COVID-19 Unmasks Complexities Behind America’s Ailing Healthcare System
COVID-19 has had a devastating impact on healthcare systems across the world; as a result of the Trump administration’s mismanagement of the pandemic, however, the US healthcare system is under particular strain. Unlike countries like Canada or France, where healthcare operations primarily rely on government funds, the American healthcare system is orchestrated by a complex ring of public and private insurance providers, deep-pocketed investment firms, and powerful government lobbyists operating on a “profit over patients” basis. As hospital revenues plummet and investor uncertainty rises, the US would do well to consider some major healthcare reforms.
The healthcare system is arguably the backbone of the US economy, today representing around 20% of GDP compared to a mere 5% six decades ago. And while inflation grew at a rate of about 3% per year in that time, healthcare saw an astonishing 8.6% growth rate. Most of this growth was felt within hospitals, where healthcare-related activities take place. For decades, hospitals seemed immune to the turmoil of economic recessions, enjoying steady economic growth and the creation of new jobs even as the 2008 financial crisis brought the world to its knees. The fast-growing and highly profitable industry attracted private equity giants like KKR, Carlyle, and Bain Capital. As a result of the billions of dollars of private capital deployed, around 25% of community hospitals in the US are now owned by private investors, a rate unmatched in countries across the world.
When the first case of SARS-CoV-2 was reported on US soil, however, hospitals around the country scrambled to restructure their operations to deal with the exponential rise in COVID-19 cases, furloughing thousands of healthcare workers in the process. Despite generous government aid packages, reduced in-patient visits and the cancellation of profitable elective services have left many private institutions and hospital groups extremely concerned about their financial viability until an effective vaccine or treatment allows the resumption of these services. If the COVID-19 pandemic has taught us anything, it's that nothing is as uncertain as seemingly unbridled growth — if hospitals are recession-proof, they certainly aren’t pandemic-proof.
The complexities of hospital spending are largely reflected by reimbursement practices from the three major payers in American healthcare: private insurers, or Commercial Managed Care organizations (MCOs), and the two publicly funded medical insurance programs, Medicare and Medicaid. In the US, insurance providers negotiate prices for medical services with each hospital on behalf of the patients they insure. Despite President Trump’s best efforts to unveil the mechanics of hospital-insurance provider pricing, the details of such agreements remain heavily guarded secrets in the healthcare system.
In early 2019, US hospitals’ net revenue was about $2 trillion. Medicare and Medicaid combined only paid for about a third of this, and private insurance companies covered the remaining two thirds. With the strong negotiation power of the federal government, Medicare and Medicaid beneficiaries pay the lowest prices for hospital services, or 88% of the estimated cost on average. Private insurers are left to make up the difference, reimbursing hospitals at more than 140% of the cost. Since the start of the pandemic, a staggering 14 million Americans have lost health insurance coverage due to job losses, and close to five million people have joined the Medicare program instead. Given the decrease in revenue from private insurers and the increase in Medicare beneficiaries, American hospital businesses find themselves in a more perilous position than ever before. The consequences of this are already clear: in 2015, the publicly traded hospital chain Community Health Systems (NYSE: CYH) saw its earnings expectations drop a whopping 20% in its Q3 report due to a 2% reduction in admission from privately insured patients. Its stock tanked 35% the day after earnings release and hasn’t recovered since. Unfortunately, the pandemic is testing the delicate balance of Medicare-covered services subsidized by private insurers, as most patients coming in for hospital care for COVID-19 are poorer members of at-risk, frontline communities, and patients over 65 years old. For the most part, Medicare and Medicaid cover these populations — and notoriously underpay hospitals for their services.
In reality, rather than creating healthcare costs, insurance simply reflects them. No healthcare reform in the US has ever attempted to cut the underlying healthcare costs behind high insurance prices. Medical bankruptcy is now the leading cause of personal bankruptcy; even for those with medical insurance, rising deductibles, or out of pocket costs, reach up to $10,000 a year for some health plans. Since the founding of Medicare and Medicaid in 1965, government efforts to address the cost of healthcare have focused on expanding insurance coverage to more people, rather than directly tackling hospital costs. Such was the focus of the Obamacare reform, which had little to no impact on overall healthcare spending. Governments should instead directly target hospital spending, the source of ever-rising healthcare costs, and the players in private equity who keep the wheel of profits turning.
Private equity firms involved in the healthcare business quietly purchase small offices and independent practitioners to form regional healthcare systems. On paper, such acquisitions are positive, as they allow independent doctors the time to focus on their respective practices while the private equity firm negotiates better medical supply deals, takes care of administrative expenses, and uses clever strategies to expand the business. However, this tactic draws sharp criticism and controversy in practice, with complaints ranging from pushing unnecessary procedures, monopolistic practices, poorer quality medical supplies, price increases, and more. A Harvard Business Review article even cites shocking findings such as, “price-gouging patients when they are most vulnerable,” “surprise bills,” and ER practices that are “22 times more expensive than at a physician's office.”
Though private equity operators refute these harsh claims, it’s not difficult to spot problems when looking at the incentives of these firms. The funds’ investors pressure them to buy businesses, drastically cut costs, and sell at a major profit within 3-7 years so they can realize 20-30% annualized returns. With a goal of making huge profits for investors within this time frame, where are the incentives to create long-term value for patients? Private investments in healthcare will continue growing rapidly, and regulators should act quickly to ensure these firms have the patients’ interests in mind.
However, implementing change is blocked by a minefield of obstacles, as private equity-backed healthcare groups, and even non-profit hospitals, spend significant lobbying budgets to influence public perception and the U.S. government. When a 2018 peer-reviewed article that criticized the rise of private equity firms in dermatology was published in a renowned medical journal, it mysteriously disappeared a few days later. The following year, a bill protecting patients from surprise billing received strong bipartisan congressional support. However, it was countered by lobbying efforts from various groups, including a $28M ad campaign funded by portfolio companies of KKR and Blackstone.
Given the significant influence healthcare institutions exert on politicians, it is extremely difficult to make changes in the healthcare system that aren’t beneficial for healthcare lobbyists. American healthcare will almost certainly be left to the free market and continue to involve powerful private investors for the foreseeable future, but growing bipartisan support for healthcare reform and public distrust should eventually force actionable changes. For instance, California’s proposed Senate Bill 977 would require private equity transactions to receive approval from the Attorney General. Similar proposals to improve the system already exist, such as implementing transparency regulations, analyzing Medicare claims to expose outlier practice patterns, and promoting relationship-based payment models where patients pay fixed rates. With the onset of change approaching, investor-backed practices should also attempt to regain public trust immediately by using their power for healthcare coordination, investments in technology, and improved ethical frameworks, including linking executive compensation to clinical outcomes, rather than to profitability.
In today’s climate, the implications of the pandemic make it even more important for policymakers to step in. The trend of private equity investment in healthcare will only accelerate as the virus strains cash-strapped small practices, leaving them susceptible to buyouts. Without regulatory protection, doctors will be forced to cash out as private investors leverage the pandemic to gain more power in the industry. We may be headed further towards the “profit over people” route, with major implications in the future of healthcare. And yet, it seems like the discourse around US healthcare is finally shifting – with hospitals caught in the crosshairs.