Tuesday, September 30, 2008

Health Care and Financial Crisis

Americans are facing a financial crisis of mega proportions. Banks are disappearing faster than pies at a state fair pie-eating contest, and credit has become as scarce as hen's teeth. Wall Street is freaked out so bad that the stock market doesn't know what direction to go--up or down, but mostly down. The turbulence in the financial markets is heading toward a perfect storm of recession and economic hardship for many families and businesses all over the country. According to the Federal Reserve Bank of New York, the origins of this crisis lie in complex interaction of number of forces. Some were the product of market forces. Some were the product of market failures. Some were the result of incentives created by policy and regulation. Some of these were evident at the time, others are apparent only with the benefit of hindsight.

The interaction of these forces made the financial system as a whole more vulnerable to a range of different weaknesses according to the FRBNY. The models used by issuers to structure these products and by credit rating agencies to assess risk and assign ratings turned out to be much more sensitive to macroeconomic assumptions than was apparent to investors at the time. And, assumptions about home price appreciation and the correlation of defaults within the underlying collateral pool were particularly critical in this context. The intensity of the crisis is in part a function of the size of the preceding financial boom, but also of the speed of the deterioration in confidence about the prospects for growth and in some of the basic features of our financial markets. The damage to confidence—confidence in ratings, in valuation tools, in the capacity of investors to evaluate risk—will prolong the process of adjustment in markets. This process carries with it risks to the broader economy. Macroeconomic and supervisory policies have an important role to play in containing those risks.

The consensus of the FRBNY is that the U.S. economic and financial system is undergoing a very challenging period of adjustment, and we are likely to be living with a high degree of uncertainty for some period of time about the ultimate magnitude and duration of the slowdown underway. But it is important to recognize that we have already seen a lot of adjustment. Prices and risks in many markets already reflect a much more sober and cautious view of the world than they did a year ago. And the degree of stress on markets that we have seen over the past six months is due in part to the sheer magnitude and speed of that adjustment to a more cautious view of the future. Nevertheless, the challenges that remain are substantial. The speed and agility with which public policy makers and private financial institutions respond to the continuing pressures in a rapidly evolving environment will determine how quickly and how smoothly market conditions return to normal—and how rapidly the risks to the economic outlook are mitigated.

Much of the financial market meltdown trickles down to various aspects of the economy. In addition to banks, mortgage companies, and other credit agencies, the health care industry has been hard hit by the down turn in the present national financial crisis. According to the Nurse Entrepreneur Network (NEN), 16%, or $1.9 trillion, of the United States' gross domestic product (GDP) is currently being allocated for healthcare, and it's projected to reach $4 trillion (20% of the GDP) by 2015. On the surface, this appears to be a good thing because if more money is budgeted for healthcare, then more people can benefit from it. Yet there's an underlying irony--an increasing number of healthcare providers are operating in the red. In fact, according to the American Hospital Association, one-third of America's 5,000-plus hospitals are actually losing money, while another one-third is barely breaking even.

An aging population, an increasing number of uninsured Americans and slow-paying government aid programs all play a part in cramping the healthcare system's budget according to the Nurse Entrepreneur Network. As the Baby Boomers begin celebrating their 65th birthdays, the surge in America's elderly adult population will start placing tremendous stress on the healthcare system because additional services will be necessary to manage their medical conditions. In addition, there will be over 43 million retired adults depending solely on Medicare to cover their medical bills next year. On the other hand, a large portion of our younger generations do not have health insurance at all. Rising health insurance premiums and overall poverty rates are both contributing to this problem.

Expensive healthcare premiums make it harder for employers to afford coverage for their employees, creating an uninsured working class as reported by the NEN. Health insurance expenses are the fastest growing cost component for employers. So much so that according to Medical News Today, the proportion of the working class who received health insurance through their employers continues to fall every year. The majority of the reason for this decline is due to employees not participating in health benefits offered to them. The Kaiser Commission on Medicaid and the Uninsured reported that over 19% of full-time employees are uninsured. Add in the fact that emergency rooms are obligated to care for any patient who comes through its doors regardless of whether they have insurance or not, and what do you get? Answer: Millions of uninsured people who visit the emergency room to receive medical attention who are also relying on the hospital to foot the bill. To make matters worse, the U.S Census Bureau reported that number is still growing. This underprivileged class is forced to either go uninsured or rely on Medicaid for their healthcare bills, and neither option is a promising solution to the healthcare cash crunch equation.

As reported by the NEN, therefore, as a direct result of the cash crunch, hospitals and nursing homes are forced to make cuts in staffing and decrease technological advances to help defray costs. In addition, many healthcare institutions have started outsourcing positions to save money. For example, hospitals and nursing homes make cuts in staffing and special programming, as well as decrease capital spending, all of which could be harmful to their patients. Another way that institutions cut back is by outsourcing positions and providing terms of net-30, net-60 or higher to their vendors. The aging population and increasing number of uninsured patients are going to continue to grow, placing even more stress on the United States' healthcare system in the future.

MSN Money reports that many Americans are evaluating health care benefits for themselves and their families, and a startling percentage of citizens are considering denying themselves and their children health care to save money during this unstable economic environment. Nearly one in 10 were are likely as a result of the reported economic crisis to either drop their health insurance plan or switch to a plan with lower premiums and less attractive benefits according to a report issued by Zogby and BearingPoint--this would translate to almost 21 million American adults that are considering making sweeping changes in their health care behavior to cut expenses considering the number of insured adults in the country, according to the most current report from the U.S. Census Bureau. While Americans are looking at many ways to curb their expenses, this survey reveals for the first time that they are considering cutting back health care services and benefits as a result of the economic conditions. And, if a portion of those considering these extreme steps actually take action, the issues we face with uninsured and underinsured Americans will only be exacerbated – there could be a real negative impact on the overall health of Americans in the year to come.

The key issues of the health care system are often viewed as involving three basic dimensions: 1) the quality of health care provided, 2) access to the health care system, and 3) the cost of health care. Good systems should provide high quality medicine to all of the population requiring health care at affordable prices. The worldwide financial crisis and credit crunch will not spare the healthcare and medical communities, and they should brace for some major upheavals according to AcuteCareInc.com. Among those potential changes is likely to be a shake-up in the physician workforce as older physicians put off retirement while young would-be doctors meet resistance in securing medical school loans. At the same time, medical group practices will have trouble making payroll or updating technology. And hospitals will be forced to change their “bigger is better” mindset and delay massive construction projects. Also, according to Managed Healthcare Executive, as the market and investment income sinks, underwriting gains will be required, meaning higher premiums and competitive pressures. Smaller plans may also have exposure to reinsurance recoveries.

Managed Healthcare Executive reports that the pressures come from three directions: government, the commercial marketplace and providers. The cost of the bailout is high. The federal government must look for sources of funds or cost savings, and reductions in payments to Medicare Advantage plans are likely. Reductions in payments to providers, especially hospitals, are also likely, resulting in even more cost shifting. State governments, pressured by losses in their employee retirement funds as well as reduced tax revenues, will make similar cuts in Medicaid. The commercial market for insurance will shrink with job losses mounting. Smaller companies will stop offering coverage, accelerating an existing trend. In a worst case scenario, large insurers with self-funded business will find those companies not able to cover medical claims costs. Hospital systems have been cost shifting into private payers for years because of underpayments by Medicare and Medicaid, and that trend will accelerate. Tighter credit, higher capital costs, trouble collecting from patients, and the relentless need for hospitals to upgrade equipment and pay high personnel costs will force hospitals to increase charges to commercial payers even more. Another alternative is an unfunded mandate on health insurers, requiring them to provide broad coverage at prices set by the government. But this would create market conditions with high risk of failure by insurers like AIG. Once the financial sector recovers stability, it will be even more apparent that healthcare costs and lack of access are a huge drag on the economy and productivity.

The current financial mess will take time to sort out, and health care is going to play a major part in the scenario now unfolding on a daily basis. Americans will need to make some tough choices in the months and years ahead, especially with a new administration to take over in early 2009. Whatever the result, the needs of individuals, families and businesses should be a major consideration in any discussion relative to health care reform.

Until next time. Let me know what you think.

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