Dissecting the Impact of Covid-19 on the Specialty of Anesthesia

Bart Edwards, MHS, MBA
Executive Vice President of Client Services, Anesthesia Business Consultants, LLC, Jackson, MI

Jody Locke, MA
Vice President of Anesthesia and Pain Practice Management Services, Anesthesia Business Consultants, LLC, Jackson, MI

2020 was the year everything changed. Early in the year, a few cases of the coronavirus were detected on the west coast. Not long thereafter the virus was expanding in the northeast. By March it was abundantly clear that we were experiencing a full-blown pandemic. At first, most people thought it would be a short-term phenomenon. The reality was that March and April were only the first wave. Cases, hospitalizations and deaths would continue to grow through the year. It is now 2021, and while there is now a vaccine, the virus is still our greatest health and economic challenge. Unlike previous health scares, Covid-19 has dramatically impacted the health of the nation in more ways and more dramatically than anyone could have ever imagined.

We tend to think of healthcare issues as isolated phenomena. We get a cold and it eventually goes away. We break a bone, it gets set and then it heals. Some conditions are life-threatening, but only the victims suffer. In this sense, the coronavirus is unique. One person’s infection puts us all at risk. The cure no longer involves just the infected, but all those who could possibly become infected. Never has a cure involved the marshalling of such a vast array of resources. We used to look suspiciously at people who wore masks in public, but now it is the norm. No one had heard of social distancing until last year and now we are reminded of it everywhere we go. So many of the activities we used to take for granted like flying, going to the gym and hanging out with friends are now viewed with suspicion. Whoever thought that holiday get-togethers with family members had the potential to become super-spreader events? By the fall, people were lining up for PCR tests. Who would ever have thought that the government would impose lockdowns and quarantines in the United States? By the end of the year, not only had we elected a new president, but the question on everyone’s mind was how long would we have to live with this virus? Would life ever return to normal?

Those of us who work in healthcare used to smugly assert that our industry was recession-proof. That may have been a pre-Covid reality, but it is definitely no longer true. Never has our healthcare delivery system been so challenged. Whoever thought that state governors would limit patient access to elective surgery? Not only did case volumes drop off for anesthesia practices, but the physical constraints put in place to contain the virus disrupted many links in the revenue cycle chain. Never have medical groups needed the kind of financial support provided by the CARES act. Ultimately, Covid-19 and its financial implications have undermined the very fabric of hospital relations with hospital-based practices. The specialty of anesthesiology has experienced some very dramatic developments over the past decade such as practice aggregation and the infusion of venture capital, but these were just preamble to the tectonic events of 2020.

Anesthesia practice managers will be scratching their heads for a long time as they attempt to strategize a profitable and successful path for the future. Dissecting the issues and trends will require lots of data, careful analysis and an open mind. The specialty is haunted by its sacred cows: those beliefs providers have taken for granted for years. Now is the time to rethink previous assumptions and explore new options. As is often said by strategic planners, very often the beliefs and strategies that got us to where we are today, will not get us to where we need to be tomorrow. Covid-19 may well prove to be the ultimate wake-up call for the specialty as a whole.

The Evolution of the Virus

The coronavirus has proven to be one of the most significant healthcare crises in the history of the country, dwarfing both the Spanish flu and the AIDS crisis in its rate of expansion and impact.

Voluntary social distancing guidelines and lockdowns worked initially to isolate people and flatten the curve of infection, but these measures had many unintended consequences that only exacerbated the situation. Unfortunately, there was no national strategy for managing the pandemic and the variety of local responses only encouraged the expansion of the pandemic. As Chart 1 indicates, the average number of new daily cases continued to increase through the end of the year. With each wave of new infections the aggregate impact kept rising to new levels.

There are many ways to monitor and measure the impact of the virus. New infections are just one measure, but most patients who become infected are asymptomatic. This has been one of the most disconcerting impacts of the pandemic. Because Covid-19 is a respiratory infection that can be transmitted just by breathing hard, it has posed a whole new set of containment challenges. Even those with no symptoms can infect those they come in contact with, and, hence the need for masks. Many observers have come to view the growing death rates as the definitive indicator of the seriousness of the crisis. As indicated in Chart 2, while many Americans got infected and survived, many others did not.

The Economic Impact

Without a doubt, the combined effect of lockdowns, quarantines and the fear of becoming infected had the economic effect of a serious financial blood-letting. As is so often the case with such dramatic responses to unanticipated events, the shock value of the measures taken was as significant as the impact of the virus and the lack of a clearly coordinated national strategy created significant chaos and confusion. Although the U.S. economy reached a peak in monthly financial activity in February, that month would also mark the end of the longest recorded economic expansion. The economy suffered its worst decline since the great depression in the second quarter of 2020, representing a decrease in economic activity of 9.1 percent. The most dramatic example of the impact can be seen in the increase in unemployment (see Chart 3).

Concern about getting infected caused many patients to defer procedures that had been scheduled after March 2020. Such fear had a pervasive and profound impact on surgical case volumes and anesthesia production across the country. State orders to cancel elective case schedules were especially impactful. From a visual perspective this is what resulted in the “Covid Canyon” in March and April (see Chart 4).

The impact of the virus must be seen through a national and a local lens, which determined the seriousness of the response to the pandemic. Some communities were far more aggressive in their response than others. Indoor dining might be permitted in some parts of the country, but not others.

The location of a practice clearly drives its payer mix and revenue potential. Successful suburban practices with a relatively low Medicare and Medicaid population almost always result in a more profitable practice than an inner city practice with a high public payer population. Successful anesthesia practices typically represent a mutually advantageous partnership with the facilities they serve where new business and growth are essential to a positive market position. When the economy goes into recession, it ultimately impacts healthcare delivery services. Perhaps the greatest irony has been that so many of the courageous first responders, who have worked tirelessly to fight the virus, have become many of its victims.

Anesthesia Production Patterns

Conceptually, it is useful to think of activity in three phases: pre-Covid, Covid and post-Covid. For purposes of this analysis, we have assessed the impact of case volumes as they compare to the average of the previous year. In most localities, hospitals stopped booking elective cases on March 15. As Chart 4 indicates, case volumes started to drop in March, bottomed out in April and began to recover in June, the period we define as Covid. The post-Covid recovery can be seen as starting in June or July. Ultimately, what matters most is the relationship between production patterns and cash collections, but let us first explore the various factors that impacted production. We begin with a high-level overview.

It has often been said that if you have seen one anesthesia practice, you have seen one anesthesia practice. The sample of anesthesia practices included in this study represents a cross section of practices and practice types across the country. As Chart 5 indicates, most practices saw their case volumes return to pre-Covid levels by October, but a significant percentage did not. If your practice is one of those that did not, then you might want to ask why and examine what venues or lines of business have not recovered, or which may not recover.

Each anesthesia practice is unique in its scope and complexity; some venues and lines of business enhance the value of the practice, while others are loss leaders. Typically, we look at practices through two lenses: lines of business and places of service. In terms of the impact of Covid, we often look at the following lines of business: obstetrics, endoscopy, cardiac, orthopedics and other general surgery. Place of service can also be significant, especially the distinction between inpatient and outpatient or ambulatory facilities. Ideally a practice will evaluate the impact and potential of each, the goal of which is to predict how they can be balanced for an optimal long-term strategy.

• Lines of Business
  • Obstetrics – For the most part, OB cases remained fairly consistent throughout the Covid period. In many practices, obstetric anesthesia may have a higher Medicaid population, in which case consistent OB volumes may not be so positive. For those practices with a very strong payer mix in OB, this could be a real plus. (There is a theory that the impact of lockdowns and quarantines in March, April and May 2020 may result in a spike in deliveries in January, February and March of 2021.)
  • Endoscopy – This line of business tended to drop off fastest and come back slowest. These tended to be elective cases; and many patients, especially those covered by Medicare, have tended to defer the screenings. Most practices saw a drop in the percentage of Medicare patients in April and May, which can be directly attributed to the drop in endoscopy cases.
  • Cardiac – A recent study published by Becker’s showed a 53 percent drop in cardiovascular surgery during the Covid period. Most clients appear to have recovered most of this volume.
  • Orthopedics – This is often the most profitable line of business for two reasons: better payer mix and the ability to perform nerve blocks, which are separately payable.
  • Other (General Surgery) – All other cases tend to fallow the usual pattern.
• Place of Service
  • Inpatient – Cases done on an inpatient basis tended to be more emergent cases and not get deferred.
  • Outpatient – Many outpatient and ambulatory facilities shut down in March. Some were slow to reopen.

Collections

Getting paid for medical services in the U.S. is more complicated than anywhere else in the world. Each payer and insurance company can have its own rules, which can be especially arcane for anesthesia services. Individual payer policies determine how much of the allowable will be paid by the payer, and how much is the responsibility of the patient. Deductible and co-insurance policies represent a further level of complexity that is patient-specific. The typical claim is processed electronically without delay, resulting in a patient co-payment. If something is missing or questionable on the claim, then the payer may issue a denial, which causes a delay in processing and may result in non-payment. There is some evidence that certain payers experienced delays in processing and increased levels of denials as a result of Covid. A review of practice data across the country reveals that many major payers experienced significant disruption to their processing patterns in the April to June timeframe, but most seemed to be back on track by August.

As a general rule, collections should ramp back up as production increases. In most practices there will be about a 45-day lag. Because of the impact of economic factors such as unemployment and payer mix, collections may not quite have reached pre-Covid levels by the end of the year. The higher the percentage of allowable expected from the patient, the more pronounced the decrease may have been. Chart 6 provides an example of how production patterns could be compared to collections trends.

Again, it must be noted that not all practices in this sample experienced the same performance pattern. Location, payer mix and the types of services being provided were significant factors in both case volume recovery and collections patterns. While the overall average variance in this sample was a 0.5 percent lag for collections, 38 percent of the practices actually collected money faster than case volumes recovered and 62 percent saw a slight lag. The expectation is that they will make most of this up with time, as insurance and self-pay balances get resolved.

Fortunately, most practices were not entirely dependent on fee-for-service collections to cover the cost of providing the services needed. Most clients received a regular stipend from the hospital and, for the most part, these remained the same throughout the year. Support arrangements are generally structured as either a set subsidy amount or a supplement to achieve a revenue target deemed necessary to support a set level of service capacity. Not many hospitals came back to their groups asking for a reduction in subsidy based on a reduction in case volume.

There was also monetary support available through several government initiatives, such as the CARES act. This involved the Medicare Accelerated and Advance Payments Program, three rounds of Provider Relief Funds, and the Payroll Protection Program (PPP). The irony is that the combination of these funds and some creative staffing adjustments actually allowed some practices to improve their profitability through the summer of 2020.

The Tipping Point

In his 2000 debut book, The Tipping Point, Malcolm Gladwell lays out a theory that small issues may converge to create great changes. It is an interesting concept in this discussion of the impact of Covid- 19 on the specialty of anesthesia because, to a large extent, the various aspects of the coronavirus have proven to be a tipping point for the specialty. We predict that when historians of the specialty look back on 2020 they will see clearly the origins of so many dimensions of the current thinking and perspective and how and why things had to change.

It should come as no surprise to anyone that most hospitals were operating with razor thin margins prior to March 2020; and that the drop in cases and revenue affected them as profoundly as it did their anesthesia practices. Health systems were critical of how anesthesia practices assessed and responded to these changes in volume, demand and revenue. Logically, it follows that anesthesia subsidies suddenly came under closer and more intense scrutiny. What has always been an ongoing challenge and source of great anxiety for anesthesia practices is now being viewed in a new light.

For a number of practices this additional financial stress tipped decisions by practices and facilities toward hospital employment. Private practices large and small are ensnared in the trend. Published articles announced new hospital employment agreements with independent anesthesia practices in Pennsylvania, Massachusetts and Missouri. Discussions with impacted practices indicate it was driven both by financial risk exposed by the Covid reality and also by frustrated hospitals who are becoming more focused on control than profitability. This trend is not just hearsay and speculation; a number of major health systems have announced their plans to cancel contracts with the existing provider groups and companies in order to directly employ the anesthesiologists and CRNAs.

Victims of the volume and revenue reductions were not limited to independent practices; corporate entities were exposed as well. Envision announced in April of 2020 that it had hired restructuring advisers and was contemplating a bankruptcy filing. A Bloomberg article indicated that Envision made cuts in early April that equated to roughly one-third of the annual physician compensation. They were not alone in considering drastic action during this time of financial stress. TeamHealth asked for voluntary furloughs from anesthesiologists.

Companies with stronger cash positions were able to go bargain hunting. American Anesthesiology was sold by Mednax to North American Partners in Anesthesia in May. Ambulatory Surgery Center management company Surgery Partners sold their anesthesia services division to Northstar Anesthesia in September.

And these are just the transactions we know about. The financial shock of the impact of the pandemic on production patterns across the country is sure to have triggered a wide range of draconian responses. For many hospital administrators, Covid-19 was the last straw in a long history of contentious negotiations with their anesthesia practices. Obviously one cannot run operating rooms without a reliable anesthesia service, they reasoned. Maybe the time has come to just employ all the providers. Anyone who has carefully analyzed the impact of such a transition from independent practice to employed providers can affirm that it never results in a cheaper solution: that it can be very disruptive, and that it undermines the very entrepreneurial spirit that makes so many private practice successful. But such is the nature of decisions that are based on the belief that the definition of insanity is doing the same thing and expecting different results. If working with an independent anesthesia practice on an arm’s length contractual basis did not result in a cost-effective and predictable solution, then it is time to do something different. Based on past history, this is the effect of a pendulum swinging from one extreme to the other. Time will only tell when it will swing back.

Final Thoughts

Anesthesia providers have always striven for the highest quality of clinical care. It has been a point of pride that anesthesia morbidity and mortality statistics are so impressive. Providers often remind nervous patients that they are at greater risk driving to the hospital than undergoing general anesthesia. Anesthesia practice managers often argue quite compellingly that anesthesia does more to determine the quality of the surgical experience than the surgeon. Versed is a wonderful drug. The problem is that too many providers have been more focused on what happens inside the operating room than what happens outside, which is now where most of the critical decisions about the practice are being made. No single event in the history of the specialty has made this clearer than the unfolding of the Covid-19 pandemic. This virus has completely changed the context of anesthesia practice—from its manpower and staffing requirements, to its revenue potential to the relationship with its customers.

For many providers, this is the beginning of the end of the kind of practice they envisioned when they started out in the specialty. For others, the chaos and confusion of the current environment represents a window of opportunity. Hospitals will always need anesthesia so they can attract and retain surgeons. Finding the right solution is never obvious or easy, but the reward doing what is right can be significant.

Bart Edwards, MHS, MBA serves as an Executive Vice President of Client Services for Anesthesia Business Consultants. Bart directs a team of Analysts, Managers, Directors and Vice Presidents who are the liaison between clients and all the resources, skill and experience that ABC offers. Bart can be reached at Bart.Edwards@anesthesiallc.com.

Jody Locke, MA serves as Vice President of Anesthesia and Pain Practice Management Services for Anesthesia Business Consultants. Mr. Locke is responsible for the scope and focus of services provided to ABC’s largest clients. He is also responsible for oversight and management of the company’s pain management billing team. He is a key executive contact for groups that enter into contracts with ABC. Mr. Locke can be reached at Jody.Locke@AnesthesiaLLC.com.