Health Care and the Broader Economic Crisis

BRIAN KLEPPER

First published on THCB.

I used to worry that the economic turmoil resulting from health care's relentless cost explosion would cascade into all other economic sectors. Now it appears that the credit crisis could push health care over the edge. The silver lining is that a sudden spike in the pressure on health care organizations could facilitate a transition to the meaningful reforms that are necessary to resolve the crisis.

Over at HealthLeaders, Dr. Richard Reece and I have an article, Will Primary Care Be Re-Empowered By An Ailing Economy?, arguing that the turmoil in the larger US economy – and particularly the tightening of credit – is going to significantly enhance the pressures on purchasers and industry players, and grease the wheels of meaningful change throughout health care.

Consider, for example, the fact that most hospitals and health systems have remained in the black only as a result of investment income. Many lose money on operations. How will health systems remain afloat if the returns on their investments are diminished?

Then there was the Wall Street Journal story a couple weeks ago in which Vanessa Fuhrmans described significant drops in office visits, filled prescriptions, elective surgeries as consumers cope with the economic downturn. That was before the big crashes that began a few weeks ago.

What will happen when insurance renewal time rolls around again – it’s upon us now – and companies hope to access lines of credit for the payments? If they can’t get the money they need, many might be forced to forego health coverage or settle for reduced benefits, which would drive up uncompensated care and bad debt.

Health care is the largest part of the US economy, 1/7th of the dollars and 1/11th of its jobs. I used to worry that as the cost explosion prices more people out of the coverage market, the health care economy's turmoil might cascade to and disrupt all other sectors within the larger economy.

Now I worry that the turbulence in the larger economy will constitute enough additional stress in health care that at least some of the presumably rock solid health care institutions will begin to fray.

Hospitals are the most vulnerable institutions in all this. While some are very profitable and flush, the data show clearly that, on average, community hospitals make only about 5 percent net margins and safety nets make about 1 percent. Their cost structures are so large that it will be difficult to adjust to significant reductions in resources. That said, we can hardly make due without them.

The good news is that economic crisis favors approaches that drive down risk and cost. Organizations that focus on medical homes, Health 2.0, advancing clinical technologies (like minimally invasive procedures, or genomic tests that can often eliminate the need for certain treatments) and medical tourism should all do well in this environment.

It is too early to fully understand how the financial crisis we're experiencing now will manifest throughout health care, but it is reasonable to believe that our industry will be profoundly impacted. Hopefully at least some of those changes will be positive, as the system seeks to cope with dramatic reductions in resources.