COVID-19's Strain On Hospitals May Necessitate More Relief

By Bruce Deal, Mark Gustafson and Phil Hall-Partyka
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Law360 (May 26, 2020, 6:02 PM EDT) --
Bruce Deal
Bruce Deal
Mark Gustafson
Mark Gustafson
Phil Hall-Partyka
Phil Hall-Partyka
As the U.S. is grappling with the medical and economic repercussions of the COVID-19 pandemic, hospitals are facing an unprecedented financial strain from the costs of mobilizing to treat COVID-19 patients, while practically halting such revenue-generating activities as elective procedures and routine care.

Further pressuring hospital finances, government and commercial reimbursements for COVID-19 cases will likely fall below the average payment that hospitals receive per bed before the pandemic. While the Coronavirus Aid, Relief, and Economic Security Act contains several provisions that direct new funding and resources to hospitals, these amounts are insufficient to cover hospitals' added costs and revenue shortfalls.

Covered California, the Affordable Care Act exchange for California, published initial projections of the financial impact of COVID-19 for hospitals and insurance companies. However, these projections likely overstate the increase in insurance costs during the COVID-19 crisis by overstating the payments that hospitals will receive for treating COVID-19 patients.

Therefore, hospitals may continue to depend on government funding to meet the financial challenges caused by the COVID-19 pandemic.

Hospitals will experience losses from delay of elective procedures.

One large financial blow to hospitals is that many states have ordered or urged hospitals to halt elective procedures, and other hospitals have voluntarily delayed some elective procedures. Hospitals often rely on revenue from elective procedures to fund operating costs; in fact, nearly half of hospital stays that involved an operating room were for elective procedures.[1]

As a result of the near elimination of this revenue source, some hospitals have temporarily closed outpatient facilities, furloughed nonessential health care workers, and withheld or reduced compensation for medical staff.[2] While furloughing workers and other cost savings measures may help mitigate losses, researchers still estimate that 90% of hospitals halting elective procedures will face negative profit margins.[3]

Government policies promoting telemedicine may offer a small boost to medical providers. Medicare has expanded coverage for telemedicine, and on April 2 the Federal Communications Commission approved a $200 million program to help defray a medical provider's cost of connecting with patients.[4] Still, while some patients may receive care with telemedicine or reschedule elective procedures after COVID-19 restrictions are lifted, even a temporary delay of appointments will reduce a hospital's profits in the short term.

Hospitals will receive smaller payments for COVID-19 cases per bed than for providing other types of care.

As hospitals experience a decline in admissions for elective and even trauma procedures, it is important to consider the economic implications of a patient population that will skew heavily toward COVID-19 patients.

Medicare — and many commercial payers — determine how much to reimburse for hospital inpatient visits using diagnosis-related groups, or DRGs. As shown in in the figure below, COVID-19 inpatient visits will likely fall within one of five DRGs. While Medicare would likely group more moderate inpatient visits as DRGs 193 to 195 — which typically result from diagnoses of influenza, pneumonia and even SARS — more severe cases requiring mechanical ventilation would likely be grouped either as DRG 207 or DRG 208.

DRGs Likely Used for COVID-19 Hospitalizations

It is too early to know the distribution of the severity of COVID-19 cases in the U.S. However, a study by Wei-jie Guan and others found that in Wuhan, China, 6.1% of admissions required mechanical ventilation and the average length of stay was 12 days for COVID-19 hospitalizations (regardless of ventilator use).[5]

While there are differences in medical practices between the two countries and it is unknown to what extent these results will replicate in the U.S., the Guan study suggests that most COVID-19 inpatient visits would not require mechanical ventilation, and thus are likely to result in a DRG of 193 to 195.

Medicare pays between $5,322 and $10,009 for inpatient hospitalization for DRG codes 193 through 195, or $1,378 to $1,836 per day. In comparison, across all DRGs Medicare pays, on average, $13,336 per discharge, or $2,773 per day.

The CARES Act that was signed into law on March 30, contains several provisions that will impact hospitals. For example, Medicare payments for COVID-19 hospitalizations were increased by 20%, and the Medicare sequester that reduces Medicare payment by 2% will be suspended from May 1 through Dec. 31.[6]

So, for example, the average Medicare payment for DRG 193 will increase from $1,836 per day to $2,203 per day. Even with this increase, however, hospitals would still receive $570 less per day for DRG 193 than the average Medicare payment per day.

The financial situation is even bleaker for hospitals if the length of stay for COVID-19 cases approaches the 12-day average seen in Wuhan. As shown in the figure above, the average Medicare length of stay for DRG 193 is 4.6 days, and even for cases requiring a modest amount of ventilator usage (less than 48 hours), the average length of stay is only 5 days.

While some Medicare claims may receive outlier payments (if the hospital's charges exceed a set fixed-loss cost threshold amount), hospitals would still receive a smaller payment per day if COVID-19 hospitalizations have above-average lengths of stay. Put simply, a hospital full of COVID-19 Medicare patients will likely generate substantially less revenue than a hospital full of the typical mix of Medicare patients.

The financial implications for hospitals with commercially insured patients is less clear. Commercial insurers using Medicare methodologies and paying a multiple of Medicare will be subject to the same kinds of shortfalls (albeit typically at higher per-DRG and per-day equivalents) as Medicare.

Those paying using a per diem methodology will pay proportional to the length of stay, and those paying as a percentage of charges pay proportional to charges. Either of these methodologies would likely result in higher payment per patient for the hospital than a DRG-based methodology.

Current estimates on financial implications are premature.

The uncertainty of the severity mix of COVID-19 patients makes it challenging to predict the average reimbursements hospitals will receive for each patient. The Covered California report provided the first national projection of the COVID-19 pandemic for commercial insurers.[7] The authors projected that total costs for COVID-19 treatment for the commercial insurance market would range between $34 billion for a low scenario (400,000 hospitalizations) and $251 billion for a high scenario (3 million hospitalizations).

However, the Covered California report likely overstates the increase in projected insurance costs during the COVID-19 crisis and, by extension, overstates the amount of money hospitals will receive from treating COVID-19 patients. First, as acknowledged by Covered California, the report was not intended to measure any offsetting reduction in claims cost from delayed or cancelled elective inpatient and outpatient procedures, which could be significant. In addition, we find that the report likely overstates commercial payers' reimbursements for COVID-19 related inpatient visits.

The Covered California report assumed that over 90% of the projected costs for COVID-19-related testing and treatment are from inpatient services. The authors assumed the average Medicare payment for a COVID-19-related inpatient visit was $30,000, which they then multiplied by the average ratio of commercial payments to Medicare payments (2.4) to calculate an average inpatient payment of $72,000 per commercial payer.

It is unclear how Covered California determined the average Medicare payment of $30,000. As shown earlier, this amount is approximately three times Medicare's standard fee schedule amount for DRG 193 (simple pneumonia and pleurisy with major complication or comorbidity). Medicare reimburses for professional services separately from physicians, which would incur additional cost.

However, COVID-19 does not generate significant expense from surgical or other procedures. It would require a very large fraction of patients to be grouped to the most expensive DRGs and a very large number of professional visits per patient to result in an average Medicare cost of $30,000 per inpatient.

The California Covered study cited a study by Chapin White and Christopher Whaley of RAND Corporation for the relationship between commercial and Medicare payments. However, while White and Whaley found that, across both inpatient and outpatient visits, commercial payments are 241% of Medicare, for inpatient visits, commercial payments are 201% of Medicare.[8]

Using the 201% multiple for inpatient visits reduces Covered California's estimated premium increase by nearly 20%. As a result, hospitals will likely receive something below Covered California's projected $72,000 amount for commercial COVID-19 hospitalizations, although the amount will depend greatly on the percentage of cases requiring mechanical ventilation.

Other studies also estimate that hospitals will receive far less than $72,000 for COVID-19 inpatient hospitalizations. A FAIR Health study released on March 25 estimated hospitals and professionals would receive a combined $38,221 for commercially insured COVID-19 patients.[9] While Covered California estimated an average inpatient stay of 12 days, FAIR Health estimated an average length of stay of only six days and limited the analysis to DRGs 193 to 195, which typically do not involve mechanical ventilation.

A third study by Matthew Rae and others using IBM MarketScan data estimated average costs per stay of $20,292 for DRG 193 and $88,113 for DRG 207 (respiratory system diagnosis with ventilator support for more than 96 hours).[10] If the estimates based on MarketScan data are accurate, the average inpatient commercial reimbursement would approach $72,000 only if more than 75% of patients require extended ventilator support.

Estimated Commercial Payment for COVID-19-Related Inpatient Cases


The U.S. health care system faces unprecedented physical and financial demands from treating a surge of COVID-19 patients. Hospitals face new costs, such as purchasing additional personal protective equipment and converting hospital wards into ICU levels of care. Payments from treating commercially insured patients are unlikely to cover these costs.

While the CARES Act has directed additional resources to hospitals, these added resources are likely insufficient for hospitals to make up financial shortfalls resulting from practically halting elective procedures and routine care and having their patient mix shift to a large proportion of COVID-19 patients.

Bruce Deal is a managing principal, Mark Gustafson is a principal and Phil Hall-Partyka is a manager at Analysis Group Inc.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Audrey Weiss, et. al., Characteristics of Operating Room Procedures in U.S. Hospitals, 2011, Healthcare Cost and Utilization Project Statistical Brief #170 (2014).

[2] Alia Paavola, 256 Hospitals Furloughing Workers in Response to COVID-19, Becker's Healthcare, April 7, 2020.

[3] Strata Decision Technology, Report: Hospitals Face Massive Losses on COVID-19 Cases Even with Proposed Increase in Federal Reimbursement (2020).

[4] Federal Communications Commission, In the Matter of Promoting Telehealth for Low-Income Consumers COVID-19, WC No. 18-213 (2020).

[5] W. Guan, et al., Clinical Characteristics of Coronavirus Disease 2019 in China, 328(18) The New England Journal of Medicine 1708 (2020).

[6] H.R. 748, CARES Act, Public Law 116-136, § 3709 (2020).

[7] Covered California, The Potential National Health Cost Impacts to Consumers, Employers and Insurers Due to the Coronavirus (COVID-19), Covered California Policy/Actuarial Brief (2020).

[8] Chapin White and Christopher Whaley, Prices Paid to Hospitals by Private Health Plans Are High Relative to Medicare and Vary Widely, RAND Corporation (2019).

[9] FAIR Health, The Projected Economic Impact of the COVID-19 Pandemic on the US Healthcare System (March 25, 2020).

[10] Matthew Rae, et al., Potential Costs of COVID-19 Treatment for People with Employer Coverage, Health System Tracker Brief (2020).

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