No sil­ver lin­ing

Growth in health­care spending slowed be­cause of the re­ces­sion but con­tin­ued to out­pace the econ­omy

Modern Healthcare - - Cover Story - Me­lanie Evans

News last week of slug­gish health spending growth in 2008 came as a warn­ing, not a re­lief, to health pol­icy ex­perts and in­dus­try ex­ec­u­tives. In es­ti­mates re­leased Jan. 5, economists and statis­ti­cians at the agency that over­sees Medi­care and Med­i­caid re­ported that health­care spending growth on hos­pi­tals, doc­tors, pre­scrip­tions and other health­care in 2008 slowed to 4.4% from 6% the prior year.

But be­hind the flag­ging pace—the weak­est growth in nearly 50 years—there weren’t the sweep­ing gains in ef­fi­ciency sought by ad­vo­cates of health re­form, said health economists and in­dus­try in­sid­ers, but rather job losses that left newly un­em­ployed work­ers unin­sured along with fi­nan­cial strains on state, busi­ness and house­hold bud­gets from the re­ces­sion.

The drag on health­care spending from the se­vere eco­nomic down­turn, of­fi­cially a re­ces­sion as of De­cem­ber 2007, un­der­scores the need for pol­icy and fi­nanc­ing re­forms to ex­pand ac­cess to care and curb med­i­cal spending that has re­lent­lessly grown faster than the over­all econ­omy, they said.

“We’re bump­ing up against the ca­pac­ity of the coun­try to af­ford the cur­rent cost” of health­care, said Wade Rose, vice pres­i­dent of ex­ter­nal and gov­ern­ment re­la­tions for Catholic Health­care West.

As a share of the econ­omy, health­care spending con­tin­ued to climb and did so de­spite an un­usu­ally swift hit from the down­turn, the CMS fig­ures show. Health­care ac­counted for 16.2% of the na­tion’s gross do­mes­tic prod­uct in 2008 com­pared with 15.9% the prior year. That’s up from 13.6% at the turn of the cen­tury. In 1970, health­care as a share of the econ­omy was 7.2%.

“De­spite the over­all slow­down in na­tional health spending growth, in­creases con­tinue to out­pace growth in the re­sources avail­able to pay for it,” of­fi­cials with CMS wrote in the jour­nal Health Af­fairs, where the fig­ures were re­ported.

House­holds, em­ploy­ers and states cooled the pace of health­care spending in 2008, the CMS re­ported, and nearly all sec­tors of the in­dus­try felt the drag. “It was a broadly based slow­down,” said Aaron Catlin, deputy di­rec­tor of the Na­tional Health Statis­tics Group at the CMS’ Of­fice of the Ac­tu­ary.

Mean­while, the fed­eral gov­ern­ment’s share of the tab grew as Medi­care spending ac­cel­er­ated, and tem­po­rary fed­eral aid for the na­tion’s health­care safety net shifted $7 bil­lion in Med­i­caid fi­nanc­ing to the fed­eral gov­ern­ment from the states.

Shift­ing the bur­den

At least some of that bur­den is ex­pected to shift back to states at the end of De­cem­ber, when tem­po­rary re­lief for state Med­i­caid bud­gets pro­vided un­der the eco­nomic stim­u­lus bill is set to ex­pire. Whether state bud­gets ab­sorb the costs without cuts to ben­e­fits, el­i­gi­bil­ity or re­im­burse­ment will hinge on the econ­omy, pol­icy ex­perts say.

De­spite a ten­ta­tive eco­nomic turn­around in 2009, con­tin­ued lay­offs pushed un­em­ploy­ment to 10%. “States clearly aren’t out of the woods yet,” said Stephen Zuckerman, a health econ­o­mist at the Ur­ban In­sti­tute.

Zuckerman de­scribed the state re­lief re­flected in the CMS fig­ures as a “quite in­ten­tional” bid to shore up the safety net and said the agency’s snap­shot of health spending amid the re­ces­sion high­lighted the need for re­forms.

“I don’t think the slow­down in health spending re­duces the pres­sure of health re­form from the stand­point of try­ing to con­trol costs,” said Zuckerman, who also noted the rise in health­care spending as a share of the econ­omy. “The need to con­trol costs is as strong as it was de­spite the one-year slow­down in spending growth.”

The num­bers

The 2008 health spending es­ti­mates held more than one record­set­ting statis­tic. The bal­loon­ing fed­eral share of the na­tion’s med­i­cal bill reached a high of 35%, the re­port said. A sharp rise in fee-for-ser­vice Medi­care spending and ris­ing en­roll­ment in Medi­care Ad­van­tage prompted an 8.6% in­crease in to­tal Medi­care spending to $469.2 bil­lion for 2008, up from 7.1% the prior year.

Fed­eral spending on Med­i­caid rose 8.4% to $201.3 bil­lion.

Mean­while, state spending on Med­i­caid de­clined for the first time since cre­ation of the safety-net in­sur­ance. States paid out $143 bil­lion for Med­i­caid in 2008, down from $143.2 bil­lion the prior year, a de­crease of 0.1%. In 2007, state Med­i­caid ex­penses grew 6.1%.

Micah Hartman, a statis­ti­cian with the CMS who helped com­pile the es­ti­mates, said the Amer­i­can Re­cov­ery and Rein­vest­ment Act of 2009 con­trib­uted to the fig­ures.

Signed into law in Fe­bru­ary 2009, the stim­u­lus bill in­cluded $87 bil­lion for states to shore up Med­i­caid as the re­ces­sion eroded tax rev­enue. The boost, spread out across 27 months, was made retroac­tive to Oc­to­ber 2008 and in­creased the fed­eral share of the jointly fi­nanced pro­gram’s ex­penses to 58.5% from 56.5%, the re­port said, or roughly $7 bil­lion.

Job losses that ac­cel­er­ated sharply to­ward the end of 2008 (un­em­ploy­ment soared to 7.2% by De­cem­ber from 4.9% in Jan­uary, Bureau of La­bor Statis­tics fig­ures show) curbed the cost of health spending by em­ploy­ers and house­holds, the CMS re­ported.

Busi­ness health spending climbed 1.2% dur­ing the year, com­pared with 3.9% in 2007. For house­holds, pay­checks still lost ground to health­care costs even as out-of-pocket costs, pre­mi­ums and Medi­care taxes grew at a slower rate (4.3%) than the prior year (5.9%), the re­port said. In­comes in­creased 2.7%, the au­thors noted, cit­ing Bureau of Eco­nomic Anal­y­sis fig­ures.

Paul Gins­burg, pres­i­dent of the Cen­ter for Study­ing Health Sys­tem Change, said the re­ces­sion’s im­me­di­ate ef­fect on house­hold spending, un­like prior eco­nomic down­turns, sug­gests pa­tients are in­creas­ingly vul­ner­a­ble to fi­nan­cial stress from med­i­cal bills. Pa­tients with pri­vate in­sur­ance shoul­der a grow­ing share of med­i­cal ex­penses, he noted. Tight credit mar­kets in 2008 left house­holds un­able to bor­row for hefty de­ductibles or other high out-of-pocket costs. The CMS re­ported spending growth on co­pay­ments, de­ductibles and other out-of-pocket ex­penses fell to 2.8% from 6% the prior year.

“The slow­down was strictly a re­sult of the re­ces­sion,” Gins­burg said. “This isn’t some new world of health­care spending on a slower trend.”

Doug Crop­per, pres­i­dent and CEO of Gen­e­sis Health Sys­tem, a three-hospi­tal sys­tem based in Daven­port, Iowa, said un­paid bills and free and dis­counted care in­creased by 15% in 2008 and again in 2009, roughly dou­ble the sys­tem’s an­nual in­crease. Crop­per at­trib­uted the jump to in­sured pa­tients who do not pay out-of-pocket costs, rather than in­creased write-offs for needy pa­tients.

The CMS’ anal­y­sis found al­most no sec­tor went un­touched by the re­ces­sion.

Spending growth for hos­pi­tals eased to the slow­est rate in a decade. Hos­pi­tals ac­count for the largest share of na­tional health ex­penses and hospi­tal spending slowed as states suc­cess­fully curbed Med­i­caid ex­penses, Anne Martin, an econ­o­mist at the CMS, told re­porters dur­ing a tele­con­fer­ence an­nounc­ing the fig­ures.

Hospi­tal price in­creases also ebbed some­what, the re­port found. Not all forces be­hind hospi­tal spending weak­ened, how­ever. Medi­care hospi­tal spending ac­cel­er­ated, as did uti­liza­tion.

Notably, in­vest­ment losses in late 2008 that drained cash from not-for-profit hospi­tal and health sys­tem bal­ance sheets con­trib­uted to a roughly 20% drop in pri­vate funds from non­op­er­at­ing sources, in­clud­ing do­na­tions, which are in­cluded in the es­ti­mates for hospi­tal

The re­ces­sion

spending. Such funds ac­counted for 3.8% of the $718.4 bil­lion in 2008 hospi­tal spending, ac­cord­ing to the CMS.

In­vest­ment port­fo­lios re­bounded with eq­uity mar­kets in 2009 but be­fore stocks re­versed course last March, hos­pi­tals suf­fered sharp de­clines in liq­uid­ity (Aug. 31, 2009, p. 14).

De­mand for physi­cian ser­vices were not enough to off­set weaker pric­ing gains as spending growth on doc­tors eased slightly to 4.7% in 2008 from 5.5% the prior year. The CMS re­ported fac­tors that drive doc­tor spending growth un­re­lated to the price of ser­vices, such as use and the in­ten­sity of care, ac­cel­er­ated slightly in 2008 to 2%.

Pre­scrip­tion spending also grew more slowly (3.2%) for rea­sons be­yond the re­ces­sion, the au­thors noted. A lack of new block­buster med­i­ca­tions and safety con­cerns helped drag down the av­er­age spending per per­son on pre­scrip­tions.

CMS of­fi­cials noted the re­ces­sion curbed health­care spending far more quickly than was the case in sharp eco­nomic down­turns in 2001 and 1990. In­stead, the econ­omy’s swift drag on health spending more closely mir­rored the 17-month re­ces­sion that be­gan in July 1981, which saw sim­i­lar un­em­ploy­ment rates to the cur­rent down­turn, said the CMS’ Hartman. Un­em­ploy­ment rates reached 10.8% in Novem­ber 1982, the month that decade’s sec­ond and last re­ces­sion ended.

Health sys­tem CEOs and fi­nance chiefs said ev­i­dence of the lat­est re­ces­sion can be found in ris­ing vis­its to the emer­gency room by unin­sured pa­tients and un­paid bills by cash­strapped pri­vately in­sured pa­tients.

Michael Blaszyk, ex­ec­u­tive vice pres­i­dent and chief fi­nan­cial of­fi­cer of Catholic Health­care West, said the sys­tem clearly felt the im­pact of re­ces­sion, from higher un­em­ploy­ment in the three states where it op­er­ates 38 hos­pi­tals—Ari­zona, Cal­i­for­nia and Ne­vada— to siz­able in­vest­ment losses.

Catholic Health­care West re­ported an 80% drop in net in­come, to $170 mil­lion, for the year that ended June 30, 2008, as op­er­at­ing and in­vest­ment in­come de­clined. Op­er­at­ing in­come re­bounded for the year ended June 30, 2009, to $261.1 mil­lion, an in­crease of 63% from $160 mil­lion the prior year, though in­vest­ment in­come losses left the sys­tem with a net loss of $126.3 mil­lion, fi­nan­cial state­ments show.

Blaszyk said the CMS fig­ures un­der­score the need for cost-con­trol re­forms and called the con­tin­ued rise in health­care as a share of the econ­omy un­ac­cept­able. The sys­tem is ex­pected to an­nounce shortly an ac­count­able­care or­ga­ni­za­tion in­clud­ing its Sacra­mento, Calif.-area hos­pi­tals, said CHW’s Rose. Such or­ga­ni­za­tions, which seek to tie pay­ment to qual­ity and co­or­di­na­tion among hos­pi­tals and doc­tors, are among the pro­posed fi­nanc­ing re­forms in­cluded in health re­form bills.

More fa­vor­ably, the re­ces­sion helped lower la­bor costs, ex­ec­u­tives noted. Den­nis Chalke, vice pres­i­dent of fi­nance for health­care op­er­a­tions for Baystate Health, based in Spring­field, Mass., said traf­fic at the sys­tem’s three Mas­sachusetts hos­pi­tals re­mained flat dur­ing the re­ces­sion, which helped ease de­mand for la­bor and low­ered Baystate’s salary costs, which in­creased by roughly 4.5% in 2009 com­pared with 6% to 7% in prior years.

Med­i­caid out­look

The CMS’ 2008 health spending es­ti­mates of­fer a stark mea­sure of the fi­nan­cial bur­den that state bud­gets face should tem­po­rary fed­eral aid to states for Med­i­caid ex­pire as sched­uled in De­cem­ber, said Alan Weil, ex­ec­u­tive di­rec­tor of the Na­tional Academy for State Health Pol­icy.

Al­ready states are grap­pling with that prospect; all but four states be­gin the fis­cal year in which the fed­eral aid ex­pires in July. Weil said the House health re­form bill in­cludes a pro­posal to ex­tend the as­sis­tance through June 30, 2011.

Fol­low­ing a sim­i­lar boost to fed­eral Med­i­caid fi­nanc­ing af­ter the 2001 re­ces­sion, state Med­i­caid spending growth slowed, which sug­gests states con­strained spending as the aid ex­pired, said John Ho­la­han, di­rec­tor of the Ur­ban In­sti­tute’s Health Pol­icy Re­search Cen­ter, who co-au­thored an anal­y­sis of Med­i­caid spending dur­ing the last decade pub­lished in the jour­nal Health Af­fairs in Septem­ber.

Med­i­caid spending surged dur­ing the 2001 re­ces­sion, fu­eled by climb­ing en­roll­ment and inflation, to av­er­age 12.9% per year be­tween 2000 and 2002 af­ter 8.8% av­er­age an­nual gains be­tween 1998 and 2000, Ho­la­han’s re­search found.

Congress boosted fed­eral Med­i­caid fi­nanc­ing to the states by $10 bil­lion over 14 months start­ing in April 2003. And state Med­i­caid spending slowed to 7.3%, on av­er­age, be­tween 2002 and 2005 and cooled fur­ther though 2007 to 2.9% be­fore ad­just­ing for pol­icy changes in 2006 that pushed pre­scrip­tion drug costs to Medi­care for el­i­gi­ble Med­i­caid en­rollees. Even af­ter the ad­just­ment, state Med­i­caid spending slowed to 5.9%.

Terry Shaw, CFO for Ad­ven­tist Health Sys­tem, which has 29 hos­pi­tals across 10 states, said it’s too soon to say how states will bud­get for the end of fed­eral aid—whether eco­nomic re­cov­ery will pro­vide re­lief or, should states con­tinue to strug­gle, if Congress will step in to fur­ther in­su­late the health­care safety net. Shaw said he would pre­fer to be paid Med­i­caid than have unin­sured pa­tients who can’t af­ford to pay at all.

In 2008, Ad­ven­tist saw “very sub­tle” shifts to pa­tients’ in­sur­ance cov­er­age, but the sys­tem re­ported an un­ex­pect­edly sharp drop in pri­vately in­sured pa­tients in 2009 and a more than 1 per­cent­age point in­crease to 11.5% from 10.2% the prior year, among those cov­ered by Med­i­caid. Shaw said he ex­pects the fig­ure to re­main steady in 2010.

The CMS’ Anne Martin, left, ex­plained that spending growth for hos­pi­tals eased as states suc­cess­fully curbed Med­i­caid ex­penses.

Crop­per: Growth rate of free and dis­counted care dou­bled.

Shaw: Med­i­caid pay­ment is bet­ter than noth­ing at all.

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