In the years before the pandemic, the country's healthcare industry was thriving. There was consistent growth and innovation that allowed providers to improve access to higher quality of care while cutting its total costs. COVID-19, however, has disrupted this progress in a number of ways. Going forward, providers and payers need to understand emerging issues that can affect their managed care contract portfolios and to better navigate the new future of healthcare.
Budget assumptions were destroyed on all levels in 2020, and this is expected to continue through the remainder of 2021, into 2022, and possibly longer. Assumptions regarding case mix, service mix, revenue, expenses, occupancy, and more, were no longer valid. A number of payers incurred many additional expenses that they did not budget for.
One major impact was a drop in total expenditures. Traditional Medicare spending decreased overall by 7% last year. The most drastic drop was seen between March and May of last year, when spending decreased by a total of 48%.
This decrease created a short-term windfall of profits for commercial insurers, which triggered state-mandated premium refunds to their policyholders, as well as additional reimbursements to providers, and additional benefits to members.
The role of telehealth changed in unexpected ways. Before March 2020, virtual doctor's visits accounted for less than one percent of Center for Medicare & Medicaid Services (CMS) visits. Between March and December of last year, this number increased to 16% of visits. Many patients have expressed a new preference for telehealth appointments, creating a new standard of conducting routine appointments as we move beyond the days of the pandemic.
Providers and payers put significant time and energy into negotiating contract terms. Often, it takes over a year for the terms of an agreement to be settled and implemented. The terms of these contracts are also stretching for longer agreement terms. While three years is the current standard, five and 10-year agreements are becoming more common.
These agreements, driven by actuarial calculations and assumptions about service mix and volume, are meant to be maximized. Provider and payer pricing terms must meet both parties' needs. The pandemic has changed everything when it comes to volume, service mix and stop loss pricing assumptions. New agreements will need to be negotiated to meet new demands and needs of everyone involved.
The changes that have come about as a result of the COVID-19 pandemic call for urgent reassessment. Healthcare organizations' managing care contract portfolios represent their largest sources of revenue. Reassessing for impact and reinvestment as we move forward can significantly cut risk and maximize opportunity going forward.
Providers will need to quantify the risks that they face. Bring these concerns to the table when it is time to renew negotiations. This will allow them to reset pricing and secure the cash flow they'll need in order to thrive in the new healthcare environment.
Strategies will need to go beyond simply asking for rate increases. Instead, providers will need to consider how to reevaluate their current reimbursement model to one that is more sustainable. For instance, reexamine whether fee-for-service still works, or if another model would be more fitting for their operation. By choosing the right model, providers and payers can both mitigate risk and maintain cash flow stability.
This is a good time to diversify services through telehealth and other remote care, such as medical homes. Wide adoption of new practice standards is inevitable, so being at the forefront of incorporating these changes puts you at an advantage.
While the years ahead have many uncertainties, it’s vital to make key decisions when needed. By looking at the big picture and proactively examining your managed care contract portfolios, you can choose the strategy that will continue to serve your organization's needs and better protect against unforeseen circumstances.