Healthcare and The Gathering Storm – Brian Klepper

Here are two very interesting and frightening charts that my good friend Warren Brennan, the CEO of SMA Informatics in Richmond, passed along this AM, with this question, aimed at the CFOs of hospitals and other health care organizations:

What do these mean for bad debt and for the health care sector’s future financial performance?



Here’s the text that accompanied the chart on wages:

This chart, from the NYT, shows annual growth in real wages. What that means is that workers today are earning significantly less, in real terms, than they were a year ago: their January 2008 earnings were down 19 cents per hour or $8.31 per week from January 2007.The chart doesn’t mention the main reason for the fall: unusually high inflation. Since inflation is running at a 4% clip right now, you’d need wages to be rising at the same rate in nominal terms just to stay at zero on this chart. If food and energy prices stop rising at some point, real wages will start looking much healthier.On the other hand, however, it’s clear that for most of the past year weekly wages have been lagging hourly wages. That’s not good news at all: it shows that the workweek is shortening for most workers. Slower increases in food and energy prices aren’t going to help on that front.

And here’s an excerpt of text that came with the second:The S&P/Case-Shiller Home Price Indices show a 9.8 percent year-over-year decline for the 10-City Composite Index, the steepest decline on record. Wherever you look things look bleak, with 17 of the 20 metro areas reporting annual declines and the remaining three reporting flat or moderate growth rates. Looking closely at these negative returns, you will see that 14 of the metro areas are also reporting record lows and eight are in double digit decline. The monthly data paint a similar picture, with all metro areas now reporting at least four consecutive negative monthly returns.

Health care has ridden a very long wave of prosperity that appears to now be in jeopardy. Combined with an explosion in information technology, transparency and decision support, the coming turmoil should force health care organizations to become far more interested in efficiency and competitiveness.

One lesson is clear. Companies that economically reduce financial and health risk will be winners.

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7 replies »

  1. I guess the market is working. As more and more people can’t afford treatment they’ll stop using healthcare, (I guess they’ll just suffer in pain, or die) the market will realize this and start to cut costs and reduce prices which will draw more people back into healthcare, and so an equilibrium will be established.
    Trouble is will the under/un-insured be able to hold out long enough without treatment to be able to take advantage of those soon to be here great prices?
    Has anyone realized this is healthcare not Ford Trucks?

  2. I’m not sure I understand what is going on either, but the fastest growth in uninsured people the past two years has been in those w/ incomes over $50 thousand a year (93% of the increase). The number of uninsured poor actually went down. So what is happening is a middle class phenomenon- a redefinition, perhaps, of what middle class means.
    Hospitals may compete for insured people, but if those insured people cannot afford the copays, which is what I think is happening, they don’t use the hospital as much. There are actually fewer hospital admissions in the US now than there were twenty five years ago (!), despite almost a 25% increase in population. Hospital use has been leveling off for the past five years, and is now falling.
    When you run out of patients, you change your economic model and start trying to economize. The rate of increase in overall health costs has steadily decelerated in the past five years without any visible changes in incentives to providers. A new world is coming. . .perhaps for all the wrong reasons, but it’s coming.

  3. I am not saying I understand what is going on and know what is going to happen, I am just mildly skeptical of these predictions. The number of individuals with health insurance has been shrinking steadily in the past … how can we rule out that over the next few years, just more people will be loosing coverage, and the hospitals will continue competing for the fewer insured and all the medicare patients? Didn’t we have price competition of healthcare- and insurance providers for more than a decade, without much cost containment?
    The economic development may increase pressure for reform midterm, but I am not sure why it would immediately change course for the current system … except that some hospitals may be forced to downsize …

  4. What is interesting about Brian’s first chart is that in December, hospital utilization fell OFF THE TABLE- all payers, inpatient, outpatient, all regions. It was down dramatically just about everywhere, and yes, rbaer, when you miss your budget, you do become interested in containing expenses. I think we have hit the wall- households are out of cash, and the home-equity cookie jar is empty- and at the level of financial responsibility we’re reached, large numbers of people can no longer afford to use our health system. This is a fascinating post.

  5. Is someone suggesting that the orgy of government spending for health care (in return for votes) by the Democrats and Republicans is going to slow? That the federal debt is not going to increase and the dollar’s value not continue to decline?
    Yo — never get in the way of a politician, fiscal policy, and the voting booth. Unless you want to be run over.

  6. In a failing economy fewer individual and organizational purchasers will be able to afford health coverage or pay out-of-pocket for services. This will increase pressure on doctors, hospitals and their vendors throughout the system.

  7. I don’t understand … of course, there is ample opportunity for cost savings in US healthcare – administrative expenses, overtreatment, drug costs. Despite significant economic pressure (take the Detroit companies), the only major efforts of cost reductions happened with HMOs in the 90s … why should “health care organizations (to) become far more interested in efficiency and competitiveness”, instead of doing what they did so far, i.e. competing mainly on advertising, “top notch care” and convenience?

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