COVID-19’s impact on healthcare purchasers’ balance sheets will drive cost reduction efforts after the pandemic

• The full impact of the coronavirus pandemic may take years to play out, according to an article in The Wall Street Journal.
• Post-pandemic, government, businesses and some households will have significantly increased their debt load, according to the Journal.
• Healthcare purchasers will aggressively look to reduce their healthcare spending in the wake of the pandemic to try and repair their balance sheets.

The Wall Street Journal on April 10 reported, “The full impact of the coronavirus pandemic may take years to play out. But one outcome is already clear: Government, businesses and some households will be loaded with mountains of additional debt.

“The federal government budget deficit is on track to reach a record $3.6 trillion in the fiscal year ending Sept. 30, and $2.4 trillion the year after that, according to Goldman Sachs estimates as reported in the Journal. “Businesses are drawing down bank credit lines and tapping bond markets. Preliminary signs are emerging that some households are turning to credit for funds, too.

“The debt surge is set to shape how governments and the private sector function long after the virus is tamed. Among other things, it could be a weight on the expansion that follows.”

Moody’s Analytics sees $90 billion to $125 billion of such cuts or tax increases coming and says the hits will be unevenly spread around the country. New York, Michigan, West Virginia, Louisiana, Missouri, Wyoming and North Dakota are especially vulnerable, according to Moody’s Analytics.

Takeaway

Two thoughts here … first, as I said in my April 2 blog: Purchasers will aggressively look to reduce their healthcare spending in the wake of the pandemic to try and repair their balance sheets. While we’ve just been through a crisis that has brought squarely to the public’s attention how crucial a well-funded, functioning healthcare system (both public health and care delivery) is, I would anticipate that we’ll see a combination of efforts to reduce the growth in per unit prices and reduce the total cost of care on the delivery system side.

Politically, payment cuts are, despite what we’ve just been through, going to be more palatable to the electorate than tax increases to help balance budgets at the state level and reduce deficit spending at the federal level. And in the private sector, a soft economy with high unemployment will give employers the opportunity (whether they actually act on the opportunity is a different question) to make changes to benefit design that could steer their employees to lower cost (on a per unit basis) sites-of-care that may be more efficient from a total cost perspective as well.

Second, I’ve seen some suggestions that as a result of this there will be a tolerance (and funding for) excess hospitals beds to provide pandemic surge capacity. While I think that’s a natural reaction, it will run headlong into the fiscal realities discussed above. It also smacks of preparing for the last war.

Make no mistake, COVID-19 is bad. But we are lucky that it’s not as infectious as the measles or as lethal as SARS or MERS. So there’s no guarantee we can build and maintain enough excess capacity to protect us from the next pandemic event.

Instead, I think what you’ll see is as replacement facilities are built, they will include the flexibility to be repurposed, and there will be investments in the ability to quickly establish field hospitals and cross-training of existing staff (it’s a bit overlooked in the press, but an ICU bed is worthless without a highly skilled care team). Where we will see additional long-term costs to the system is in the stockpiling of higher levels of PPE, which will become a cost of doing business (and in some cases a requirement in unionized caregiver contracts).

Instead of additional capacity, I think we’ll see an increased emphasis on public health countermeasures to identify new outbreaks and stomp them out before they become full-blown pandemics. As a society, we’ll need to think very carefully through the inherent civil liberties issues associated with tactics like barring people who are running a fever from public places, immunity cards and using GPS data thrown off by cell phones for contract tracing to isolate (or quarantine) individuals who have come in contact with someone diagnosed with COVID-19 (or the next bug).