Yes Virginia, there is a cost shift: Hospitals with higher occupancy rates due to COVID-19 provide more evidence

• The cost shift is traditionally thought of as cross-payer subsidization. With governmental purchasers typically paying providers less than the cost to deliver care, in order to make the finances work, providers negotiate higher payment rates from private purchasers.
• Some in the health policy community continue to doubt the existence of the cost shift despite evidence in support of it.
• While the COVID-19 pandemic is a unique circumstance, emerging margin data from hospitals in the Northeast provide additional evidence in support of the cost shift, according to a recent Kaufman Hall report.

The cost shift is traditionally thought of as cross-payer subsidization. Governmental purchasers typically pay providers less than the cost to deliver care. To make the finances work, providers negotiate higher payment rates from private purchasers. Without those higher payments from commercial purchasers to make up for losses on governmental business, a provider quickly becomes insolvent. Implicit in this is also a cross-service subsidization with profitable non-emergent services (cardiovascular, orthopedic and imaging, and oncology) subsidizing those that aren’t typically emergent medical services (e.g. pneumonia admissions).

Rural hospitals and cost shift

What’s happened to many rural hospitals, offers slow moving proof of this theorem. If you talk to a long-tenured rural hospital CFO, you typically will hear a common story. It goes something like this … two of the three largest employers in the area 20 years ago are no longer there, and the remaining one has reduced head count. Many of those who lost their jobs found work, but those jobs do not provide insurance, increasing their self-pay and Medicaid mix. A lot of younger people and many families have left the area. The remaining commercially covered population is rapidly aging into Medicare.

All of this, coupled with downward pressure on Medicare rates in the ACA, has caused over 128 rural hospitals to close since 2010. Despite the evidence provided by the cautionary tale of rural hospitals, there’s a school of thought in the policy community that questions the existence, or necessity of the cost shift.  

Additional evidence in support of cost shift

While the COVID-19 pandemic is a unique circumstance, emerging margin data from hospitals in the Northeast provide additional evidence in support of the cost shift. Kaufman Hall’s recent Flash Report finds that, “hospitals’ median operating EBITDA margins fell more than 100% in March, dropping a full 13 percentage points relative to last year.” This makes sense as hospitals have canceled elective procedures to prepare for COVID-19, which has caused revenue to collapse.

But what happens when you look at the medians on a regional basis? According to Kaufman Hall’s report, “Hospitals in the Northeast/Mid-Atlantic saw operating EBITDA margin fall 167% compared to March 2019.” Operating EBITDA declines in the other regions ranged from 87% to 110% compared to the prior year. What might explain the Northeast/Mid-Atlantic’s markedly worse performance relative to the rest of the country?

Eight of the 10 states with the highest per capita rates of COVID-19 infection are in the Northeast/Mid-Atlantic, including the hard-hit New York Metro area. Higher infection rates likely translate directly into admissions rates, especially given the constraints on testing. According to Kaufman Hall’s report:

• The West saw the greatest decreases in discharges, down 20% compared to budget
• The Northeast/Mid-Atlantic had the lowest decreases, down 11% compared to budget

So while volumes are down across the country, they were down the least in the area that performed the worst. This is typically counter-intuitive but in this situation makes sense.

The payer mix for the remaining admissions for hospitals in the Northeast have likely skewed towards public payers due to age and associated risk factors related to COVID-19 hospitalization. At the same time, the case mix has skewed lower due to increased medical admissions for COVID-19-related exacerbations (e.g. pneumonia). These cases, absent the payer mix shift, typically have lower contribution margins even before the significant increase in cost per discharge that will be somewhat offset by the increase in Medicare payment for COVID-19 discharges. This suggests that the cost shift — both payer and service shift — is real. And when it breaks down, as in the case of COVID-19, despite having a full house, you get losses on the scale of what New York Presbyterian Health System is projecting.