Crisis of Healthcare Financing in America

SEAN V. RYAN, MD, MBA

On a late Saturday night in Coatesville, PA, an altercation erupted between a group of young teenagers. As is too often the case in America today, gunfire left one young man with a bullet wound to the abdomen with injuries to the major vascular structures and intestines. Bleeding internally and dying in the street, the prognosis was grim. Police responded quickly and rather than wait for EMS to arrive, made the risky decision to transport the patient to the nearest hospital in their trooper car, known as a “scoop and run,” to quickly get him to care when every minute was critical to survival. On route, the emergency room was notified of their impending arrival. The ER staff then called general and vascular surgeons, Donelle Rhoads and Gerald Patton, seasoned veterans, who performed major abdominal surgery in a specially designed trauma bay in the ER designed and equipped for just such an emergency. In short order, Drs. Rhoads and Patton manage to control major bleeding and organ damage in what is known as “damage control surgery.” Once clinically stable, the patient was transferred via helicopter to the world-renowned Trauma Service at the University of Pennsylvania where cutting edge critical care and further lifesaving surgery was delivered for as long as it took for the patient to recover. All of this was done without any question of insurance coverage or ability to pay. This is the American medical system at its finest.

Dramatic stories such as the above are not all that rare in modern healthcare in America. Maybe it’s the much more routine emergencies, but no less stressful, like a heart attack or stroke where minutes count and a life is in the balance. In the modern American healthcare system and hospitals, life-saving care can be mobilized within a fraction of an hour, delivered by coordinated, highly trained and dedicated doctors and nurses utilizing the latest in modern medical technology, imaging, and critical care equipment. The modern American healthcare system is truly a wonder of the world, but often criticized for its massive expense and relatively poor outcomes when compared to other first world industrialized countries. In 2023, the US healthcare system is under serious financial threat. As our young patient will find out, with or without insurance coverage, delivering care is not the issue, but how we choose to finance care is riddled with perverse incentives that will lead us to eventual collapse. It is unsustainable for all parties involved.

Patients, Doctors / Nurses and Hospitals, the key stakeholders delivering frontline care, are all under historic strain. The reasons for how we got here, and the many potential solutions, are beyond the scope of this article, but I hope to delve into these topics in future articles. My goal is to briefly outline the current economic realities facing three critical players in the modern MedicalIndustrial Complex: The Patient, the Hospital, and the Physician.

The Patient

In 2000, the average annual family employer-based health insurance premium was roughly $6,200. Fast forward to 2021, that figure is nearly $23,000.1 From 2011-2016 alone, single premium coverage saw a 63% increase while wages increased only 16%.2 As if this is not bad enough, workers are getting silently squeezed by paying more for their premium and paying a higher out-of-pocket deductible. In 2000, workers paid on average 25% or $1,600 out of their paycheck for the $6,200 premium, but by 2021, the number is $6,000 of the $23,000, or approximately 27%.3 In 2006, deductibles for employer-based family coverage averaged $584. By 2021, that number is over three times the cost at $1,700.4 Over the last two decades, families are finding healthcare costs to be the largest portion of the household budget. Like boiling a frog that doesn’t notice the heat until it’s too late, each year over the last two decades, families have incrementally shouldered more of the cost of their overall premium taken from their weekly paycheck and faced higher deductibles that need to be paid before insurance kicks in. Unfortunately, these expenses have seriously outpaced wage growth and overall inflation which clocked in around 7-9% in the last year. The hidden tax of inflation and increasing healthcare “insurance” expense is insidiously stressing individual and family budgets. This is unsustainable and the cracks are evident. As of 2021, 58% of all debt collections in the US are for medical bills.5 A total of 41% of US adults, 100 million people, bear medical debts. One of every 8 individuals owes more than $10,000.6 Meanwhile, the Federal Reserve reports that 36% of Americans don’t have enough money on hand to cover a $400 emergency, 51% of Americans have $5,000 or less in savings, while 35% have $1,000 or less, and the median savings amount is $4,500.7 With more taken from wages to cover premiums, higher deductibles and little savings to handle a medical emergency, and inflation reducing the purchasing power at the pump and the grocery store, the unfortunate fact is that a vast majority of Americans are “functionally uninsured,” choosing foregoing basic medical care in order to cover the basic needs of food and shelter.

The Hospital

Philadelphians, and particularly Chester Countians, witnessed within just the past two years what was once unthinkable. Hahnemann Hospital, Delaware County Memorial Hospital, Brandywine Hospital and Jennersville Hospital all closed their doors to patient care due to financial losses! In the wake of the pandemic, the remaining regional hospitals that serve our communities reported severe operating losses stressing the ability to provide care and threatening more closures to come! For you MASH fans, in the words of “Radar” O’Reilly, what “H-E-double toothpick” (“hell”) happened? Is it all the pandemic, or is more going on? Obtaining a clear picture of the hospital financial landscape is difficult due to the opaque nature of hospital costs and reimbursements from private payers. Also, consolidation trends with major academic centers and community hospitals make it difficult to understand how much hospital finances are underpinned by “direct patient care” versus diversified market investments, IP investments and large endowments outside of direct patient care that cross-subsidize hospital or service line losses. Nevertheless, some clear trends are notable. Hospitals traditionally operate at very low overall margins of around 3-5%.8 Hospitals have managed small positive net margins with higher reimbursement from a predominantly higher proportion of private payers that offset slight losses from a lower proportion of Medicare patients and major losses from a small minority of Medicaid patients. Hospitals without diversification strategies or a favorable payer mix are in serious jeopardy. Approximately 80% of hospitals in America are community hospitals, often serving the poorest populations that are on Medicaid (or Medicaid eligible / uninsured). The math just simply doesn’t work for these hospitals, and this may represent most small community hospitals in the US. Given these facts, it is not surprising that we’ve seen a record number of hospital and service line closures in the last few years. Nearly 180 rural hospitals have closed since 2005, with a sharp uptick in 2019-2021. Many experts predict this trend will continue.8 Unfortunately there are additional down-stream affects. When hospitals that serve poor communities fail, those patients naturally move to the next closest hospital, thereby straining the finances of their neighboring hospital. A vicious cycle ensues as less beds are available for patients with richer reimbursement insurance plans than Medicare and especially, Medicaid.

Another trend is the entirely predictable growth of Medicare. Medicare, as originally designed, was a principled idea rooted in a duty to care for the elderly. Before Medicare, many of our elderly patients, in need of hospital care, suffered and died indigent without even basic medical care. But the scope of Medicare today is a far cry from the original intent of the legislation. Since its passage in 1964, benefits expanded well beyond its original mandate along with the rising costs of the expansion. Like many government programs, the original estimates of the costs were wildly underestimated. Almost from the start, there was fierce ideological political debates on how to address the problem, continued on next page >

Crisis of Healthcare Financing in America continued from page 13 numerous attempts at legislative fixes and political compromises intended to reign in expenses rising much faster than general inflation. None have worked. Let that sink in…none. Especially damaging was the transition to the prospective fee schedule adopted in 1983 that ushered in the DRG and CPT coding methodology that I believe is at the root of so many problems in healthcare financing problems. This system is underpinned by a simple question Yale Business School Professors in the 1970s asked when consulted by a physician hospital leadership group seeking to control hospital costs. What is the “product” of hospital care? Out of this simple academic exercise, the DRG system was born, and legislation passed in 1983 that changed reimbursement to pay for the “product” or the “output.” At the time, this was viewed as a revolutionary advance in healthcare financing. Unfortunately, incentives matter and you tend to get what you incentivize. We incentivized “product” and more product is what we got. * Since then, the reimbursement game rewards documenting for dollars, upcoding and the perverse incentives that rewards more tests, more surgeries, more medicines, and more diagnoses that appear to make our patients “appear sicker” to garner more reimbursement. The more the “product” the costs more it gets reimbursed.

Fast-forward to 2011-2012; the oldest of the baby boomers retired and signed up for Medicare. Medicare enrollment in 2010 was approximately 48 million Americans, by 2020 approximately 60 million and by 2035 projected to be 87 million all with much more expanded coverage than the original intent.9 This exponential rise in Medicare patients is stressing hospital finances because Medicare, similar but to a less extent than Medicaid, does not cover the typical cost of care, and a larger percentage of patients are on Medicare. Current forecasts suggest The Medicare Trust Fund will be bankrupt by 2026 without meaningful reform.9

The pandemic continues to wreak havoc on our health care system. Yes, we have the vaccines and better treatment, the virus becomes less virulent as it becomes endemic, admissions and deaths are waning. The havoc now is best described by the phenomenon dubbed in the popular press as “quiet quitting.” Empirically, health care workers seemed to have walked off the job. I suspect many close to retirement decided to exit early. Others may have found better opportunities with less personal risk and stress in other industries with better wages and lifestyle. The bottom line is that hospitals have found themselves short-staffed. The only solution is to resort to “travelers” or “agency workers” to staff necessary services. Temporary workers can command 2-3x the normal wage. This has massively blown a hole in hospital budgets and is the major contributor to negative margins. Short term, this is a necessary expense to care for patients. Long term, this is creating wage inflation for dedicated full-time workers. In the current environment, wages must and naturally will increase until an equilibrium exists between “travelers” and long-term employees. The new wage must be accounted for in the long-term financial solvency of the hospital system.

The Physician

Some sobering statistics highlight the current crisis of Physician job satisfaction. “Physician burnout” was an emerging issue prior to the pandemic, but it seems to have worsened in the post-pandemic era.11 In a 2022 Medical Economics survey, 94% of physicians have experienced burn-out at some point in their career, nearly ¾ report burn-out at the time of publication. The top reasons for burn-out were too much paperwork / regulations, poor work/life balance, adoption of the EMR and lack of professional autonomy. Although physician reimbursement has declined in both real and nominal terms over the last two decades, only 10% cite this as a reason for burnout. This stat is refreshing and reinforces our professional belief that most of us don’t do this “for the money,” even if broader society might feel otherwise! Almost 80% expressed a desire to quit medicine.11 A 2022 report by Medscape mirrored the top three reasons as administrative burden, over-worked, and loss of professional autonomy. The highest levels of burnout were matched only by Nurses and Policemen!10 Sadly, nearly 1 in 5 physicians have contemplated suicide during their career. An estimated 300-400 do so each year.

Hospitals, now the largest employers of physicians, are starting to recognize the depth of the problem and are doing their best to implement programs to address the problem. Interesting solutions include Physician Wellness programs, better access to mental health professionals, free yoga, mindfulness training and lounges with message chairs. These are laudable and appreciated, but in my opinion are akin to rearranging the chairs on the deck of the Titanic. Why is this happening now? Physicians have always been gluttons for hard work. We love the challenges and rewards of patient care without regard to personal sacrifice. We love the discovery of the science. It’s never been a job, it’s a vocation. Why now, in the last few decades, are many of our colleagues finding ourselves disillusioned and seeking an exit? Maybe root cause is the way we finance and reimburse for healthcare? Maybe it’s the business model? The EMR, mandated upon us in the last decade, is first and foremost a cash register for managing the labyrinthine bureaucracy of insurance reimbursement. The EMR has taken a simmering problem of physician discontent to a full-blown boil. Physicians, the majority of whom are now employees of the hospital corporation, are routinely expected to document encounters to maximize reimbursement. If they don’t, they are barraged by “coding inquiries” informing them of the opportunity to maximize reimbursement with better documenting strategies. After finishing routine patient care, hours at the end of the day are spent on documentation, responding to coding queries, and peer to peer reviews with insurance companies. I don’t know of any physician that doesn’t bring home 2-3 hours of “charting” each week, some 2-3 hours per day! With declining reimbursement every year, the natural incentive is to do more, go faster, and document / code better. Physician contracts are mostly based on productivity or “RVUs.” Again, sell more product! Additionally, commercial insurance companies and Medicare Advantage programs require prior authorizations for almost every medical recommendation that seeks to limit care. The entire reimbursement scheme is giant moral hazard that is inflicting “moral injury” on physicians and will only get worse as we see continued cuts in reimbursement. This is not what we thought we were getting into when we embarked on this journey. Most of us were idealistic teenagers when we chose this path! The noble profession of medicine, for many of us, just doesn’t seem so noble anymore.

I submit to you that the root of the problem is the reimbursement system. Without meaningful reform of the fundamental method of financing healthcare, patients, physicians, and hospitals will continue to face serious challenges.

In an interview for the Wall Street Journal, Wisconsin Representative Mike Gallagher commented on the state of the US military, but also aptly describes the healthcare predicament as well: “The military (healthcare) crisis is a microcosm of the broader societal crisis.” The U.S. is “increasingly becoming a healthcare and retirement organization that has guns.” The next president will have to “sail the ship of state through the Scylla of a confrontation with China and the Charybdis of an entitlement crisis.”

If you are unfamiliar with the Scylla and the Charybdis, Wikipedia provides an interesting read, but it’s best summarized as stuck between a rock and a hard place.13 The current system is financially unsustainable. The business model is failing. Hard choices will be thrust upon us. The patient is bleeding and dying on the street. It’s time for bold decisions. This is a challenge we can solve.

References:

1. Kaiser Family Foundation Employer Health Benefits Survey. October 2022.

2. Kaiser / HRET Survey of Employer Sponsored Health Benefits, 2011-2016. Bureau of Labor Statistics, Consumer Price Index, US City Average Annual Inflation (2011-2016). Bureau of Labor Statistics, seasonally adjusted Data from the Current Employment Survey (2011-2016)

3. Kaiser / HRET Survey of Employer Sponsored health Benefits, 1999-2017; KFF Employer Health Benefits Survey 2018-2021

4. Kaiser / HRET Survey of Employer Sponsored health Benefits, 1999-2017; KFF Employer Health Benefits Survey 2018-2021

5. Levey NN. 100 Million people in America are saddled with health care debt. Kaiser Health News. June 16, 2022. https://khn.org/news/article/diagnosis-debt-investigation100-million-americans-hidden-medical-debt/

6. Berwick DM. Salve Lucrum: The Existential Threat of Greed in US Health Care. JAMA. Published online January 30, 2023. doi:10.1001/jama.2023.0846

7. Economic Well-Being of U.S. Households in 2020 - May 2021. Board of Governors of the Federal Reserve System.

8. The Current State of Hospital Finances: Fall 2022 Update: Kauffman Hall

9. Intermediate Projections from 2005-2019 Annual Reports of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

10. Medical Economics: 2022 Physician Burnout Survey results

11. Medscape: Physician Burnout & Depression Report 2022: Stress, Anxiety, and Anger

12. America’s Military Faces a ‘Window of Maximum Danger’; Marine turned lawmaker Mike Gallagher warns that the U.S. is far more vulnerable to losing a war than the public recognizes. Wall Street Journal, Kate Bachelder Odell, Oct. 7, 2022

13. https://en.wikipedia.org/wiki/Between_Scylla_and_Charybdis

Sean V. Ryan, MD, MBA, is a practicing vascular surgeon providing care to patients at Bryn Mawr, Paoli, and Chester County Hospitals in the suburbs of Philadelphia, PA. He would welcome your input and opinion at sryan@ vascularss.com.