Following the market turmoil after the failure of Lehman Brothers in the fall of 2008, the Federal Reserve Board began conducting “stress tests” in 2009 to make sure the banking system could endure the financial crisis. In a similar fashion, we need to stress test the U.S. hospital system to guarantee it can survive ongoing waves of coronavirus outbreaks and future pandemics.
Like the banking system in 2009, hospitals across the U.S. could be pushed to the brink of collapse as surges of Covid-19 cases take resources away from the usual medical services that keep such facilities afloat.
The hospital system was already in bad shape before Covid-19 hit. Morgan Stanley concluded in 2018 that 18% of U.S. hospitals had weak financials or were at risk of closing. Now, as most U.S. states report mounting Covid-19 caseloads, numerous hospitals are reporting they are overwhelmed and taking steps to manage capacity, such as pausing elective procedures, building field hospitals, and transferring patients out of state.
Stress-testing helped authorities ease the financial crisis by determining how best to distribute economic resources to make the banking system more resilient. The same approach can work for hospitals now.
It would start by addressing the underlying weaknesses of hospital systems, which have been building for years. The main source of trouble: an unhealthy mix of payers and services performed. Patients who get their insurance from their employers subsidize those on Medicare and Medicaid, which pay clinicians less for the same services. Some hospitals have too many lower-rate patients.
At the same time, in many health systems a handful of specialties, like cancer and orthopedics, pay all the bills and then some. Many community health systems, in contrast, have less-profitable specialties and a higher proportion of lower-rate patients.
Covid-19 has further amplified these distortions. Some large metropolitan areas have been hit with tsunamis of Covid-19 cases. New York City’s academic hospital systems, for example, were losing $350 million to $450 million each month per system in the spring as they halted higher-revenue procedures to respond to a surge of Covid patients, many covered by Medicare.
Hospitals in less hard-hit areas paused non-emergency procedures such as elective surgeries, even though those are among health care’s most profitable activities. While they did not immediately see a surge, and lost revenue on those higher-margin services, many of those hospitals have since been slammed with Covid-19 cases.
The health care system wasn’t built to withstand these kinds of shocks — a problem in need of tackling once peacetime returns. First, we must win the war.
The financial crisis was a simpler campaign to wage in many ways. All the banks needed was capital, and stress testing determined who needed it, and how much. Hospitals, by contrast, need money, nurses, doctors, drugs, devices, diagnostic tests, personal protective equipment, and more. To prepare for future emergencies and pandemics, we need to know how much equipment and human capital is needed, and where it is needed.
Who could administer such a stress test? The most obvious candidate would be the Centers for Medicare and Medicaid Services, which pays for more than one-third of U.S. health care expenditures. The law provides for CMS to have quality and safety oversight responsibilities over its participating providers, which include nearly every American hospital system. Such responsibilities could be extended to financial resiliency as well.
The stress test could determine whether health care assets such as hospital beds are sufficient for the predicted number of Covid cases. Mix is important as well: Most towns, for example, have too many medical-surgical beds and not enough ICU beds, which would be needed for a Covid-19 emergency.
The test also could also consider the talent pools and labor capacity available. Such capacity is unevenly distributed, with 48% of hospitals, for example, lacking a single critical care physician with privileges at the hospital.
In terms of financials, the stress test could examine solvency metrics like days of cash on hand and the mix of private insurers versus Medicare, Medicaid, and the Children’s Health Insurance Program. It could also look at some measure of cost for patients not covered by commercial insurance — perhaps the operating expense per case vs. Medicare payment per case. A hospital that can break even on Medicare can probably survive long-term, while a hospital whose solvency rests on privately insured patients is fragile.
These are just the starting points. We need a thorough understanding of the U.S. hospital system’s pressure points before the next pandemic hits. Let’s not waste time in preparing for it.
Til Schuermann, a former senior vice president at the Federal Reserve Bank of New York, is co-head of Oliver Wyman’s risk and public policy practice in the Americas. Helen Leis is a partner in Oliver Wyman’s health and life sciences practice.