Hospitals are busier than ever — and going out of business

At various points over the last few weeks, news reports have told stories of booming hospitals: emergency departments overwhelmed by patients, imminent shortages of both ICU beds and ventilators, and even the need to create makeshift field hospitals to accommodate extra patients. At the same time, they also showed how hospitals are furloughing staff and cutting salaries and retirement benefits.

And Congress has allocated $100 billion to bail out hospitals in financial trouble.

How can hospitals be so busy and still be losing so much money?

If you could have walked through a few hospitals at various points over the last few months, you would have seen parts of the answer. While large hospitals typically run near capacity, many have been largely empty. Hospitals preparing for the surge of Covid-19 patients opened up beds by decreasing or cancelling elective procedures and admissions. Those recovering from the first wave are still waiting for non-Covid-19 patients to come back. Expenses have gone up as hospitals redeployed staff, repurposed beds to create additional ICU capacity, paid overtime, and bought needed supplies at higher cost.

But an even more important reason that hospitals are currently running in the red is because of how they are paid. Hospital margins — how much they make or lose — vary dramatically across different types of care. Procedural services such as hip and knee replacements, colonoscopies, and radiology tests are the cash cows for hospitals, while they break even or lose money on non-procedural admissions, such as those for pneumonia or psychiatric conditions. Hospitals often lose money when a patient has a prolonged ICU stay because of the high expense of providing intensive care.

So the profitable procedures and radiology tests subsidize the unprofitable care, and it sort of works out in the end.

Except when it doesn’t, like during a viral pandemic when hospitals have to cancel all the lucrative services, pivot almost exclusively to unprofitable treatment, and provide selected patients with weeks of critical care. It is no surprise that hospitals are running massive financial deficits. In every respect, the pandemic has exposed the discrepancy in how hospitals are paid for doing procedures compared to providing non-procedural medical care.

This policy approach was problematic even before the pandemic struck. It encourages the hospitals to perform potentially low-value but well-reimbursed procedures with little benefit and unnecessary risk to patients. From a hospital accountant’s perspective, it is far better to invest in highly reimbursed but minimally beneficial technologies like proton beam therapy than in effective and evidence-based cancer treatments. Hospitals in financial trouble may cut back on critical but relatively poorly reimbursed facilities such as emergency departments and psychiatric wards, with predictable adverse effects on community and mental health.

Since reimbursement discrepancies are also reflected in the salaries of clinicians who provide procedural versus nonprocedural care, they distort the physician labor market and harm public health. Areas of the country with higher numbers of primary care physicians have better survival, but our best and brightest medical students are understandably less likely to enter this relatively low-paying field.

Here are three things we can do about this problem:

First, we can fix imbalances in Medicare’s reimbursement schedule. In addition to being the largest payer in the country, Medicare’s prices are often the starting point for negotiations between hospitals and insurers, meaning that distorted Medicare prices echo throughout the health system. Second, new procedures often command high prices when they are first introduced, but then their relative prices fail to fall when more efficient ones are developed. Better mechanisms must be created to continuously update relative prices of different procedures and types of hospitalizations to prevent these imbalances. Third, we should bolster efforts to develop, refine, and test new payment models, such as accountable care organizations, that provide specific incentives for cost-effective and clinically appropriate care.

It shouldn’t have taken a pandemic, with hospitals overwhelmed yet underwater, for our country to reform how hospitals are paid for the services they provide. We hope that once the Covid-19 crisis is over, one of its long-lasting effects will be a critical re-evaluation of how we pay for hospital care, improving our nation’s health for the long term.

Zahir Kanjee is a physician at Beth Israel Deaconess Medical Center and instructor in medicine at Harvard Medical School. Ateev Mehrotra is a physician at Beth Israel Deaconess Medical Center and an associate professor of health care policy and medicine in the Department of Health Care Policy at Harvard Medical School. Bruce Landon is a physician at Beth Israel Deaconess Medical Center and professor of medicine in the Department of Health Care Policy at Harvard Medical School.