Hospitals squeezed, insurers boosted as utilization lags

By Nona Tapper , Caroline Hudson / August 17, 2022

The balanced relationship between COVID-19 and non-coronavirus utilization tipped during the second quarter, leading some of the largest health insurance companies to raise profit forecasts while health systems bemoaned the negative impact on their finances.

Health systems attributed the slump in inpatient services to staff shortages that limited procedures, telemedicine alternatives and fewer acute COVID-19 patients. Insurers credited the decline to patients deferring care due to rising inflation, the availability of more cost-efficient value-based care payment arrangements and care shifting from hospitals to less expensive outpatient sites.

This condition may be short-lived. Volume is down compared with before COVID-19 arrived, but that appears to be gradually changing. “It's not at 2019 levels, but it's trending towards that,” said Glenn Melnick, a health economics and policy professor at the University of Southern California. “Volume is going from minus 10 to minus five to minus three-something. It's still below, but the trend suggests that it's going to return to normal, certainly at some point this year.”

Changes in volume

Fewer patients are being admitted to hospitals but those who are tend to be sicker, said Erik Swanson, senior vice president of data and analytics at the consulting firm Kaufman Hall. Higher inpatient acuity and longer stays at Mass General Brigham led to a 5% decrease in discharges during the quarter that ended June 30, which denied the Boston-based not-for-profit hospital of revenue it would have gained from new intakes.

Inpatient surgeries, in particular, are lagging. Those volumes are about 18% below the pre-pandemic level, according to a Kaufman Hall analysis of 900 hospitals. Inpatient surgery volume fell 4% in the second quarter at Nashville, Tennessee-based HCA Healthcare's facilities. Inpatient surgeries at Boulder Community Hospital in Colorado were down 3.4% in the first half of 2022.

Community Health Systems CEO Tim Hingtgen described second-quarter volumes as “relatively choppy, kind of fits and starts” in an earnings call last month. The Franklin, Tennessee-based for-profit company experienced an uptick in volume after the omicron surge early in the year. However, volumes lapsed in the back half of the second quarter, which the health system cited as a factor in its $326 million net loss that period.

“There’s not really a long-term view on how to get volumes up,” said Bill Dixon, managing director at consulting firm Pearl Meyer. “There are just so many things that are uncertain right now that I don’t know that a lot of health systems yet know how to work their way through it, other than getting through each day and doing the best they can.”

Care is shifting toward outpatient settings as a lower-cost option for hospitals, patients and insurers.

Vernon Memorial Healthcare shifted orthopedic implant surgeries to outpatient when Medicare lifted the inpatient-only designation for knee and hip procedures, said Scott Leckey, the Viroqua, Wisconsin-based health system's chief financial officer.

Two orthopedic surgeons were not-for-profit Vernon’s biggest admitting physicians, he said. As a result, about 80% of surgical procedures were outpatient during the first half of 2022, compared with 51% a year ago. Outpatient visits increased during the first half for cardiac rehabilitation, respiratory therapy and lab services, and diagnostic tests such as X-rays, ultrasounds and mammograms also occurred at higher volumes.

However, the uptick in testing depends on geography and public knowledge of COVID-19 cases. Some patients in areas with higher case counts are still more reluctant to go in for medical appointments, said Brad Ellis, senior director at credit rating agency Fitch Ratings.

The shift to outpatient care has been a challenge for Genesis Health System-Davenport in Iowa, as improvements in length of stay for these procedures are not enough to offset decreased revenue, President Jordan Voigt said.The Davenport operations are growing in every service line but that will be difficult to maintain with staff shortages, he said.

Low medical spending

Insurers incorrectly modeled the cost of COVID-19 care and treatments associated with lingering effects of infections, which led to inappropriate premium increases, Melnick said. A lack of competition exacerbated this problem, he said.

“My premiums are probably up 20% since 2019, and I know that my plan costs are not up 20%,” Melnick said. “What's going on here?”

The drop in hospitalizations because of COVID-19, along with a decline in inpatient stays, led UnitedHealth Group’s UnitedHealthcare, Cigna and Humana to raise profits expectations for this year. Insurers noted emergency visits remain below pre-pandemic levels, although commercially insured patients and some older adults seeking preventive care have caused volumes to return to where they were in 2019.

“We’re not yet seeing any meaningful signs of pent-up demand or acuity,” Cigna Chief Financial Officer Brian Evanko said during the company’s second-quarter earnings call this month. Cigna didn’t respond to an interview request.

The decline in medical spending helped boost Cigna’s net income 6.2% to $1.5 billion in the second quarter. The company’s medical loss ratio dipped 3.7 percentage points to 80.7% from a year before, and declined since the first quarter, which “was unexpected and rare for Cigna,” Cowen analyst Gary Taylor wrote in a research note this month. Health insurers’ medical spending typically rises as the year advances and people pay down deductibles and schedule more care.

During the pandemic, insurers medical spending receded as waves of the COVID-19 virus caused patients to defer care and hospitals to limit procedures. Insurers named the threat of patients flooding doctors offices with more extreme conditions once the pandemic ended as justification for raising premiums. So far, there is no indication that commercial policyholders put off needed care and have more severe conditions as a consequence, Evanko said.

“One of the difficulties that insurance companies have had is pricing, right? It’s very difficult to price the premiums for very uncertain utilization,” Ellis said. “That’s how these predictions are priced into the premiums that we all pay in our insurance. If those don’t come to fruition, then insurance companies can make more money.”

Health insurers contend that federal limits on how much premium revenue they can pocket serve as a check on excess profits. These medical loss ratio standards do not apply to self-insured group plans, which cover more than half of U.S. residents, however.

Health insurers are also watching utilization trends in the fast-growing Medicare Advantage market. By effectively managing these patients' care, health insurers aim to keep a larger portion of the flat fee they are paid to cover Medicare enrollees.

UnitedHealthcare is the nation’s largest Medicare Advantage insurer with 6.9 million members, and has worked to ensure members get routine care by ramping up home visits. “We are still not seeing patterns which indicate shifting acuity,” UnitedHealth Group Chief Financial Officer John Rex said during the company’s second-quarter earnings call last month. UnitedHealthcare responded to questions about patient utilization by directing Modern Healthcare to executive statements during that earnings call.

Humana, the second-largest Medicare Advantage insurer with 5.1 million members, is also focused on delivering care at Medicare beneficiaries’ residences: Home visits are up 3.1% and hospice care is up 5%, the company reported.

Older adults comprise the majority of Humana’s membership, and its medical costs during the second quarter reflected the human toll of the pandemic, Chief Financial Officer Susan Diamond said during an earnings call in July. The insurer responded to questions about patient utilization by referring Modern Healthcare to the earnings call.

“Higher mortality as a result of COVID has an impact on medical cost trends and overall utilization. Those that passed away due to COVID tended to be high utilizers, they had multiple comorbidities,” Diamond said. “We will see continued impacts from that going forward.”

Within Humana’s Medicare Advantage segment, utilization differed between patients individually enrolled in plans and those with group plans from employers. Group Medicare Advantage members are resuming care at a faster rate after deferring treatment, and surgical volumes rebounded 600 basis points ahead of individual Medicare Advantage members, Diamond said.

“What we thought was lower morbidity has turned out to be more reflective of deferred utilization and pent-up demand that’s working its way through now,” Diamond said.