Health care is largely shielded from the economy, but not completely. New policies from the Obama administration will change the playing field.
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| Jeff Goldsmith |
While the U.S. economy sheds more than 600,000 jobs a month, the health system continues to grow. In 2008, health care added 372,000 new jobs, one-third of them in hospitals, while the rest of the economy lost 1.9 million jobs. Health care is the only private-sector economic activity that has added jobs continuously since the recession began. In fact, health employment has fallen during exactly one month in the past 25 years—in mid-1984, and then only by 4,000 jobs—and never two months in a row.
The reality is that, despite employment growth, the U.S. health system is in recession. Inpatient hospital admissions and elective surgery, as well as physician office visits and prescriptions filled, are all down by low- to mid-single-digit amounts. Colleagues in health insurance report that 2008-2009 health costs are trending in the 6 percent or 7 percent a year range. Only during the mid-1990s post-Clinton-reform, managed-care panic have we seen this cost trend lower for a longer period of time.
I certainly haven't seen all the demand indicators cited above decline at the same time in my 30-plus years in the field. Yet compared with new homes sales or new car sales (both off more than 40 percent annualized in the past year), or reduced capital goods orders, health care demand remains relatively robust, and is not going to fall precipitously, due to demographic pressures.
First Signs of Recession in Health Care
Health care demand actually began softening before last fall's thunderous financial market collapse. The downturn began in 2007 and may have been a leading indicator of a spreading family-cash-flow crisis. The steady increase in patient cost sharing over the past decade has burned away the insulation health insurance traditionally provided families against recessions. Most hospitals report rising bad debt and charity care, as people lose health insurance coverage along with their jobs. It should concern hospital leaders that the customer is less and less able to afford their product.
The sharp reduction in investment earnings and rising cost of capital from the nation's financial crisis led almost half of the nation's hospitals to report negative margins in the third quarter of 2008 (though median operating margins held at about 3 percent), according to Thomson Reuters. The catastrophic damage to the hospital industry's capital base, which has no precedent in the post-Medicare health economy, caught the industry by surprise; it is still largely unappreciated by the general public or policymakers. This damage has narrowed the capital cushion and financial options of many health systems, making them vulnerable to funding reductions from private or public health plans.
Help from the New Administration and Congress
A flurry of legislative action in the first months of the Obama administration has softened the blow to hospitals at least for the next year to 18 months. Eighty-seven billion dollars in federal Medicaid funding will help offset what would otherwise have been ruinous funding reductions from state governments that are struggling to balance their budgets. The expansion of the State Children's Health Insurance Program will provide insurance coverage for as many as 4 million uninsured children. And the American Recovery and Reinvestment Act provision to subsidize COBRA coverage could provide insurance for as many as 7 million people who would otherwise have lost coverage along with their jobs.
These measures are likely to stem the otherwise predictable steep rise in the ranks of the uninsured. The fact that construction, agriculture and tourism have all collapsed in the Sun Belt will also contribute because many of the noncitizens who staffed these industries have returned to their home countries. As a result both of policy intervention and immigration reversals, the number of uninsured may not spike as sharply during this recession as many in the industry have feared.
Possible Challenges Ahead
The president's fiscal year 2010 budget largely spared hospitals from payment reductions, focusing instead on the more tempting political target of health plans that contract with Medicare under Part C. The most challenging policy change in the budget is one that proposes to hold hospitals at financial risk for "avoidable" readmissions, and bundling post-acute care 30 days after a hospital admission. We can also expect a tightening of fraud and abuse policy, including heightened scrutiny of hospital-physician joint ventures and renewed scrutiny of hospital tax-exempt status.
However, hospitals may not escape significant Medicare funding reductions if the recession persists into 2010, and they may find Congress tempted to use Medicare savings to finance a significant portion of the cost of the Obama health reforms. Hospitals should re-examine their expense base and ensure that they can cover their Medicare costs by aggressively managing their expenses. As a result, hospital employment could trend downward in the rest of 2009 and next year. To survive the coming tightening of public and private payments, hospital managers will need to learn to run their organizations on "regular gas."
Despite all these challenges, I do not sense the wariness with which the industry greeted the prospect of health reform under the Clintons 15 years ago. Rather, there is far more support in the field not only for broadening health coverage, but for re-engineering how care is provided. The success of Don Berwick's Institute for Health Improvement and the number of grassroots efforts in quality all across the country evidence a much more aggressive effort to ensure patient safety and dignity and eliminate bureaucratic barriers to more effective care. Hospitals are also likely to enthusiastically support reforms in how primary care physicians are paid, if only because they have come to employ so many of them.
Still a Strong Industry
It is hard to escape the sense of fear and anxiety that pervades the private economy and financial markets as we move through 2009. Yet health care managers and professionals should say a silent prayer of gratitude that they work in this field.
Demand for our services, while softened, has not collapsed. Unlike the real estate and financial services sectors, we have not squandered the confidence of our customers. People in crisis appreciate that we are a vital part of their safety net, and know that we are there for them when they need us. If we can accomplish the urgent task of health reform, we can reaffirm that promise for all of the people in our country. The hospital industry will enter the next decade chastened by this economic crisis, but stronger for it.
Jeff Goldsmith is president of Health Futures Inc. and associate professor of public health sciences at the University of Virginia. He is also author of The Long Baby Boom: An Optimistic Vision for a Graying Generation and a member of the Center for Healthcare Governance's Speakers Express service. He has followed state and federal health policy for many years, beginning his career in the governor's office in Illinois and the executive office of the University of Chicago Medical Center.
This article 1st appeared on July 6, 2009 in HHN Magazine online site.
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