Sunday, July 09, 2006

Hospitals and HMOs in a Bird Flu Pandemic

According to conventional wisdom, the businesses that would be hardest hit in the event of a bird flu pandemic (or even a pandemic scare) are those that aggregate people:
  1. Malls and other forms of bricks-and-mortar retail
  2. Entertainment venues, including movie theaters and sports facilities
  3. Restaurants and bars
  4. Transportation of all kinds, especially air travel and cruise lines
Are these really the most vulnerable sectors? How about hospitals and HMOs?

There are two scenarios one has to consider when imagining how a hospital will experience a bona fide pandemic. Hospitals with a rigorous pandemic plan and a strong management team will face a much different future than those without a sound plan or those whose management falls prey to the "fog of pandemic."

Poorly Prepared Hospitals

A hospital can easily blunder into a disaster. Consider a hospital that simply keeps filling beds as serious flu cases arrive. This is not an unnatural thing to do; it's what any hospital would do in the case of a train wreck.

Unfortunately, if a hospital admits an overload of influenza cases, there can be dangerous consequences. Many people at the hospital will understand the dangers, but without a good plan and good management, it is still easy to fail to react quickly enough or definitively enough.

Things can easily get out of hand. With just a little bad luck, influenza can spread throughout the hospital infecting both staff and non-influenza patients, including maternity patients for whom influenza is especially life threatening. Also, without a huge amount of planning and pre-event education, there will be substantial absenteeism at all levels. If the situation becomes bleak, the effects of attrition and desertion can send the hospital into total meltdown.

This is a horrible vision, but, for the hosptial as an instituion, the aftermath is also bad. Law suits are almost certain to destroy whatever remains of the hospital's finances.

Best Practice Hospitals

Even a hospital with a good plan and a strong management team can fall into traps, but such hospitals will have much better chances of avoiding disaster. Temporary facilities in near-by schools or other public buildings will be used to segregate the influenza patients from all other hospital patients. Staff at all levels will be provided with Tamiflu or other antiviral prophylaxis. Staff will have clear evidence that should they become ill, they will receive effective, quality care. There will be absenteeism, but there is a chance of keeping it at controlled levels. Good media relations and self-evident professionalism can give courage to volunteers to come forward to help the hospital through the crisis.

What Are the Business Consequences?

With the possibility of a pandemic on the horizon, this seems to be a bad time to be deeply invested in a small private hospital, even if one has confidence that it will manage to attain best practice. In any pandemic scenario, a private hospital will face substantial losses from the deferral of almost all of its traditional for-profit business. Such hospitals will also suffer from substantial under-compensation for the public services which they will surely provide.

University hospitals are not exempt from the disaster scenario. Most will have a sensible plan, but for many their decentralized managements will make it difficult for them to execute the plan. The challenge is especially serious for large teaching hospitals in urban environments.

In the case of 1918-level pandemic, a hospital like that of the University of Pennsylvania will be faced with huge political and community pressures. It will take a exceptionally clear manegerial vision to do what must be done to avoid disaster.

How will HMOs do Financially?

Because of the litigation that is likely to follow a pandemic, if an HMO has even one unit that goes into meltdown, then the HMO is at risk as a whole. At a bare minimum HMOs will face years of legal defense. Settlements, as always, are uncertian, but the odds are that they will be substantial.

If a pandemic develops, HMOs are likely to suffer much more than holdings like cruise lines or retail malls. The cruise lines and malls will recover much of their lost business when the pandemic abates, and they face no substantial post-event risks.

HMOs will have excessive costs during the pandemic, and then the will face extensive litigation after the pandemic. Certainly, HMOs will try to pass these costs along to participants through increased fees in subsequent years, but this will not be easy --- especially if a local competitor has less legal exposure. Those HMOs with numerous meltdown units will lose much of their customer base when they try to increase rates to cover losses from the pandemic.

In the years following a 1918-level pandemic, some currently health HMOs can be expected to be pushed into bankruptcy --- or at least into forced consolidation.

On the other hand, financially healthy retail REITs and financially healthy cruise lines are unlikely to go bust in the wake of an influenza pandemic. Lost business will cause such firms big cashflow problems, but there are balancing forces. Interest rates are almost certain to decline, and creditors are bound to understand that the cashflow problems are not premanent.

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