The Covid-19 pandemic has shaken the health care industry over the past year, but what can health systems and health plans expect financially going forward?

Advisory Board's Natalie Trebes and Christopher Kerns sit down with Radio Advisory's Rachel Woods to talk about the financial outlook for health systems and health plans for the rest of 2021 and beyond.

Read a lightly edited excerpt from the interview below and download the episode for the full conversation.

Rachel Woods: There is a lot of variability when it comes to the financial outlook, not just because of the very specific conditions of the crisis that we are living through, but also because one segment of the industry isn't going to look like another segment. And even if you look at the same segments during the same time period, we still see differences. Christopher, what was the spread of performance on the hospital side of the industry?

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Christopher Kerns: When we look at the numbers on revenue performance, margin performance, overall cashflow performance, what we saw is that by the end of 2020, even the 25th percentile of performers did a little bit better than they did the year before, which I think surprised a lot of people, but so did the 75th percentile of performers.

So what we saw was a widening gap between the haves and have-nots when it comes to hospitals and health systems. So the bigger, more financially strong organizations did better and they widened their lead over smaller organizations.

Now that's not true across the board, there were a number of large organizations that struggled, and there were a number of small organizations that thrived, but by and large, we saw a widening spread in performance across 2020 that we have not seen in several years.

Woods: And what is your prediction for how that gap will change over time? Do we expect it to continue to expand or maybe to narrow back to where things were in 2019?

Kerns: I would expect at the very least some stability in that gap, if not some widening of it across the course of the year. And one of the main reasons for that is the huge spike in costs that we have seen across the board—labor, supplies, technology—and those are going to disproportionately affect smaller organizations that don't have either the financial cushion or frankly, the flexibility to be able to absorb those costs or adopt different in kind staffing, supply, or technology models. So I think that we're likely to see a bit more widening between the haves and the have-nots across 2021 and probably into 2022 as well.

Woods: Natalie, is this haves and have-nots problem also the same in health plans?

Natalie Trebes: Yes, I don't think it's as extreme, or rather, I think there's the have-a-little and have-a-lots, rather than haves and have-nots, but the big variable for plans is their enrollment mix. And I think it's worth teasing that out by the health plan type.

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So the big national plans that you're seeing make headlines right now for their massive profits, there is a reason for that; they have an especially good position with their different businesses for these kinds of enrollment shifts. Most of them have really substantial Medicaid businesses. So they were ready to absorb some of that drop in employer coverage right back into their own business, rather than lose it to other plans. I think Cigna and Centene are both interesting outliers there; Cigna's pretty heavily focused in the commercial space, Centene's pretty heavy in the Medicaid space. But in general, the extremely high profit margins might turn heads right now, but they are blind enrollment shifts. And again, they will be paying rebates back later.

Woods: What about plans that are slightly smaller in size? I'm thinking like a regional Blues plan, what are we seeing there?

Trebes: So the Blues plans I think are actually particularly special, they are mostly really heavy in the employer space, both self-funded and fully funded. And I make that distinction because it's worth noting that a fully funded business is more profitable than a self-funded business.

So any drops in employer coverage for them can be extra painful compared with the nationals who mostly have self-funded coverage. And then they also, again, because of that mix had less of an opportunity to capture that new Medicaid enrollment.

And finally, they are deeply integrated in their local market. So any kind of regional variation of what was going on with the economy or Covid policies, it's going to hit them more dramatically. So when we look across the Blues, there is about a 12 percentage point spread in margins across the Blues from negative 5% to 7% positive. So the haves and have-nots is really playing out within the Blues space.

Woods: And what about the even smaller plans, I'm thinking the local ones?

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Trebes: So that's where the variation in portfolio and geography gets even more extreme, but on average, these plans have tended to pick up enrollment in the government space and Medicaid and individual in particular.

I do want to distinguish the provider-sponsored plans locally in particular because they have this entire arm, the hospital system, that was struggling at the beginning of the pandemic. And so I think many of them were put in a position of feeling like they really had to focus on sustaining that provider arm.

So they might not be coming out of the end of the year, even if they had growth in Medicaid or individual in the same place as some of these national plans.

Woods: And all of this really comes back to support our point, that the headlines are going to go for the attention-grabbing story, but aren't going to capture all of the variations between hospitals, between health systems or for the industry at large.

I'm surprised that we haven't talked about Medicare Advantage yet. And I think that's because it's really removed from discussions that center on things like employment and insurance. What's going on in Medicare Advantage for plans?

Trebes: So that I think is the really big story that's not getting talked about as much, is the shifts there. Growth in Medicare Advantage is really crucial for plans right now for a number of reasons. It's not tied to economic cycles, so it's a little bit insulated from all of the rest of the churn we're seeing everywhere else.

The margins are extremely high, and it's really the only avenue that plans have for new growth. So they are getting enrollment in Medicare Advantage by shifting from traditional government Medicare to their own, versus in other business lines, they have to steal that market share from other plan competitors.