Economic crisis ripples down to healthcare sector

November 1, 2008

As goes the national economy, so goes healthcare. Unemployment will cause a rise in uninsured and Medicaid enrollment with higher spending ahead.

The Dow is on a rollercoaster course. Credit markets have contracted, choking off money to small businesses, would-be home buyers and other potential borrowers. Joe Six Pack and Joe the Plumber worry about whether they'll have jobs and healthcare coverage next month. It can be said that all economic stories are also healthcare stories.

Indeed, the ramifications of the current economic crisis are visible across the board. State health officials are girding themselves for more Medicaid enrollees, higher expenses and budgetary shortfalls. Employers say they're shifting more healthcare costs to their workers, and average Americans are tightening their belts by cutting back on trips to the doctor, prescription drug spending and preventive screenings-measures likely to have a negative impact on their health as well as the economy.

Add to these woes the likelihood of job cuts, and the outlook is pretty grim.

"It's all intertwined," says George Whetsell, a managing director with Huron Consulting Group.

When health-plan members cut back on services, they not only jeopardize their health and run the risk of incurring far greater costs in the future, they affect the overall healthcare economy. While some physicians report they are seeing fewer patients, they may also see rate cuts as payers seek to reduce expenses.

Medicaid programs in New York, Nevada and South Carolina have already cut rates for providers for 2009, and those cuts "may be a harbinger of things to come," says Vern Smith, a principal with Health Management Associates (HMA). Almost two-thirds of Medicaid directors surveyed recently by the Kaiser Commission on Medicaid and the Uninsured and HMA indicate the chance of a Medicaid shortfall in the coming year is about 50-50.

Hospitals and health systems are feeling the pinch even more.

"Hospitals are very capital-intensive businesses," says Whetsell. "We have some clients that have had to put their capital projects on hold because this is no time to go to the bond market to fund a $50 million or $100 million capital improvement project."

What's more, Whetsell says, "a pretty high percentage of hospitals have money for their pension funds and endowment money invested. A lot of hospitals report a large share of their non-operating income comes from investments, and right now that's going to be negative or non-existent."

That, of course, has a trickle-down effect, with healthcare's nearly 15.3% piece of U.S. gross domestic product. As patients, service providers, hospitals and others tighten their purse strings, it ripples out to related businesses, such as equipment vendors and pharmaceutical companies. A survey by D2Hawkeye on behalf of the Wall Street Journal found patients are already forgoing healthcare services for non-acute conditions. From March 2007 to March 2008, knee replacements per 1,000 fell 18.6%, pap smears fell 6%, and dispensed prescriptions for antidepressants dropped 29%.

For their part, employers continue to shift healthcare costs to employees in the form of higher copays and deductibles, says Alain Enthoven, professor of management emeritus at the Stanford Graduate School of Business, and they're likely to cut jobs, which translates to fewer members for managed care organizations.

"There will be layoffs," Enthoven says. "We've already seen a lot of jobs lost, and I expect we will see more of that in the next six months."

At this point, to understand the future of healthcare, executives don't need a healthcare economist, they need someone who can forecast employment, he says.