Resilience in Health Care Financing (2024)

The last several weeks have seen a radical transformation in the delivery of health care in the United States. Physicians have moved millions of in-person office visits to video or telephone. Clinical teams have managed patients with serious illnesses without hospitalization whenever possible. Hospitals have shifted infusion therapy and other services to the home setting.

This abrupt shift, driven by the coronavirus disease 2019 (COVID-19) pandemic, has led to a tremendous loss of revenue. In the US, the predominant mechanism for paying clinicians, hospitals, and other facilities for health care is the fee-for-service model. It is estimated that physicians have lost about 55% of revenue and hospitals are experiencing negative operating margins, significantly affecting cash flow and leading to layoffs and the threat of closure.

The dire financial situation has led the federal government to rapidly subsidize the loss of income through grant funding in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and Centers for Medicare & Medicaid Services (CMS) cash advances, which organizations will be required to repay. There is, however, an alternative to a policy of filling the holes left by lost revenue. The federal government and commercial payers can embrace the opportunity to build a more resilient payment system that supports the ability of clinicians to adopt innovative models of care.

The seed of such a strategy can be found in the most aggressive experiments in payment reform today. Not all entities providing health care services have experienced the same steep decline in revenue during COVID-19. Hospitals in Maryland and Pennsylvania and health systems and clinical practices in Vermont’s single accountable care organization (ACO) have had greater flexibility to shift care to alternate settings, without the financial instability experienced by their peers. Their models provide a foundation for future reform.

In Maryland, a public agency called the Health Services Cost Review Commission negotiates a budget with each hospital, with rates then set for all public and private payers so that revenues add up to this budget. In January 2019, Pennsylvania’s Department of Health and CMS launched a prospective all-payer global budgeting model for rural hospitals. The model is in its second performance year and now includes 13 hospitals and 5 commercial payers in addition to CMS. These all-payer models shift hospitals from fee-for-service reimbursem*nt for all payers. To date, evidence has shown that the budgets help to stabilize financially challenged hospitals, incentivize hospitals to improve population health, render care in the most appropriate setting, and slow health care cost growth.

Additional benefits of these models have become apparent during the COVID-19 pandemic. While there are signs that the pandemic may accelerate the closure of rural and safety-net hospitals, hospitals participating in Maryland and Pennsylvania’s global budgets are relatively protected from catastrophic fluctuations in finances. For example, in Maryland, regulators have allowed hospitals to shift the location of services and raise rates over the next year to partially compensate for substantial declines in visits and elective procedures. At the same time, regulators have made plans to increase budgets if needed to respond to a surge in patients with COVID-19.

The single ACO model launched in 2018 by Vermont and CMS engages both public and private payers. In its first 3 years, the ACO has been associated with a reduced rate of inpatient admissions and emergency department visits. It has also saved the Medicaid program $97 million.

With prospective payment cushioning against financial shocks, Vermont’s ACO has taken several steps to support the COVID-19 response. The ACO has advanced payments to primary care practices and other agencies to assist with cash flow and developed a digital tool to identify and support outreach to patients most at risk for complications with the virus.

The relative resilience of financing systems in Maryland, Pennsylvania, and Vermont during the pandemic has implications for national reform. When payers adopt a global approach to financing, physician practices and hospitals can shift the delivery of care dramatically without upending financial stability.

The CMS and commercial payers can learn these lessons by seizing the moment to promote innovative payment models. These can support switching to virtual visits when convenient, adopting hospital-at-home programs, growing food-as-medicine pilot programs and other programs aimed at social contributions to health, and creating remote monitoring and new models of care management. The opportunity is not only to provide high quality at lower cost but also to reduce the patient traffic that fosters the spread of COVID-19 inside and outside of health care settings.

Of course, it is possible to pay for all these new services—and others—through fee-for-service rate schedules. The weakness of such an approach, however, is that if rates remain higher for inpatient and in-person care, care will naturally gravitate back to these more expensive and more crowded settings over time—and perhaps faster than is optimal for infection control. A more sustainable approach would be a transition to global payment solutions, including all-payer hospital budgets, ACOs, and other similar arrangements. Innovative financing models can give clinical organizations the flexibility to invest in the long-term staffing and infrastructure changes that alternative models of care require.

The COVID-19 pandemic has exposed the fragility of the US approach to health care payment. Rather than just rebuilding, this is a moment for reimagining. A more resilient system can support the stability and sustainability of essential health care services as well as promote the health of the population.

Corresponding Author: Joshua Sharfstein, MD, Johns Hopkins Bloomberg School of Public Health, 615 N Wolfe St, Room W1033D, Baltimore, MD 21205 (joshua.sharfstein@jhu.edu).

Correction: This article was corrected on May 27, 2020, to add omitted information on Dr Sharfstein’s conflict of interest with regards to Maryland’s Department of Health and Mental Hygiene.

Conflict of Interest Disclosures: Dr Murphy reported having previously served as the Pennsylvania Secretary of Health and the director of the State Innovation Models Initiative Models at the Center for Medicare and Medicaid Innovation. Dr Sharfstein reported serving as secretary of Maryland’s Department of Health and Mental Hygiene during the establishment of the state’s model for global budgeting and receiving personal fees from Sachs Policy Group outside the submitted work. No other disclosures were reported.

Previous Publication: This article was previously published in JAMA Health Forum at jamahealthforum.com.