Ian Morrison

The recent market meltdown is fundamentally reshaping the planet. As I write this, the Dow is bumping along at 8500, world markets are shaken, and American families have lost trillions in net worth as home values tumble, as retirement accounts plunge (wiping out all the gains of the last decade), and as unemployment and job insecurity rise. Yet, health care seems like a safe haven to some of the investment pundits. In my view, health care will not remain unscathed by the economic collapse. Here are a few observations on the long-term effects of the recent market meltdown.

Reduction in the ability to pay. The current economic crisis is being felt by business, government and households alike, severely constraining their ability to pay for health care. The payers’ ability to pay is constrained in any recession, but in an environment of high government deficits, high household debt, shrinking corporate profits and tight credit markets, the problems with ability to pay are aggravated considerably.

Pitting out of pocket health care costs against other household budget items. As recessionary pressures build and consumer purchasing power gets eroded, the rising co-pays and deductibles that patients face become even more onerous, leading to patients’ foregoing treatment and visits. Anecdotal evidence shows slowing consumer demand for prescription drugs, routine office visits and elective procedures.

Searching for the Value Menu. In an economic slowdown we move to the value menu at McDonald’s, but in health care we have few such options. With the exception of Wal-Mart’s $4 generics, and the retail clinics’ very limited scope of service at affordable prices, there are not that many value choices in health care. Patients simply don’t get the care, or they cut their medications in half or postpone the check-up or the procedure.

Supplier-induced demand. At the same time as consumers cut back, providers need to make up the shortfall. The classic health economics view of supplier-induced demand might rear its ugly head as providers try to promote more activity among the better insured and more affluent patients. Revenue cycle enhancement can become a cover for up-coding as well as for unnecessary tests and procedures for the affluent.

Rising number of uninsured and underinsured. Unemployment and rising unaffordability of care both raise the number of uninsured, and those employers who want to provide health benefits often stay in the game by increasing cost-sharing. As the number of uninsured and underinsured swell, providers will face increased costs of uncompensated care.

Rising cost of capital and credit. Health care is a huge employer and has a big payroll to meet. At the same time, hospitals and many other providers have enormous capital budgets for new construction, expensive new clinical technology and electronic health records. The market meltdown is causing dramatic short-term spikes in the cost of credit, which foreshadow a longer-term challenge with the rising costs of capital.

The steep rise in short-term borrowing and the potentially tougher and more expensive capital lending requirements of the future could put a severe damper on the hospital construction boom, the rollout of electronic health records and the pace of medical technology deployment. If operating income severely declines because of reduction in consumer demand and growing uncompensated care, the capital crunch will only worsen.

The NASDAQ Dependent.  I have always believed that American hospitals fall into three financial buckets.  A third are doing just fine financially because of a favorable payer mix (which is code for we don’t see a lot of poor people) and sound management.  At the other extreme, a third of hospitals are basket cases with unfavorable mix and/or poor management.  In the middle are what I call the NASDAQ dependent:  they can’t make money on patient care and they rely on investment income to balance the books.   The NASDAQ dependent are being hit hard financially by this economic downturn even if patient volume remains strong.

…..And Kaiser, Too.  It is not only hospitals that have a large dependence on investment income.  In the most recently reported quarter Kaiser made $400 million on health care but lost $700 million in investment income, for a net $300 million overall loss for the quarter.  It could happen to anyone with big portfolios that support ongoing operations.

Bringing Medicare trust fund insolvency closer. The Medicare Trust Fund is projected to reach insolvency by 2017. Some have speculated that the economic meltdown will bring that forecast closer as budget projections shift.

The enormous Medicare unfunded liability of $35 trillion did not get much attention from the presidential candidates in the run up to the election, primarily because any possible response would have involved painful and unpopular prescriptions, such as benefit cuts, payroll tax increases, raises in eligibility age or clinical rationing—none of which have a feel-good ring to them. But if the economic meltdown brings the trust insolvency closer, it will inevitably grab the attention of the new president and Congress.

Retirement…forget it. I wrote long ago that the baby boomers will eventually have an epiphany and discover that they can never afford to retire, ever, largely because of the out-of-pocket costs of post-retirement health benefits. We are all going to be limo drivers in Boca Raton, working forever to pay the bills.

The recent meltdown underscores and turbo-charges the precarious position of retiree health benefits. Benefit consultants say we need $250,000 or more at retirement to pay for our expected lifetime out-of-pocket medical costs. Those lucky enough to have healthy 401(k) plans saw that amount evaporate from their retirement accounts in a matter of days in October. Boomers will be forced to work longer, and they will want to work for employers willing and able to provide health benefits until Medicare eligibility and beyond. Good luck to us all.

Effects of recession on government (particularly state and local government). Recession typically hits hardest at state budget coffers. With limited ability to run deficits, states face the double whammy of increased Medicaid and welfare rolls as revenues decline. Since states’ finances typically lag behind a broader recovery, the budget hole could be deep and long, putting huge pressure on state and local government–funded safety nets for years to come.

Effect of the bailout on future spending. The federal government bailout, the wars in Iraq and Afghanistan, and the huge number of budget priorities at the federal level may have sucked all the available oxygen out of substantial health reform. The ability of the federal government to cover the growing ranks of uninsured will be limited by close to a trillion dollars tied up in economic recovery plans. No matter how popular or pressing, any large-scale health care reform proposals may have to be tailored to an austere time and may have to be phased in, postponed or piecemealed to accommodate the economic realities.

However, instead, the New Obama Administration may take the “opportunity” that the economic meltdown presents and make massive changes in the economy including health care.  It will all depend on whether the new President can sell and the country can accept, massive short-term deficits in the name of long-run reform.  Hey, we are in this for a trillion what’s another trillion.

I believe in the ability of Americans to respond to crisis, to change, to innovate and to make money. While we are in a tough economic place right now, we should not bet against the American system. With smart leadership, sacrifice and innovation, we might actually take this opportunity to build a sustainable future for the economy and for health care.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN OnLine.