What structural weaknesses did COVID-19 expose in the U.S. healthcare system?

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The Impacts of COVID-19 Blog Series

The COVID-19 pandemic has been characterized as a black swan—an event that happens so rarely that it is incredibly hard to predict and even harder to prepare for. With the benefit of hindsight and knowledge of our current reality, this blog series approaches and attempts to answer a series of questions about our present state and our future. The first post dissects the U.S. healthcare system and discusses the structural weaknesses that this pandemic exposed. The series follows with a post on how innovative healthcare stakeholders are responding to these weaknesses with incredible problem solving and resiliency. Building off this foundation, we continue the series with a look forward into the future of healthcare (Part 1, Part 2) through the lens of this pandemic. We conclude the series with the viewpoint of the investment community and unpack what pre-COVID-19 themes will persist or be accelerated and what new categories will emerge.

Physical Infrastructure

It is no surprise to anyone that healthcare is highly dependent on brick and mortar, which inherently limits the ability to scale capacity quickly. Digital health evangelists have called this dependency a weakness for a long time, but few could claim to have known the extent to which it would cause turmoil for patients going without necessary but elective care, and healthcare professionals forced to flip from physical care to virtual care overnight. Hospitals and clinics have been conditioned for seasonal peaks, which still challenge them in the event of a particularly bad flu season—let alone surges of this magnitude.

Technological Infrastructure

In many cases, the core IT infrastructure in healthcare is antiquated and often unsupported by an agile methodology. This is likely in part due to the prioritization of physical infrastructure discussed above. It makes it more difficult than it needs to be to deploy the necessary technology. Enormous demand has been placed on healthcare IT departments in the face of this pandemic—and it extends far beyond the obvious of standing up a new telehealth platform (something that could have taken months pre-COVID-19). It now includes updating cellular, text, web and mobile app communications, reconfiguring EHR workflows to support clinicians and to code/bill appropriately, updating permissions and security access to account for the shifts of coverage, and onboarding new or volunteer care teams. These demands expose weaknesses that IT departments have been dealing with for years.

Furthermore, there has been limited penetration of AI and predictive analytics into core functions of the healthcare system. Applications have been limited in use and lack the flexibility and dynamism needed for the healthcare system to manage capacity, risk prevalence, supply shortages, etc. The lack of interoperable systems within and across the healthcare system worsens the situation, making it incredibly challenging to accurately predict outcomes, staffing, supply needs, etc.

Supply Chain

Healthcare, especially at provider organizations, has historically engaged in horizontal integration more often than vertical integration, yielding a highly dependent supply chain. While the push to value-based care has resulted in some vertical integration in services, it has not influenced the supply chain. The healthcare system has viewed the supply chain as a cost to be minimized, not a strength to be leveraged. The race to the bottom and rationing of supplies and medicine during this pandemic can be explained through prioritization of efficiency over redundancy: sole-sourced agreements, reliance on China, and upwards of 70% of hospital purchases being made through GPOs.

Lack of predictive analytics—in the supply chain especially—is a weakness. Few healthcare systems have automated inventory management, let alone point-of-care services. As recently as one year ago, leaders admitted to manual data entry and spreadsheets to track supply margins. These weaknesses, paired with the heavy historic imbalance between efficiency and redundancy, have led to the supply shortages we’re seeing during the surge.

Workforce and Culture

The supply and demand equation for the healthcare workforce and the silver tsunami were already widely at odds. Burnout among physicians, nurses and others in the healthcare industry has been acknowledged but not yet solved. The pandemic has exacerbated these known weaknesses. Compounding these workforce supply weaknesses are the regulatory complications of working across state lines and regulatory burdens limiting the scope of license for various clinical professions.

In a constrained workforce such as this, culture matters even more. As Michael Watkins said, “Culture is the organization’s immune system.” In a LinkedIn discussion regarding culture, it is mentioned that organizational culture functions like a form of protection that has evolved from situational pressures. In healthcare, the problem is that these organizational cultures have also diminished agents of needed change. Our healthcare system is known for the painfully slow adoption of digital health and technology, and an even slower pace of scaling new technology beyond initial pilot use cases.

Healthcare culture is not used to being agile or changing rapidly, stemming from rational situational pressures such as quality, safety, privacy and security concerns. Fortunately, as we’ll see in the next post in this series, cultures are dynamic: as Abdi Osman Jama said, “An organization [is] a living culture… that can adapt to the reality as fast as possible.”

Financial

Healthcare has long faced difficulties in aligning incentives while delivering value. Even during the COVID-19 pandemic, the enduring weakness of a fee-for-service system cannot be overlooked.

First, consider the disastrous impact the cancellation or postponement of elective procedures will have on income statements and cash flow positions (see the voluntary disclosure from NYP and fear from ACOs). Even leading health systems with healthy balance sheets operate on razor-thin margins with mounting reimbursement requirements. Consider the massive losses they can expect from COVID-19 cases and the additional high costs they will face as they deal with ramping up staffing and infrastructure. Finally, think about the already high uninsured and underinsured rates in the U.S., as well as the rise in uninsured rates that will be seen for months to come due to rising unemployment. Yet even worse than the direct financial burden this high uninsured rate will put on health systems is the persisting spread and strain of COVID-19 due to barriers in access to care and fears of medical bills for the uninsured. These vulnerabilities will require liquidity planning for those best positioned to withstand the pandemic, and they pose a very real threat to the viability of rural and safety net hospitals.

This brief analysis discusses the ways in which the healthcare system’s constituent parts interrelate while providing context on the root causes behind the weaknesses that have been exposed. The way healthcare stakeholders are responding to this black swan event is promising; we hope this short-term crisis will turn into a long-term opportunity to address these structural weaknesses.

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