What If We Gave Hospitals Real Incentives To Prepare For The Next Pandemic?

Editor’s note: This was originally published on the Health Affairs Blog on April 24, 2020. 

The U.S. response to COVID-19 makes it clear that hospitals in the United States are not adequately prepared to handle pandemics. Researchers have shown that hospitals will only have enough beds to meet demand in the best-case scenario of a 20 percent infection rate over a year. That claim assumes half of the hospital beds are repurposed to specifically treat COVID-19 patients. In the worst-case scenario, in which 60 percent of the population falls sick and the virus spreads over six months, the United States would need seven times more hospital beds than it currently has. And aside from beds, U.S. hospitals suffer equipment shortages—including masks, personal protective equipment (PPE), and ventilators—that threaten the health and safety of patients and providers.

A major reason for this lack of preparedness is inadequate incentives. Hospitals, which have continued to consolidate and prioritize efficiency over the past decades, have little incentive to build additional, expensive negative-pressure rooms for single patients. They do not want to order extra ventilators for intensive care unit (ICU) beds, which are costly and may not serve patients outside of a pandemic. They seek to avoid the economic damages and public stigma of converting into facilities for large-scale triage or quarantine. Furthermore, as more care is being shifted to the home, hospice, and outpatient settings, the number of existing ICU beds nationwide have been declining. But given the frequency and disruption caused by large-scale epidemics and pandemics, that should change. We believe a system of incentives should be put in place to guide hospitals toward emergency preparedness.

Before The Pandemic: Incentivizing Enough Infrastructure 

Performance Metrics
Before a pandemic arrives, hospitals should have clear incentives to invest in pandemic preparedness infrastructure and, ideally, rebuild and redesign existing facilities so that they can also provide surge capacity. The Rush University Center for Advanced Emergency Response, built in 2012, encompasses the idea of doubling capacity. Its ambulance bays can convert into large decontamination zones with more than twice the normal capacity. It features beds that can quickly convert to negative-airflow rooms. Patients have the ability to receive radiology services in the emergency department, so they can remain isolated from other patients in the hospital. 

Rush University’s Center for Advanced Emergency Response was funded primarily through multimillion-dollar charity grants. A more accessible option for incentivizing hospitals would be for public payers to introduce surge capacity performance metrics into reimbursement models. This is especially important because some crucial investments for pandemic response, such as building more decontamination showers, will not necessarily generate revenue for a hospital outside the pandemic. One potential example of this approach would be for the Centers for Medicare and Medicaid Services to leverage the Hospital Value-Based Purchasing Program, established under the Affordable Care Act, by expanding its safety domain to include pandemic preparedness metrics. Such metrics might include how much inventory (including negative-pressure rooms, ICU beds, PPE) a hospital maintains proportional to the size of its surrounding population in a defined vicinity. Hospitals that score high on this metric would be eligible for additional funding.

A New Hill Burton Act
A different option would be to create a grant and loan program similar to the 1946 Hill Burton Act that provided federal grants and guaranteed loans to improve hospital infrastructure. Funded facilities had to adhere to certain requirements, including providing reasonable volumes of free care and proving their economic viability. In this case, similar legislation might require hospitals to meet certain pandemic preparedness requirements (for example, procuring a set amount of infrastructure, having an evacuation plan) to be eligible for certain funding. Additionally, this funding could be increased for hospitals that focus research efforts on creating dual-purpose infrastructure for pandemic response.

During And After The Pandemic: Guarding Against Economic Damages 

Another concern that may dissuade hospitals from investing in pandemic preparedness is that they will not be adequately compensated from economic damage, during and after the pandemic, if they serve as a primary isolation or quarantine center. This is because hospitals need to conduct a certain amount of high-revenue services, such as elective surgeries, to compensate for the services that reimburse less. A hospital that converts its outpatient facilities—traditionally used for revenue-generating elective procedures—to single-patient negative isolation rooms and take on a high proportion of patients in a pandemic may risk bankruptcy and closure. This has been the case amidst the coronavirus outbreak for many hospitals that lack the money to handle the influx of new COVID-19 cases. Furthermore, hospitals may worry about goodwill and the negative perception that may harm their reputations after serving as an isolation site with infectious patients. Future patients may feel uncomfortable receiving care in a hospital that was recently designated as a quarantine center.

One way to guard against these damages is by requiring business interruption insurance (BII) companies to offer insurance plans to hospitals that cover losses—both economic and goodwill—due to a pandemic. Currently, most BII policies are triggered when the policyholder sustains “direct physical loss of or damage to” insured property. Courts should interpret this language to include physical contamination of a workplace, which would allow insurance coverage for financial losses due to pandemics. The federal government could pay reinsurance for losses incurred by BII private insurers after the insurers pay a significant deductible amount. Additionally, states could mandate that hospitals purchase BII as part of their licensure requirements. This would help protect companies that offer BII against adverse selection, where only hospitals that have a higher likelihood of experiencing disease outbreaks opt into the insurance plan and cause an artificial rise in premiums.

The security that comes from BII would further incentivize hospitals to transition toward accepting the risk associated with an effective pandemic response. Any additional damage due to lost goodwill may be compensated by federal and state reimbursement, based on calculated projections of revenue loss for characteristic-matched hospitals in prior epidemics.


Our typical response to pandemics in the United States, reflected during the COVID-19 outbreaks, has been to pass stimulus legislation, hoping that hospitals will build enough infrastructure to control the spread of disease. But hospitals have little incentive to prepare for the pandemic response before the outbreak occurs—or accept the business liabilities of leading a response during and after the pandemic strikes. We need to rethink the way we incentivize hospitals to handle pandemic response for ourselves and the future of our public health system.