Key Takeaways
- Value-based healthcare is a proposition that works to decrease costs while improving patient care and ties reimbursement to patient outcomes.
- The COVID-19 pandemic further strained our healthcare system’s resources and worsened existing underlying issues.
- Labor and staffing shortages have led to an increase in temporary employees, which makes it harder to implement patient care team models.
Value-based healthcare is the concept of tying healthcare outcomes to reimbursement of care. Broadly speaking, the idea is to provide the best care and deliver the best outcomes most efficiently and cost-effectively. Given that the United States has the world’s highest per capita health care costs, more than two times those of other wealthy nations, everyone from policymakers to the general public understands the need for change and agrees that a value-based system is more sustainable.
While this concept has entered the industry and now does affect provider reimbursement, the full value proposition faces unique difficulties.
The pandemic exacerbated the existing, unresolved issues within our already complex healthcare system, making the complete reality of value-based care much harder to attain. Here are some reasons why (and how).
The Pandemic’s Effect On Healthcare
The Cares Act
The first act of the pandemic focused on the provision of care. This was helped by the passage of the Coronavirus Aid Relief and Economic Security (CARES) Act. The CARES Act earmarked 100 billion dollars in aid to assist with lost revenues and Covid 19-related expenses for healthcare systems and hospitals.
Revenue losses resulted from lower clinical volumes, particularly profitable elective procedures. Simultaneously, costs abruptly increased as hospitals scrambled for personal protective equipment (PPE), pandemic-related hospital equipment, and sanitizing supplies.
Without the CARES Act in 2020, most hospitals would have run a deficit or closed. Even with the CARES Act, more than 600 rural hospitals (nearly 30% of all rural hospitals in the country) are at risk of closing in the near future, while 200 of these hospitals are at immediate risk.
Although the CARES Act provided the necessary subsidy to meet the challenges associated with providing care, it did not solve supply chain disruptions, workforce shortages, and rising inflation that would soon follow. Facing these headwinds, industry leaders, such as Kaiser Permanente, Partners, and the Cleveland Clinic, posted 10-figure losses in 2022.
Staffing & Labor Costs
The second act would involve healthcare consortiums trying to regain financial stability.
During the pandemic, the Federal Reserve cut the Federal Funds Target Rate to 0 – 0.25% and bought treasuries and mortgage-backed securities “in amounts needed.” These efforts and other legislation ensured smooth market functioning with 4.6 trillion dollars infused into the economy. Easy money fueled demand, while pandemic-related restrictions exacerbated supply-side constraints. The result was record inflation levels, increasing overall business costs.
Labor continued to account for a significant portion of costs. Healthcare workers emerged from the pandemic emotionally exhausted and ready to leave their jobs. According to the US Bureau of Labor Statistics, the quit rate in the healthcare and social assistance industries surged from a pre-pandemic level of 23.9% in 2019 to 30.4% in 2021.
On top of the higher quit rates, there are approximately 1.9 million healthcare job openings each year, and employment is projected to grow 13 percent from 2021 to 2031. In addition, matching staffing to demand will become increasingly necessary as the aging baby boomer population (67 years+) of workers in healthcare retires.
The Post-Pandemic Workforce
The Great Resignation proved to be the highest turnover rate in history for mid-career workers, especially in healthcare. The quit rate for healthcare and social assistance workers from April to August 2022 exceeded 2.5% per month. Emboldened by increasing job vacancies and ballooning wages, many opted for traveling positions or temporary employment.
Healthcare facilities, left with few options, and began competitive wage increases to fill critical staffing shortages. While most hospitals have back-filled open positions with travelers or temporary workers at nearly every level (physicians, nurses, therapists, and technicians), nursing costs, specifically, continue to rise as the marketplace for traveler nurses has exploded.
Today, workforce and contract labor expenses represent over 50% of total hospital expenses. Many industries that experience sudden workload fluctuations nimbly mitigate costs through temporary employees. However, when increased workload needs persist, and workers are in short supply, using temporary employees becomes costly and burdensome.
Given the highly skilled nature of the healthcare industry, a larger presence of temporary employees may not bode well for future productivity or cost savings.
Mitchell Tsai, MD, MBA
The Impact of Temporary Employees
Besides the financial premium associated with temporary employees, other ramifications may affect quality, safety, and clinical outcomes. Once hired, temporary workers need to be oriented and may have negotiated unique parameters defining the scope of their practice. Plus, the differential treatment of temporary and permanent workers may reinforce in-group and out-group comparisons, ultimately fracturing team-based care.
Hofmann et al. noted that temporary nurses could find themselves in hostile and inadequately supported work environments as full-time staff nurses might not welcome them. In addition, regardless of the industry, temporary workers might be less willing to cooperate with their employers in developing innovations, as they presumably will not be a part of the expected benefits.
Given the highly skilled nature of the healthcare industry, a larger presence of temporary employees may not bode well for future productivity or cost savings.
How Hospitals Are Responding
Hospitals are cutting clinical service lines (e.g., primary care, mental and behavioral health) and instituting layoffs to combat rising costs from inflation. Long-term investments necessary to improve the quality of care are being delayed, and these investments will most likely continue to decrease as the combination of tighter monetary policy and inflation places persistent strain on healthcare organizations.
In the private sector (manufacturing and service industries), increasing inflation and labor costs are passed on to consumers, ultimately destroying demand. This economic phenomenon typically serves as a natural governor of inflation in free markets. Given the demographics of the country, hospital closures, and workforce shortages, the healthcare industry is not likely to benefit from this phenomenon.
Government Healthcare Spending
One could argue that the value proposition for value-based care never had a chance against the convoluted American healthcare system. Generally thought to be an insurance marketplace where competition for business controls costs, the reality is that the government pays most healthcare expenditures in the United States.
According to the Center for Medicare and Medicaid Services, in 2021, the government was the largest sponsor of total healthcare spending (Federal 34%, State and Local 15%). Further, the public share of healthcare expenditure continues to rise from 31% in 1965 (before Medicare and Medicaid) to 56% in 1980, 60% in 1999, and 64.3% in 2013. The pandemic exacerbated these trends and is likely to continue due to government subsidies of the Affordable Care Act and increased Medicare enrollment of an aged population.
… the reality is that the government pays most healthcare expenditures in the United States.
Mitchell Tsai, MD, MBA
Moreover, these figures exclude the substantial tax subsidies that fund private health plans. If all Federal, State, County, and Municipal Employees, Military and Military dependents, Veteran beneficiaries, Indian Health Services beneficiaries, jail populations, and subsidies were included, government healthcare spending most likely accounts for a far more significant percentage of total healthcare expenditure. Although the concept of a government-run health system is unpopular with the public, it is only a matter of time before an increasingly costly government-subsidized private health system is as well.
The Ultimate Impact On The Healthcare Industry
Against rising inflation, workforce shortages, industry consolidation, and the inability to integrate systems, it becomes difficult to justify a value-based healthcare framework when the primary lever to increase value is to drive down costs and maximize profits.
Unless management has the tools and permission to improve quality, perhaps it is time to remember the words of Karl Weick and “drop our management tools” when it comes to value-based healthcare.
Mitchell Tsai MD,MBA
Dr. Tsai is a Professor of Anesthesiology at the University of Vermont Larner College of Medicine, where he also attended medical school. He is the current President of the Association of Anesthesia Clinical Directors (AACD) and is a champion of perioperative management curriculum for anesthesia residents and medical students. He attended college at Stanford University and obtained an MBA from the University of Southern California's Marshall School of Business. Outside of medicine, he enjoys reading, golfing, cooking, and traveling.
Ian H. Black, MD
Dr. Black is a Senior Medical Officer (SMO) in Anaesthesia and Critical Care at the Hutt Hospital in New Zealand. He has also served as Chief of Anesthesiology and Perioperative Medicine at the Veterans Affairs hospitals in Denver and Cheyenne. His clinical expertise includes cardiac and adult anesthesia as well as intensive care medicine. Prior to joining civilian life, Dr. Black served for 24 years in the US Army, where he had the role of Chief of Anesthesiology at the US Army Burn Center and the Command Surgeon for the 377th Theatre Sustainment Command. He has deployed twice to Iraq, twice to Afghanistan, and once to the Middle East at large. He always takes an active role in resident education and currently is working on interests regarding health care systems and how they define and deliver value, especially when resources are constrained.
Jacob Martin, MD
Jacob Martin, M.D. is the Division Director of Cardiac, Thoracic, and Vascular Anesthesia at the University of Vermont Medical Center. In addition to resident education, his academic interests include using Time Driven Activity Based Costing (TDABC) to identify significant cost contributors in healthcare to eliminate waste. He has written about the value proposition and its lessons for anesthesiologists. He has noted that medicine has yet to leverage the proposed productivity gains associated with the electronic medical record. He believes that the United States' current and projected cost of healthcare compared to G.D.P. is not sustainable.
