COVID-19: Paying for the new normal

By Robbie Hughes, Founder and CEO, Lumeon 

In the penultimate piece of my series on what healthcare will look like ‘post peak’, we move on to the next level of optimization that will drive change as we live through the COVID-19 pandemic: reimbursement and links to delivery incentives.

In the UK today (as I write this) it has been announced that cancer care is being moved into new, parallel ‘clean’ sites that are designed to avoid the risk of infection for vulnerable patients. This is an important first step, but likely to be one of many on a long road ahead.

In the US, the situation is more complicated: a vast continent, no common definition of peak, variable access to resources. In the UK, the central funding of care and the government desire to do ‘whatever it takes’, means that hospital funding is more or less assured, but in the US it’s a different matter.

Reimbursement has long driven behavior in the US. Many would argue that innovation in healthcare has been stifled by the rigid optimization of care delivery models to suit reimbursement. Why has telehealth not taken off in the US? Because providers (until very recently) didn’t get paid for it.

The Challenge

The challenge this creates for hospitals is an interesting one: how can a hospital do the right thing and optimize for the internal risks and operating constraints of COVID-19, potentially to their own economic detriment? Or do they optimize for reimbursement and increase the risk of contagion?

The US Federal government so far has shown a strong willingness to remove regulatory barriers, and I hope that the deregulation we’ve seen through the CARES Act will remain over the longer term. There is a complication however: the entire healthcare environment is still designed for care as it was delivered in 1965, when Federal payment became a reality, not as it will need to be delivered post-peak COVID.

Have the various payors, providers and medical associations proposed a ‘recalibrated’ set of codes/reimbursement levels that reflect the operational and economic realities of the environment I described in my previous post, Care Redesign for a Post-Peak Covid World?

Some payor forecasts seem to suggest that a substantial drop in overall claim volume will occur over the coming months as ‘normal services’ are deferred, with a bow wave of claims arriving in the back end of the year as these play catch up.  Some payors are even posting record first quarter profits as elective surgeries have effectively ceased (as 40% of the Q1 drop in GDP is due to this phenomenon).  However, this is clearly not reflective of a new reality with substantial additional operational burden brought about by a care delivery chain that must accommodate a COVID-19 infrastructure and the requisite pandemic management processes.

Ultimately healthcare costs in the US are borne (in the overwhelming majority) by employer groups (and their employees), whether through insurer relationships and premiums, or self-insurance and the management of the consequent risk pools.

So, we are presented with a problem:

  • These same employers have been hit with a massive near-term drop in demand, with only partial compensation in the form of expense management and Federal/State subsidies to allow them to survive the immediate crisis, resulting in material balance sheet damage.
  • Separately, and in parallel, healthcare institutions are enduring a huge near-term increase in operating costs.
  • Substantial short- and long-term changes are required to the care delivery operating model that will present an additional cost burden which has to be paid for by someone – most likely those same employer groups that are suffering today.

Failure to reconcile this equation will result in a massive escalation in the employer burden and/or a wave of consolidation / bankruptcies on the provider side.

This is clearly untenable on every level – whether economic, political or social – on both sides of the aisle.

The Options

  • Carry on as before

Assuming the Fee for Service reimbursement model continues, then the likely consequence is going to be more or less what I described above. Healthcare providers will expect a ‘pandemic premium’ to match the increased burden of dealing with COVID risk. The consequent regulation and reimbursement will inevitably be out of sync with their needs and some very difficult conversations will have to take place at every level to try and fix this over time.

In my opinion, this is the worst possible outcome.

The next two alternatives reflect a material change in how incentives are funded:

  • Deregulate, eliminate, simplify

The middle ground option here is what most people would have considered to be an extreme option even 6 months ago: remove as many regulations and limits around reimbursement as can practically be done. The Revenue Cycle industry has been built around the optimization of care delivery for the enhancement of charges, not costs, so the opportunity to realize savings by simplifying vast numbers of codes and rules and replacing them with bundles and less proscriptive reimbursement mechanisms is substantial.

Shoppable services are already a long way towards this so it’s likely that this will be the foundation for much of this work. If done well, these changes should enable providers to innovate and bring new ways of working whilst still getting paid. The only consideration is that some sort of quality and outcomes framework will need to be defined to ensure that this innovation doesn’t result in a drop in standards of patient care. Again, this is very likely to be in the works anyway as a result of the Shoppable Services piece.

  • Go Full Risk

This is the opportunity, and the (simplified for dramatic effect) payor pitch goes something like this: “You, my chosen group of healthcare providers, take the risk on managing COVID, just as you have done already, and I’ll prop up your balance sheet. Go do the right things for your patients”.

This scenario is exemplified by the Direct Primary Care models that are taking root now all across the US, as roughly approximated by the Medicare Accelerated and Advanced Payments Program, which consists of an advanced payment for a population with a performance adjusted ‘true up’ at the end of the performance period.

Which way to go?

The benefit to the providers of these models is that they fill a short term hole in their finances and allow them to innovate and do the things they’ve always wanted to do, with the freedom to move at the speed they want.

In a sad irony, those that are already in this model may have suffered the most from their risk models, but buying into the model post COVID will be an effective way forward for many.

By going full risk, the burden is on the provider to move quickly, but as we’ve seen over the past few months, they are more than capable of doing so on the medical side. The slow pace of change in the industry has little to do with desire or medical necessity, but everything to do with regulation and reimbursement.

By allowing providers to focus on risk alone, we will create an environment of substantial and long lasting change that embraces technology and optimizes for the right things, rather than the perverse incentives that have been burdening the industry for too long.

We are a long way from this playing out yet in full, but without giving due consideration to these important factors, health systems (let alone public health professionals) won’t be able to plan for next month, let alone next year.

With business plans that are designed on 10-year horizons, with baked in assumptions of moderate margin erosion alongside moderate increases in demand, these are not organizations that are accustomed to this kind of change.

Long term planning is what is needed, but it is the only thing that is not possible today without clarity on the specifics of how FFS reimbursement levels are going to be updated to cope with this new reality. Maybe now is the time to stop trying.

The tunnel is long, but the light is bright indeed, and for my final piece in this series, I’m going to focus on the operating models that will take us there. In the meantime feel free to send me your views, or go to our Coronavirus webpage to see what we’re doing to help our customers address the challenges of COVID-19 right now.

Welcome to the future.