The Economic Crisis, Health, and Healthcare Coverage: The Recessionary Effects on the Business of Health
One year ago, Lehman Brothers, the well-known investment bank, collapsed, representing the single largest bankruptcy filing in U.S. history. This singular occurrence heralded a recession, the likes of which had not been seen in the U.S. since the Great Depression. As a result, world economies spiraled out of control. The unemployment level rose quickly, is presently at 9.7%, and is predicted by many economists to exceed 10% by the end of this year. The looming threat of losing jobs is forcing families, individuals and corporations to reevaluate every aspect of their financial situation. One of the target areas — one that certainly is on our nation’s radar — is the provision of and access to health care.
With the climbing anxiety associated with losing one’s job, consumers have reduced their spending. In fact, the U.S. Labor Department recently released statistics that detail the spending cuts made by families and individuals for travel, dining out and apparel during 2008. Conversely, consumer outlays for health care last year rose by more than 4%. It comes as no surprise, therefore, that 8 out of 10 people are concerned about how they will be able to pay the increased costs for their healthcare insurance. Some significant changes that employees are experiencing with their coverage include:
1) an increase in the overall premiums paid directly by employees
2) the addition of or an increase in co-pay amounts
3) the addition or increase in the individual deductibles
4) the elimination of one or more of the types of insurances offered (i.e., life, health, and/or disability.
These issues are an even greater source of anxiety to individuals who have lost their jobs.
The number of people without health insurance has risen dramatically during the recession, leaving an estimated 46.3 million uninsured. More individuals and families are turning to government-supported and subsidized programs as they lose their employer-provided insurance.
Fortunately, the new American Recovery and Reinstatement Act allows individuals who have lost their jobs the ability to receive 65% of their COBRA (Consolidated Omnibus Budget Reconsolidation Act) payments from the government. And while 65% of one’s health care premium insurance (which can easily cost upwards of $14-18,000 per year) is being covered by the government, the additional 35% remains a burden on an individual’s small unemployment insurance income, after taking into consideration other household needs such as food, mortgage and clothing.
Leaders at many of our nation’s healthcare institutions predict that the present economic crisis has increased the burden of illness on our already strained economy. But how has this crisis affected healthcare?
It would be intuitive, for example, to presume there might be fewer people seeking healthcare, especially for elective procedures, due to inability to pay for coverage. Additionally, how are healthcare givers being affected by the crisis? Is the lack of scheduled procedures forcing hospitals to cut back the number of employees, supplies, etc.? Are reimbursements to hospitals and physicians cut to the extent that hospitals are doing fewer of them? This article attempts to explore some of these questions, beginning with a look at two of the largest insurers of our nation’s population – Medicaid and Medicare.
Medicaid is funded by both federal and individual state governments, and currently covers an estimated 43.5 million people. In a report released in September of this year detailing year-to-year growth of Medicaid enrollees, Medicaid experienced a 3.0% growth in the number of participants from June 2007 to 2008. This represents a major reversal from the 0.6% decline experienced during the same period from 2006 to 2007. It might be suggested that this enrollment spike is a direct result of the rising unemployment rates, forcing many individuals to seek insurance assistance through public coverage.
To qualify for Medicaid, certain requirements for eligibility must be met, including age, whether an individual is pregnant, disabled, blind or elderly, and one’s income and resources (such as bank accounts, real property or other items that can be sold for cash). As employees are laid off from their jobs or, as is the trend, have their hours or total earnings reduced to remained employed, more families are becoming Medicaid and State Children’s Health Insurance eligible.
Unfortunately, state revenues are challenged, too, and when states try to cut back on Medicaid spending, they lose access to federal matching funds. Should the ability to fund Medicaid remain hampered by shrinking state budgets, even stricter criteria for eligibility may be imposed, prospectively putting states in a position where they will be unable to pay treatment bills for their Medicaid enrollees.
Today, Medicare — the government-sponsored plan that exists for individuals that are 65 years of age or older — covers over 45 million people. Medicare exists in two parts. Medicare Part A is the individual’s hospital insurance. Most people qualify for Medicare automatically upon reaching the age of 65. Medicare Part B is the component that pays for physician and outpatient services, as well as for physical and/or occupational therapy, and most people pay a modest monthly premium for this benefit.
The government is proposing certain cuts in the Medicare program. Reimbursements for certain procedures will be decreased, forcing people to pay more out-of-pocket expenses for healthcare services. In cardiology, the proposed changes set forth by the Center for Medicare and Medicaid Services (CMS) for 2010 would result in a 10% decrease in Medicare reimbursement for the average cardiology practice and up to a 42% decrease in reimbursement for certain cardiology services. For example, there is a proposed plan to cut by 40% the $251 Medicare currently pays for echocardiograms. The reimbursement rate for a cardiac catheterization is facing a reduction of up to one-quarter of the present payment; EKGs, more than 20%. It is anticipated that cuts in payments for cardiac procedures and oncology services alone will total $1.4 billion next year. See Figure 1 for reimbursement trends for certain cardiovascular procedures.
These cuts will directly affect patients, as it is presumed what is not reimbursed by Medicare will become the burden of the patient. Patients having to pay more out of pocket because of lower reimbursements might not be able nor be willing to seek cardiology services when they want or need them.
Practice Viability, Volume Changes
It’s true that employment in the healthcare sector has increased (some estimates place net growth at nearly 500,000 jobs since December 2007), while the rest of the economy has lost millions of jobs. However, the pace of the healthcare job growth has slowed significantly in 2009, at less than half of last year’s job growth pace. No matter what measure is used, the healthcare industry — once thought to be impervious to economic changes and recessions — is seeing many changes in the number of staff, the volume of cases, delays of necessary capital equipment installation. What’s more, in a period of shrinking reimbursements, revenues for services will continue to be challenged.
According to a February 2009 report by Thomson Reuters’ Center for Healthcare Improvement, hospital operating margins remained stable through the third quarter of 2008, suggesting revenues remained somewhat constant. However, non-operating margins dropped precipitously during the later half of 2008, leaving nearly half of the nation’s hospitals in the red.
But what can be said about hospital revenues in 2009? To have a better understanding of this, we would have to look at the Producer Price Index (PPI) from the U.S. Bureau of Labor Statistics. A hospital’s PPI represents the reimbursement for inpatient and outpatient services. As mentioned earlier, Medicaid and Medicare are decreasing levels of reimbursement for services. According to the PPI, private payers and well as employer-sponsored reimbursement may have helped many hospitals maintain their positive operating margins last year. However, in 2009, this may change due to lower levels of reimbursement from both government health insurance as well as private insurance companies. When patients are required to pay more for their health coverage, we may witness a decrease in the PPI. With declining levels of reimbursement from Medicaid and Medicare, employer-sponsored and private pay might not be able to maintain a stable level in hospital operating margins. In other words, although there may not be a significant decrease in the amount of procedures performed in both outpatient and inpatient settings, there may be a change in overall operating margins.
The impact of current operating losses is evident at hospitals everywhere. The New York City Health and Hospitals Corporation announced a second round of layoffs this past spring. In April of this year, Boston’s Beth Israel Deaconess Medical Center, a teaching hospital of Harvard Medical School, announced 140 job cuts, salary freezes, and the reduction of vacation and retirement fund contributions to offset its $20 million dollar budget loss, some of which can be attributed to the $7 million cuts in Medicaid payments by the state. Other facilities across the country, such as the University of Pittsburgh Medical Center and Akron General Health System have also announced workforce reductions and layoffs in recent months.
In both private practices as well as hospitals, reduction in overall revenue will also make it difficult to maintain current staffing levels. Hospitals have found themselves doing more with less. In conversations with directors and managers of cardiovascular and EP labs at a number of hospitals, it has become clear that in order to improve margins and reduce operating losses, many have frozen full-time employee headcount. Instead of using any contract employees or outside agencies to fill staffing gaps, they are utilizing existing hospital employees to administer the same number of procedures. And when nurses or clinical specialists retire or resign, departments are simply not replacing these open positions, putting a strain on already overworked staff members who are expected to continue meeting hospital productivity demands.
Data from Thomson Reuters suggests the total moving average for total cardiovascular admissions at their cohort of regularly studied hospitals fluctuated within normal and historical ranges during the last two years. It is important to note, however, that hospital inpatient admission may not be a sensitive predictor to the recession, but this is not necessarily true for outpatient services.
However, more specific cardiovascular procedure data from other sources point to a decline in invasive cases during the recent past. Research from the 2008 Cardiac Cath Lab Market Summary Report from industry research firm IMV Medical Information Division estimates that some 3.75 million procedures were performed in the nation’s 2,000+ cardiac cath labs. While this number represents a total decline of 460,000 procedures since 2006, the report indicates that more electrophysiology and device implants are being done in this setting, as are non-cardiac cases, including interventional radiology studies for carotids, femorals and extremities.
Cardiovascular procedure reports from the Washington Hospital Center (WHC) website support the IMV trend information: the number of cardiac catheterizations fell by more than 4,000 from FY 2006-2007, but then rebounded significantly, growing by nearly 7,000 cases between 2007-2008. Further data from Millennium Research Group (MRG) of Toronto, Ontario, also reveals that elective procedures were the first to experience the impact of the recession. Anuk Karunaratne, a senior analyst with MRG, reports that their U.S. Marketrack™ study saw erratic cardiovascular procedure growth rates (which include interventional cardiology, cardiac rhythm management, peripheral vascular and electrophysiology) of 2-4% during last year, and actually experienced negative growth during the third quarter of 2008 (Figure 2). However, Karunaratne stated these CV procedure drop-offs were modest when compared to other elective procedure categories, down nearly one-third at hospitals nationwide, such as orthopedics and facial aesthetics.
Hospitals are not the only ones feeling the change in the present economic climate. Suppliers and others serving the medical industry are also being significantly impacted. With the overall volume declining in inpatient and outpatient procedures, industry vendors have also reduced their workforces, including sales, marketing and other roles. Pharmaceutical firms and equipment manufacturing companies have had to modify their strategies to compensate for the decrease in capital expenses being made by hospitals due to reduced access to credit facilities. Healthcare giants such as Johnson & Johnson are expected to layoff workers; St. Jude Medical recently eliminated 200 employees; and Siemens eliminated over 16,000 jobs worldwide as of August 2008.
Signs of Hope
In the past few months, there have been signs of some modest economic recovery, however tenuous. Indeed, MRG’s Karunaratne reports that there were certain procedure categories that experienced little or no decline during this recession, particularly in the total number of atrial fibrillation cases performed. WHC, a leader in terms of volume of invasive cardiovascular procedures, experienced a 12% increase in the number of EP cases during its 2007-2008 fiscal period. In addition, MRG’s Medtech Confidence Index (MCI), which surveys 2,000 healthcare professionals across a number of therapeutic categories and geographies, has seen two consecutive quarterly increases, giving analysts “guarded optimism” for recovery and growth in the medical technology sector. This survey is supported by additional data on the growing number of cardiovascular procedures reported in the MRG’s U.S. Marketrack™ study (Figure 2).