No silver lining
Growth in healthcare spending slowed because of the recession but continued to outpace the economy
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 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
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.
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.