologies. A group also recently developed a new standard to advance trust in AI solutions.
On the regulatory front, the U.S. Food and Drug Administration (FDA) last month released its first AI and machine learning action plan, a multistep approach designed to advance the agency’s management of advanced medical software. The action plan aims to force manufacturers to be more rigorous in their evaluations, according to the FDA.
HENRY KOTULA 