This is the first part in a three-part series looking at the intersection of healthcare and financial services
At Commerce Ventures, our focus within the healthcare industry pertains primarily (though not exclusively) to the financial service interactions between industry participants as well as the technologies that enable them. Access to and affordability of healthcare is increasingly becoming a critical component of Americans’ financial lives — with recent reports suggesting U.S. households are spending 11% of their annual income on healthcare.
Many of the healthcare commerce trends we’ve observed over the last few years have reinforced our belief that there are significant limitations to, and friction in, the existing financial relationships, obligations and infrastructure that underpin the U.S. healthcare industry. COVID-19 has created additional urgency and focus on how the pandemic may exacerbate these constraints.
Recently, we worked with our healthcare-fintech network to develop a perspective on how this health crisis is likely to accelerate or prevent the desperately needed change in the American healthcare industry.
Wait…what just happened?
The U.S. healthcare industry sees several trillion dollars of payment volume pass through an interconnected network of stakeholders each year:
One of the implications of this type of multi-party network is that trends and shocks that affect one party often trigger a domino effect through the rest of the ecosystem. In this context, COVID-19 is uniquely difficult to unpack. We believe that it is not just one shock affecting a single party, but rather a series of shocks (e.g. joblessness & delinquencies, skyrocketing healthcare claims, rapidly evolving payer regulation) affecting multiple industry participants at once.
Below is a brief summary of some of the financial services implications we believe COVID-19 will have on each stakeholder:
- Loss of Employer-Sponsored Coverage: The ~300% rise in unemployment over the past ~5 months will significantly limit many Americans’ access to healthcare as nearly 50% of all Americans receive coverage through an employer-sponsored health plan . Though independent coverage plans are available on the public exchanges, many unemployed Americans will find themselves unable to afford even the most basic coverage due to sharp income declines. Short-term solutions like COBRA, tax credits, and the potential expansions to Medicaid may dull some of this pain, but significant population coverage gaps in the longer term seem inevitable.
- Decreasing Ability to Pay: The loss of income due to unemployment and decreased working hours will significantly drive down individuals’ ability and willingness to pay medical bills. Additionally, recent reports suggest that health plan premiums could increase anywhere from 10–40% if there is a “true second or third wave” of COVID-19 cases. If this comes to pass, it is likely to further spur more employers to leverage high deductible payment plans (“HDHPs”) to shift payment burden towards patients to reduce their health plan costs. This will likely result in patients facing higher-than-ever financial obligations for medical treatment while at the same time confronting mounting financial insecurity. Looking ahead, we anticipate that these trends will drive a substantial increase in delinquencies for medical bills.
- Loss of Revenue: Elective procedures, which drive the lion’s share of Providers’ revenue, were largely cancelled in 1H20. This has already resulted in a significant revenue shortfall for many Providers — who will also need to deal with the rise in Patient delinquency outlined above. While we believe that we may see a moderate return to these procedures (early data suggests practices can expect to return to 80–90% of capacity within two to three weeks of ending shelter-in-place) the continued volatility in rising cases across states drives uncertainty on future cash flows and will likely force providers to double-down on cost-cutting measures. These initiatives will include staff and salary reductions as well as renegotiations of RCM / supplier contract renegotiations.
- Payer Obligation Ambiguity: Providers will experience significant ambiguity around what COVID-related expenses will be covered by which party (e.g. health plan vs hospital vs government vs patient). While hospitals will receive some degree of government support, the aid seems unlikely to cover 2020 expenses. Consequently, many Providers will need to adjust pricing of care through 2H20 and into 2021 in order to offset 2020’s unexpected losses.
- Failing Billing Infrastructure: Over 65% of medical practices leverage a third party medical biller to collect or service Patient and Payer receivables. These +8,000 legacy medical billers are almost entirely call-center based solutions and have likely experienced significant difficulty in shifting to remote work. This will result in delayed collections, which will compound the cash flow crisis brought on by deferred elective procedures and rising patient delinquency.
- Spike in COVID-19 related Claims: Payers have seen a drop-off in traditional claims from elective and non-urgent procedures but have seen (and will continue to see) significant claims volume from COVID-19. Like Providers, Payers are likely to experience material ambiguity around which COVID-related procedures will be covered by which institutions. Increasing losses may force some Payers to bump up premiums in 2021.
- Spike in Post-COVID-19 Claims: When shelter-in-place restrictions are lifted, Providers will schedule as many elective procedures as possible in order to make up for lost revenue from 1H20. Additionally, there is a possibility that the overall count and magnitude of claims increases as well, as many Patients will find that their medical conditions have worsened or become more expensive to address due to lack of treatment during quarantine. A leading indication of this outcome is captured in a recent report quoting nearly 10% of Patients as being unable to acquire prescribed medication due to COVID-19.
- Rising Fraud, Waste & Abuse: Healthcare fraud, waste, and abuse will increase over the mid to long term as bad actors take advantage of claims ambiguity, Providers struggle to keep up with new and changing billing procedures, and legacy rules-based mitigation platforms fail to adapt to new claim patterns. Additionally, continued COVID-19 claims collection moratoriums will mean payers will be unable to recall incorrectly billed COVID-related claims for the foreseeable future.
In summary, we expect that coverage rates will go down, unpaid expenses will go up, and that there will be a lack of transparency around the exact financial obligations between parties. Regulation, stimulus packages, and private sector altruism undoubtedly will play a role in addressing some of these issues. However, new technology and coverage models must be part of the sustainable long-term solution as well.
In our next installment, we will cover potential solutions and explore specific opportunities for technology to address these pain points.
The Commonwealth Fund
Department of Labor, Bureau of Labor Statistics
Kaiser Family Foundation “Health Insurance Coverage by Total Population”
Covered California: First National Projection of the Coronavirus
Sikka Software: COVID-19 Rebound Map
Centers for Medicare & Medicaid Services: National Health Expenditure 2017
Evidation Health Survey