Adrian Piña
Expert Contributor

Will the Pandemic Fix the Healthcare Industry?

By Adrián Piña | Thu, 01/28/2021 - 13:03

For years, insurance companies and government agencies (payers) have been pushing to move the financing of healthcare to a Value-Based Care model (VBC), moving away from the current model of Fee-For-Service (FFS). This initiative has received strong opposition from healthcare providers but that may change due to COVID-19.

Under the FFS model, healthcare professionals are paid a separate fee for each patient, each visit and each service, resulting in payers being billed regardless of clinical outcomes. This is how it has worked for centuries. When you combine the financing model FFS and the fact that the healthcare industry is one of the few industries that suffer from the Baumol effect (where cost and salaries continue to rise with minimal or no increase in productivity) the result is an unsustainable year-over-year cost increase that represents one-sixth of US GDP. This increase does not show any sign of decelerating in the near future.

Many experts talk about the problems of the FFS model. Some of the most quoted are:

  • Low quality of care
  • Never-ending cost increases
  • Focus on volume
  • Little focus on preventive care

Up until last year, patients continued to demand medical services and healthcare institutions and professionals were ready and happy to provide them. Provider cost increases were passed to the payers who, in turn, passed them to insurance policyholders and/or taxpayers via premiums or taxes.

What Changed With COVID-19?

The FFS model works when there is a patient-driven demand for services. Due to COVID-19, patients, reluctant to visit a physician and risk infection, postponed physician visits and elective procedures. The results have been financially devastating for healthcare institutions:

  • The World Bank has estimated that the revenues of healthcare institutions dropped by 10-15 percent in 2020, with a similar forecast for 2021.
  • Of the healthcare institutions surveyed by Kaufman Hall, 48 percent had an increase in bad debt and uncompensated care services.
  • In the US, the Centers for Medicare and Medicaid Services (CMS) annual report is forecasting a decline of 3.6 percent in hospital revenues in 2020 with some hospitals showing a decline over 20 percent.

In the past, it has been challenging to move to VBC as healthcare providers in most countries have not been supportive, mainly because they would take a financial loss during the transition period. Due to the pandemic, many have already experienced a significant financial loss. At this point, given the reduction in visits to their facilities for transactional services, healthcare providers would welcome the opportunity to get paid based on outcomes.

Getting Ready for 2021 and Beyond

The forecast for 2021 is not optimistic. A McKinsey study shows that 84 percent of hospital executives in the US are already expecting lower than planned profit margins in 2021, and, therefore, they are already implementing increased efficiencies and cost-saving initiatives. The Top 5 initiatives found in the study are:

  • Clinical operation improvements
  • Reduction of nonclinical workforce
  • Deferral of capital expenditure
  • Revenue cycle optimization
  • Implementation of a long-term shift to telemedicine

Initiatives such as these not only will help hospitals survive the current financial crisis but will also help them prepare to implement and adopt a VBC model promoting preventive and more affordable care. 

What Will it Take?

Implementing a new way to finance healthcare requires involvement from government agencies, insurance companies, healthcare institutions and professionals, as well as technology vendors, and, in some cases, even from politicians. Changes also require significant capital investments.

Additionally, some countries are not prepared to implement VBC. In many countries, standardization of drug, lab, disease, procedures codes and claims formats, which can take years, is needed before implementation can begin.

In emerging countries, the challenge is acute: In Latin American and most of Asia, many healthcare systems are close to bankruptcy and, therefore, have big limitations on investments, even if investing will mean potential savings in the future.

On a positive note, in some regions, the change has already started. The Gulf region in the Middle East has taken steps toward VBC by launching initiatives of code standardization and the use of Diagnosis Related Groups (DRG).

The Race is On

Many more healthcare institutions will sadly close their doors in the next few months as only the most efficient and better-prepared will weather this storm. I am optimistic that the healthcare industry will come out stronger from this crisis but the question remains: Is this the crisis that will give us the push we need to review and fix the industry?

As always, leadership will separate the winners from the losers. Heads of state, ministries of health, and healthcare executives have a huge opportunity to fix a broken system and put it on a sustainable path with aligned incentives for everyone and more importantly, better patient care through a focus on health outcomes.

Photo by:   Adrian Pina