ECONOMIC ISSUES THAT COULD AFFECT THE HOSPITAL INDUSTRY’S RESPONSE TO A SECOND SURGE OF COVID-19 CASES KENNETH E. RASKE, PRESIDENT AND CEO, GREATER NEW YORK HOSPITAL ASSOCIATION This paper describes COVID-19’s fiscal impact on hospitals in the New York City area in three stages: • Stage 1 was the period from January through June in which hospitals had to rapidly expand bed capacity to accommodate the surge of COVID-19 cases. • Stage 2 is the current period during which COVID-19 admissions are continuing at a manageable level, but hospitals are facing a growing financial crisis. • Stage 3 could be the point at which either the pandemic will end because the population is vaccinated, or a second surge of COVID-19 cases requires hospitals to once again expand bed capacity. STAGE 1: THE COVID-19 SURGE The COVID-19 global pandemic started in Wuhan, China and spread west to the United States and east to Europe in January. Washington State had the first case from China on January 21, 2020, and New York City, the largest gateway for travelers through Europe, had its first case on March 1 and 500 cases by March 15. During the last two weeks of March, hospitals in the New York City area canceled all elective procedures to make room for COVID patients, and New York State Governor Andrew Cuomo shut down all non-essential public activity to slow the rate of viral transmission. He also required all hospitals to expand their bed capacity by at least 50%, and his administration and the U.S. Department of Health and Human Services (HHS) waived regulations to permit hospitals to ramp up quickly. In response, New York’s downstate hospitals undertook the largest mobilization of health care resources in the nation’s history and successfully weathered the surge, but their efforts had severe economic consequences in the form of lost revenues and higher COVID-19 expenses. Decreased Hospital Revenue Because payments for complex surgeries are much higher than payments for treating COVID-19 patients, canceling all elective procedures was a massive blow to hospitals. In fact, payments for commercially insured complex surgeries (about 8% of all cases1) generate most of the operating surpluses for tertiary hospitals. Hospitals also lost money during Stage 1 because Medicare and commercial payers did not reimburse them for the convalescent care they provided for long-term ventilator and other COVID patients with no discharge placement options. As a result, hospitals in the New York City area lost 38% of their monthly revenue on average.2 In addition to their COVID-19-related revenue losses, hospitals were already experiencing across-the-board (1.5%) and targeted Medicaid cuts that were made to help close the State’s pre-pandemic budget deficit. 1. GNYHA analysis of 2018 data from the Statewide Planning and Research Cooperative System (SPARCS). 2. Survey of the fiscal impact of the COVID-19 surge on New York hospitals by the Healthcare Association of New York State (HANYS) and GNYHA. GNYHA is a dynamic, constantly evolving center for health care advocacy and expertise, but our core mission—helping hospitals deliver the finest patient care in the most cost-effective way—never changes. GNYHA ECONOMIC ISSUES 2 OF 5 Increased Hospital Expenses To expand bed capacity, hospitals converted operating rooms, emergency rooms, lobbies, conference rooms, cafeterias, and other space into COVID-19 medical and intensive care units. Some hospitals even set up nearby field hospitals. But that was easy compared to finding and training personnel to staff the new beds; finding personal protective equipment (PPE) for all hospital staff; procuring ventilators, dialysis machines, and other equipment; and procuring diagnostic and antibody testing materials, sedatives and other drugs, and oxygen and other supplies. The staff, equipment, drugs, and supplies were in extremely short supply and commanded grossly inflated prices. The quantities needed of some supplies during the crisis, like PPE, dwarfed the numbers needed under normal circumstances. Between the increased quantities and prices, hospitals’ monthly operating expenses increased by 23% on average.3 Hospital Losses In Stage 1, hospitals nationwide lost revenue from canceling elective procedures and preparing for a potential influx of COVID-19 patients. Hospitals in areas without many COVID-19 patients, however, were able to furlough staff and otherwise cut operating costs to stem their losses. But hospitals in the New York City area lost revenue while simultaneously increasing expenses. As a result, their operating margin plunged from an already tenuous baseline average surplus of 1% to a Stage 1 COVID-19 deficit of minus 50%.4 Federal Grants The only way the hospitals got through Stage 1 was with Federal financial help. First, they accessed Medicare “advance payments.” Then Congress delivered a $175 billion Provider Relief Fund. This was done through the Coronavirus Aid, Relief, and Economic Security (CARES) Act (COVID 3), and the Paycheck Protection Program and Health Care Enhancement Act (COVID 3.5).5 The New York Congressional delegation did outstanding work to help Speaker Nancy Pelosi shape those bills in the House of Representatives, and Senate Democratic Leader Chuck Schumer’s leadership pushed them through the Senate. The Provider Relief Fund is administered through grants. HHS has distributed $102.5 billion so far, but has not yet announced how it will distribute the remaining $72.5 billion. Of the distributions to date, $50 billion was given in April to all providers in all states based on their proportionate share of national patient service revenue, regardless of the prevalence of COVID-19 in their area. The other $52.5 billion was targeted to certain providers as follows: • $10 billion to rural providers on May 6 • $12 billion to hospitals in COVID-19 ”hot spots” on May 7 • $5 billion to nursing homes on May 22 • $500 million to tribal providers on May 29 • $15 billion to Medicaid-only providers on June 9 • $10 billion to safety net hospitals on June 9 As New York’s downstate hospitals move into the next stage of the COVID-19 pandemic, they face new pressures on their financial condition. It is therefore crucial that the ongoing Federal assistance comes as close as possible to fully restoring their Stage 1 losses. 3. Ibid. 4. Ibid. 5. Four COVID-19 relief bills have been enacted so far: 1. The Coronavirus Preparedness and Response Supplemental Appropriations Act, enacted March 4 2. The Families First Coronavirus Response Act, enacted March 18 3. Coronavirus Aid, Relief, and Economic Security Act, enacted March 27 3.5. The Paycheck Protection Program and Health Care Enhancement Act, enacted April 24 PRESIDENT, KENNETH E. RASKE • 555 WEST 57TH STREET, NEW YORK, NY 10019 • T (212) 246-7100 • F (212) 262-6350 • WWW.GNYHA.ORG GNYHA ECONOMIC ISSUES 3 OF 5 STAGE 2: THE ONGOING COVID-19 THREATS TO HOSPITAL FINANCING Hospitals in the New York City area are observing two disturbing economic trends in early July as they begin the process of reopening for non-COVID-19 patients: a decrease in hospital utilization and an unfavorable shift in their payer mix. They are also concerned about potential revenue losses from the impact of the State’s ballooning budget deficit on the Medicaid program. If these trends continue and the potential losses come to pass, hospitals will have to realign their operating costs with their lower level of patient service revenue. Lost Revenue from Decreased Hospital Utilization During Stage 1, emergency room visits dropped by 50%, presumably because the shutdown led to fewer accidents and injuries, as well as less transmission of non-COVID-19 communicable diseases. But an additional factor was at play. For the period of March 11 to May 2, 2020, the New York City Department of Health and Mental Hygiene reported a statistically meaningful year-over-year increase in deaths from serious conditions such as heart attacks and strokes, indicating that many people with urgent medical needs stayed away from the hospital during the surge over concerns about acquiring COVID-19 in the hospital. With the worst of the COVID-19 surge over, the return of hospital business is slow. Hospitals have noted an uptick in off-site ambulatory surgery, but the return of on-campus services has been slower. Two GNYHA polls, the first in early May and the second in early June, have shown a change in consumer demand and attitude about getting care at a hospital. While the numbers improved slightly from May to June, New Yorkers remain concerned about COVID-19 transmission in the hospital and are reluctant to visit a hospital emergency room. The latter consequence is impacting hospital revenue because many community hospitals get half or more of their inpatient admissions through the emergency room. Further, even though the volume of elective surgeries has picked up, it has not rebounded for international and other visiting self-pay patients, who, in addition to commercially insured patients, are the hospitals’ other source of operating surpluses. The critical question is how long this fear will last. GNYHA began an advertising campaign to let the public know that with the strictest infection control practices in place and far fewer COVID-19 patients, the risk of contracting COVID-19 in the hospital is much less than the risk of not attending to chronic conditions, or signs and symptoms of potentially serious acute conditions. But even under the best scenario, hospitals expect less hospital utilization for the foreseeable future. Lost Revenue from an Unfavorable Shift in Payer Mix A July 7, front-page New York Times story (“Calamity Looms in New York City Over Job Losses”) said, “The sudden shutdown of the city nearly four months ago threw nearly a million residents out of work and threatened the survival of many of their employers.” Indeed, massive unemployment is causing a shift from employer-sponsored insurance (ESI) to government-sponsored insurance. According to data from the U.S. Census Bureau and estimates from the Kaiser Family Foundation (KFF), 15% of New York’s population with ESI—about 1.5 million people—lost their insurance when their families lost jobs due to the COVID-19 shutdown. KFF further estimated that, over the course of 2020, 76% of those 1.5 million people will go on Medicaid, 18% will obtain subsidized coverage on the New York State exchange, and the remaining 7% will become uninsured. Assuming those proportions correspond with the hospital patient population, a growing share of patients will lose commercial insurance, which generates most of the hospitals’ surpluses, and go on Medicaid, which generates most of the hospitals’ losses. PRESIDENT, KENNETH E. RASKE • 555 WEST 57TH STREET, NEW YORK, NY 10019 • T (212) 246-7100 • F (212) 262-6350 • WWW.GNYHA.ORG GNYHA ECONOMIC ISSUES 4 OF 5 Potential Lost Revenue from State Cuts to Medicaid Program Spending The COVID-19 pandemic decimated New York State tax receipts and created a budget deficit of $13.3 billion and counting for the current State fiscal year. Unless the State receives substantial additional Federal help in a fourth COVID-19 relief bill, Governor Cuomo may take administrative actions to save $5.1 billion, and cut public programs and services by $8.2 billion. If that happens, deep Medicaid cuts would be unavoidable, which would likely force some hospitals to curtail services. Medicaid payments currently cover only 75% of hospital costs,6 a deficiency that generates huge hospital losses. Safety net hospitals, whose patients are mostly poor and uninsured, currently make up those losses with almost $800 million in direct subsidies from the State. But if the $13.3 billion budget gap persists, it is doubtful that the State could maintain the current subsidy level. Hospitals with a meaningful share of commercially insured patients currently make up their Medicaid losses by negotiating higher rates with commercial insurers, but as previously noted, pandemic-induced unemployment is shrinking the proportion of commercially insured patients. One thing seems certain—there will be dire consequences for hospitals and their patients if Congress does not deliver sufficient funding for states and localities. July will be a bellwether month for hospitals. The Economic Recovery Omnibus Emergency Solution (HEROES) Act, which passed the House of Representatives on May 15, includes $500 billion for states and $375 billion for localities. The Senate is expected to debate and act on a fourth COVID-19 relief bill later this month. Depending on what happens in Washington, DC, hospitals should soon have a better sense of the magnitude of State Medicaid cuts that might be part of a second gap closing program for the current fiscal year. Moving further into Stage 2, even if Congress provides enough COVID-19 relief to New York State to reduce the magnitude of cuts needed to close the State’s budget gap, its tax receipts will remain anemic due to the pandemic-induced recession and protracted unemployment. It is therefore possible that the State would make another round of major cuts in late fall or early winter to help close huge budget gaps this year and in future years. Realigning Hospital Costs Based on the above Stage 2 outlook, it is reasonable for hospitals to expect significant revenue losses in the medium term from fewer emergency room visits and admissions, lower demand for specialty services, and fewer patients with commercial insurance. Combined with the uncertainty about Federal relief for states and localities, it is possible that Medicaid cuts could exacerbate these losses, in addition to losses not recouped from Stage 1. This grim reality will require hospitals to realign their costs, which will be an extremely difficult process, as follows: 1. It may involve painful decisions for patients and communities because it will be particularly hard to preserve current service levels for clinical services that require cross-subsidization, such as obstetrics, mental health, addiction, and other services for which Medicaid is the principal funding source. 2. With labor representing 63% of hospital expenditures in the New York City area,7 the realignment will also require painful staffing decisions. Hospitals will try to reduce staff as much as possible through attrition, and they will rely on their longtime collaboration with organized labor to maintain both the solvency of their operations and the integrity of their workforce. This problem is not unique to New York. Numerous press reports from other states have 6. Source: GNYHA analysis of hospital data reported on Exhibit 46 of the 2018 Institutional Cost Reports (ICRs). 7. Source: GNYHA analysis of data reported on Exhibits 11 and 12 of the 2018 ICRs. PRESIDENT, KENNETH E. RASKE • 555 WEST 57TH STREET, NEW YORK, NY 10019 • T (212) 246-7100 • F (212) 262-6350 • WWW.GNYHA.ORG GNYHA ECONOMIC ISSUES 5 OF 5 documented layoffs and furloughs following the COVID-19 surge. New York will be different, though, because of the historic track record of working with labor for the common good. STAGE 3: A POTENTIAL SECOND SURGE If the population can be vaccinated against COVID-19 without a second surge in COVID-19 admissions, then Stage 2 can end with an opportunity for the hospitals to strategically rebuild their cost structures in accordance with the “new normal.” This could include the permanent use of expanded telehealth services and a smaller hospital footprint. But with COVID-19 cases soaring across the south and southwest, there is growing risk of another surge of cases in the northeast, including the New York City area, especially if the development and widespread dissemination of a vaccine is delayed. If that happens, the hospitals would face the same dual blow they experienced in Stage 1—the need to rapidly increase spending with inadequate resources. The obvious problem in this scenario is that the hospitals’ economic resilience would have been severely damaged by the forces occurring in Stage 2. During the spring 2020 surge, the most difficult challenge was finding and training staff. With a smaller workforce going into a second surge, this challenge would be exponentially harder, if not impossible. Conclusion The unknowns of Stage 3 are many, including the magnitude and duration of a possible second surge. But even without a second surge, major additional Federal assistance will be needed to mitigate the protracted fiscal impact of less hospital utilization, a changing payer mix, and looming State Medicaid cuts. GNYHA will advocate for Congressional action to replenish the Provider Relief Fund, the cancellation of hospitals’ obliga­tion to repay the high-interest Medicare advances they received at the start of the pandemic, and Federal funding for states and localities. In addition, a second surge could lead to a second shutdown of non-essential business activity, which would further drain the State’s resources and its ability to support the Medicaid program and safety net hospitals. With or without potential Federal assistance, the State should consider special bond issues, backed by its good faith and credit, to preserve the essential hospital infrastructure. July 2020 PRESIDENT, KENNETH E. RASKE • 555 WEST 57TH STREET, NEW YORK, NY 10019 • T (212) 246-7100 • F (212) 262-6350 • WWW.GNYHA.ORG