Healthcare and the Fallen Souffle

It is increasingly clear that the United States’ economic troubles are far from over.   This Economist analysis argues that the political system has exhausted its remedies for our economic problems.  www.economist.com/node/21524886  

The stock market plunge that began in earnest last week reflects the market’s belief that we’re not going to recover fully from the recession that began in 2007.  As a Wall Street Journal commentator said mid-Monday’s plunge:  “The market is pricing in a double dip recession”. In reality, the recession (caused initially by $150 a barrel oil) never ended.  We are likely to experience a Japanese lost decade- indeed we’re already halfway there. 

Past remedies for recession basically involved nearly free money and Keynesian pump priming to stimulate demand with borrowed or freshly printed money. The most recent (bipartisan) effort, nearly a trillion worth of extended Bush tax cuts, unemployment extensions, payroll tax cuts, etc. which Congress and the Obama Administration negotiated in December seems to have disappeared into thin air, producing a whopping 0.8% economic growth in the first half of 2011 and a July unemployment rate of 9.2%    With the dawning of fiscal reality, it’s clear that there is no more pump priming to be done, and it may be just as well. 

Unfortunately, healthcare played a major, if unscripted role, in causing our economic crisis. Rising health premiums made a major contribution to the recession by depriving  employers of cash flow, and employees of real earnings growth.  The health benefits vampire sucked out every dime of spare employee comp, leaving employees with no real growth in their paychecks for the decade.  Consumers borrowed trillions of dollars to make up for this slack purchasing power, peaking at $14 trillion in consumer debt in mid 2006.    When families ran out of cash in late 2006, they began defaulting on their mortgages and car loans, and the financial crisis that brought down the bond market in 2008 caught fire.  

As the Economist’s Buttonwood points out, the result of the cheap money/borrow and spend remedies to past recessions and foreign financial crises (the Mexican, Thai and Russian debt crises)  was  a succession of  bubbles- Internet stocks, real estate, commodities (oil, gold, grains, etc.) and, sadly for those in our field, healthcare.  The real estate bubble was a doozy- and left us with nine million empty houses and condos, and millions of idle construction workers.    Since real estate financed with cheap credit has traditionally been the engine pulling us out of recession, it was clear from the moment the real estate bubble popped that this recession was going to be different- much longer and more painful. 

Ironically, healthcare has been the healthiest part of the private economy the past three years, if by “healthy”, you mean adding jobs. The health sector has added a million net jobs since the beginning of 2007, while the rest of the economy lost, at the bottom of the trough, more than nine million jobs.   Health care’s employment growth has taken place in the face of across the board slack demand for health services. All this job growth has taken place despite the fact that the health system itself is in recession.

Healthcare’s recession actually began in 2003, when the cost curve politicians like to pontificate about bent downward. It’s like management didn’t get the memo.

I believe demand for health services has slackened because almost half the county cannot afford to use the health system’s product, either because they lack health coverage, lack cash to pay their copays if they are covered, or are on Medicaid, and face significant access challenges. 

As other, more recent THCB blog postings have discussed, health costs grew at the lowest rate in 2010 in over fifty years (1960!), only 3.9%. http://thehealthcareblog.com/blog/2011/08/07/healthcare-spend-at-historic-low/   Nearly every indicator of demand for health services has turned negative in the past eighteen months after softening for several years:  hospital admissions, surgical volume, physician office visits, branded drug sales, etc.    Even imaging volume is shrinking, for literally the first time since the technologies were invented.

People inside the health system know that a lot of the demand for the health system’s product was either 1) medically unnecessary or 2) the product of correcting iatrogenic errors in treatment.   In our imaging sector research, which led to The Sorcerer’s Apprentice: How Imaging is Reshaping Healthcare (with radiologist Bruce Hillman), we heard over and over again that perhaps as much as a third of imaging studies contributed nothing to medical outcomes.  This demand was stimulated by malpractice butt-covering, self-referral (e.g. provider conflicts of interest) and, most of all, by wasteful Gregory House-style diagnostic workups. As copays have risen and as more employers are challenging the medical necessity of imaging studies, volume has plummeted from near double digit rates to zero or negative growth.

Healthcare stocks have gotten clobbered in the most recent stock market debacle.  HCA, the largest IPO since the 2008 stock market crash, had lost a staggering 40% of its IPO market value as of this last Monday.   Long term care stocks have gotten crushed as Medicare prepares to cut payment for nursing home care.  Managed care stocks that depend on government payment (Medicaid or Medicare Advantage) have also taken it on the chin.   Basically, anyone who has financed their healthcare businesses on borrowed (e.g. federal) money is going to endure a lot of shared deficit reduction pain, and an agonizing reappraisal of their operational efficiency. 

It isn’t the end of the world.  It’s just the end of an era- a drunken bender of cheap credit and heedless government and private borrowing and spending.   Our economy will resume growing when we’ve “detoxed”- withdrawn from the cheap money cures and found “neutral buoyancy”- demand fueled by real income growth.  We’ve taken down a trillion dollars in consumer credit already, either by paying it back or defaulting, in the past two years.   It’s going to take another two or three trillion paid off to restore household cashflow, and return consumers to the market.

 Healthcare providers, manufacturers and technology firms will have to play their parts -a focused and thoughtful conservancy in the name of our patients and the non-healthcare businesses whose health insurance contracts provide the industry’s free cash flow.  We need an extended period of single digit premium increases, and therefore, an end to cost shifting as we know it.  Hospitals, ambulatory and long term care providers need to learn to run on regular gas. Providers need to manage their expenses and service intensity in such a way that they break even on Medicare payments, and avoid wasting resources in treating the Medicaid population.

Providers are going to learn from Virginia Mason, Thedacare and Denver Health how to run lean, and to make war on waste, both of time and resources.  We won’t have a choice.  The good news, longer term, is that demand for health services will eventually resume growing, buoyed by health reform (if it survives the coming deficit reduction jihad and political/judicial challenges) and by a lot of newly employed younger people.  The health system is going to endure a period of austerity, one which could leave us on a healthier and more sustainable footing. There’s  a lot of work to do.