Business Matters
Health Care in a Lousy EconomyWith a national recession looming, Detroit may provide lessons for the rest of us
I’m from Detroit. Have been my whole professional career and I’m darn proud of it. Go Tigers! Go Pistons! Go Red Wings! Go Wolverines! But the Detroit economy has been America’s worst over the past 18 months, with unemployment double the national rate and the auto industry in free fall. While many pundits claim that health care is immune to economic cycles, you’d never be able to convince the hospital, physician or payer sectors in metro Detroit.
What are the lessons from a really bad economy that might be relevant across the nation as we enter a national recession?
1 I Health care isn’t immune to economic cycles. It is very cyclical. It just lags the overall economy by six to 18 months. Laid-off workers are often COBRA’d for up to 18 months, and they get all their needed and planned health care usage out of the way during that period. Medicaid cuts come from the state and federal governments the fiscal year after the economy tanks. Issues trickle down from the larger employers to the smaller service-oriented ones who can’t afford to give their workers health insurance any more.
2 I The payer mix changes. There are 5 percent fewer commercially insured people in Michigan today than there were two years ago! A laid-off worker doesn’t move from commercial insurance to Medicaid—he or she becomes “self-pay.” And for those who still have insurance, co-pays and deductibles are up due to consumer-directed health plans and fewer dual-coverage families.
3 I The patient-responsible portion of the bill goes up, bad debt skyrockets. In published reports, metro Detroit hospitals admit to having more than 20 percent increases in bad debt, but we think it is much worse. There are indications charity care and bad debt are both up 50 percent across the market.
4 I Hospital volumes drop, especially the good stuff. As fewer families have insurance and those with insurance face higher co-pays and deductibles, they use a lot less health care. They may show up at your ER, but they’ll work hard not to be admitted. An informal survey of the major metro Detroit hospitals showed inpatient volume was down 2 percent to 3 percent in 2007 from 2006 levels. Orthopedic and cardiac volumes were down even more.
5 I Everybody is expanding. Hospitals attempt to increase their geographic reach to keep heart, cancer, orthopedic and surgical volumes stable. In Detroit, most of the systems were subregional, content to dominate one side of town. Now all are attempting to move outside their subregions. This means everybody is facing new competitors, many formerly loyal physician groups are in play, and marketing and advertising spends are up dramatically.
6 I merging quickly. Marginal hospitals merge quickly because they lack the financial strength to survive the downturn.
So is it all bad news? Not really. Nurse vacancy rates are way down! The strong regional not-for-profit systems are doing quite well. Nobody in this market is happy with their profit margins—but those with strong balance sheets are picking up market share and investing in physicians, services and technologies for the future. They hope to return to adequate margins once (or maybe six to 18 months after) the economy eventually recovers.
Jeff Lutz is a principal in the Detroit office of Deloitte Consulting LLP.
You can contact our guest author at jlutz@deloitte.com
This article 1st appeared in the June 2008 issue of HHN Magazine.
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