Healthcare Provider Systems (organizations that have hospitals and physicians to provide care to patients) lost billions of dollars in 2022.
In 2022, Providence Health reported a net loss of $6.1 billion. Before the pandemic in 2018, they had reported a net income of $165 million. They were not alone among the health systems. Ascension Health went from a $382 million net income in 2018 to a $1.3 billion loss in 2022 and Trinity Health went from a $901 million net income in 2018 to a $1.4 billion loss in 2022.
During the same period, the health insurance payers (organizations that sell health insurance and pay for healthcare costs) doubled or tripled their net income.
Anthem (Elevance Health) went from a $3.7 billion net income in 2018 to a $6 billion net income in 2022. Cigna from $2.6 billion to $6 billion and United Health from $11 billion to $20 billion.
These massive financial losses for health systems are resulting in closure of healthcare facilities and layoffs of care providers (doctors, nurses etc). Both of these result in fewer and less convenient care options for healthcare consumers.
Question is why health systems are suddenly losing billions of dollars, why the profits of health insurance payers have doubled, what impact this is having on healthcare consumers and what health systems can do to recover.
Why are health systems losing billions of dollars?
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Health systems tend to make the most income on elective procedures. For other services they tend to break even or make a small income.
During past few years, healthcare consumers sharply cut back on elective procedures to avoid the risk of contracting COVID. Since the procedure is elective why take the risk?
A large number of care providers left the field due to the extra stress from dealing with COVID. Some reports suggest that over 200,000 care providers quit during COVID pandemic.
Almost all the revenue of a health system is directly or indirectly related to care providers. In addition to clinician fees, revenues related to surgery centers, healthcare supplies, medications etc are all indirectly related to care providers. If you don’t have enough care providers to provide care, the revenue engine sputters.
Initially the government funding for COVID services helped the revenue but that has sharply dropped off recently as the COVID pandemic has been downgraded.
The combination of these factors have resulted in high net losses for health systems as shown in the charts above.
Why did healthcare insurance payers profits double?
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In highly simplified form, the profit of a health insurance payer is total premiums minus total costs.
Profit = Total Premiums – Total Healthcare Costs – Total Administrative Costs
The average annual premiums in 2018 were $6,896 for single coverage and $19,616 for family coverage. In 2022, these increased to $7,911 for single coverage and $22,463 for family coverage. A 14% increase in premiums.
While premiums went up 14% from 2018 to 2022, healthcare spending per person came down due to reduction in elective procedures and reduction of healthcare workforce as explained above.
The administrative costs at health insurance payers went up so the doubling of profit for healthcare insurance payers in unlikely to be materially due to them becoming more efficient. For example, Cigna reported a 1.2% increase in administrative expenses in 2022.
The math is simple. Since the total premiums and total administrative costs went up while total healthcare costs came down hence the profits for the health insurance payers soared.
Interested in how health insurance can be improved then read Five Ideas to Create a Better Health Insurance For Consumers.
What was the impact on healthcare consumers?
Healthcare consumers saw the following impacts of this situation:
- Higher premiums and higher out of pocket costs
- Healthcare premiums went up 14% from 2018 to 2022. At the same time, inflation went from 1.9% in 2018 to 4% in 2022. This double whammy resulted in higher premiums and higher out-of-pocket healthcare costs for almost all consumers.
- Reduction in care choices and increased inconvenience
- As health systems suffered massive losses, some of them reacted by increasing prices to consumers, closing down facilities or laying off care providers (doctors and nurses). This resulted in reduced access to care for consumers (since they had less doctors and facilities to provide them care) and reduction in convenience (since they had to find new doctors and facilities and had to drive further.)
- Confusion and change
- Some health systems reacted by merging with other health systems to gain more market power, more negotiating power with health payers and reduction in administrative costs. In many cases this resulted in confusion to the healthcare consumer with all these changes since they had to figure out where to go, how to get their records and how to learn new billing practices.
The consumers saw not only their premiums and out of pocket costs go up but they also had a harder time finding and receiving care.
Why is this an existential threat for health systems?
Health Systems are in a spiral.
Health Systems are not a high profit margin business (most systems have a profit margin between 5-10%). Many are non-profit or not-for-profit organizations who are focused on patient care. Hence their ability to sustain losses is very limited.
These losses are already forcing health systems to close facilities and lay off care providers. This is a downward spiral since both these actions will reduce their income in the future. This is unlikely to be a sustainable path for a business. So they would likely need to repeat this process continually until some are forced to shut their doors.
One hedge to their healthcare revenue that many health systems do is to rent out commercial space and to have investment portfolios. With the trend of work-from-home and the increase in interest rates by the Fed, the commercial rental market is suffering. Investment portfolios helped cover the income statements of health systems in 2020 & 2021 when the stock market was booming but those days of high investment return appear to be over for the next few years. Most likely, the hedge of commercial rentals and investment returns will no longer be able to cover their losses in healthcare operations in the near future.
Merging with another health system can help temporarily but they would have to continue merging with other health systems to reproduce the short term benefit. Mergers between small health systems tend to have a bigger payoff since the market overlap is low. As health systems are forced to merge with larger and larger health systems, the benefits may start to dissipate.
What can Health Systems do to stop the losses?
Health Systems need to become an active business where, like a conductor, they are directing each patient individually at the right time.
Health Systems today are a passive business. They wait for their patients to realize they need some care, then for patients to figure out the care provider and the setting (ER, urgent care, ambulatory surgery center etc) and then for the patients to actually call the health system.
While health systems try to be proactive by sending out mass communications about flu season and mammograms these are not very effective since they are not personalized to the patient. Patients have learned to ignore these mass communications since they keep getting emails about flu vaccine long after they have received it or they may have a serious condition (auto-immune disorder etc) that disallows them from getting the vaccine or they have another condition that is more important to address (cancer etc). For example, I still get emails from my health system about how to cope with pre-menopause. I’m sure there are many health problems I should worry about but as a man I don’t think pre-menopause is one of them.
The sustainable solution for health systems is to become an active business. A active healthcare system is one where their patients are getting proactive and personalized communication about what care they need, easy to use care pathways to allow patients to find the right care provider and the right care setting on their own and transparency to see the out-of-pocket cost of the care before they receive the care.
Do Patient Portals solve this?
Patient Portals (like MyChart from Epic or HealtheLife from Cerner) today are just a way for the patient to see their data and schedule care in some cases.
These require the patient to already know what care they need, what care provider they should see, how much it will cost them and what alternative choices they have.
Patient portals just replicate the passive business model of waiting on the patient to figure out all the above steps first. They do not enable a health system to become an active business.
Health Systems need a Consumer Activation Engine
What health systems need is a consumer activation engine.
A consumer activation engine is like a conductor in a musical group.
A consumer activation engine monitors the patient’s health record, proactively notifies patients of the care they need, helps them find the provider and care setting, and shows them choices of care (in-person, Telehealth, digital programs, pharmacy, lab etc) with transparency of out-of-pocket costs.
A consumer activation engine turns a health system into an active business. The consumer activation engine directs the patients in a way that gets them the healthcare they need but also in a way that health systems can increase their net income.
Some examples of how a consumer activation engine can do both:
If this week there is extra capacity available in primary care department then the consumer activation engine can proactively reach out and direct some patients to come in for their annual exam this week instead of next week.
If there is capacity in Internal Medicine department then patients with certain complicated cases can be automatically directed by the consumer activation engine to schedule with Internal Medicine instead of Primary Care.
If the health system starts offering tele-health for skin conditions for diabetic patients then the consumer activation engine can direct those types to patients to tele-health first.
If patients are making appointments with a specialist claiming to have migraines, a consumer activation engine can look at the patient’s chart and ask the patient some questions to understand whether they are likely to have a migraine (potentially direct to a specialist) or just a bad headache (potentially direct to Primary Care).
Consumer Activation Engines in eCommerce
All high performing eCommerce businesses use consumer activation engines today.
No eCommerce business today waits for the consumer to decide what they want, how they want it and at what price. All eCommerce business are continuously activating their user base via proactive notifications and personalized discounts to buy the right things in the right manner at the right time.
Today you get personalized emails from Amazon and other eCommerce stores telling you what things you may be interested in (based on your historical data) that are on sale and when you can have them in your hand. Plus these consumer activation engines reach out after you buy something to recommend and give you discounts on other products that go along with the product you bought a couple of days ago.
Conclusion
Health Systems are suffering huge losses due to the sharp decline in elective procedures during COVID years and due to large numbers of care providers leaving the work force either by choice and because of layoffs.
Health Insurance Payers, on the other hand, are making huge profits for the same reason.
Healthcare Consumers are suffering from increase in premiums and out-of-pocket costs, reduction in care choices and higher inconvenience to find and receive care.
The sustainable way for Health Systems to become profitable again is to become an active business and start using consumer activation engines to control their income.