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The New Normal of Healthcare Spending[/SIZE]
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On October 6, 2013, I penned a rather lengthy discussion of the economic impact of the Affordable Care Act. I still think it was one of the better pieces I have written. You can read it herehttp://email.mauldineconomics.com/w...E800BZKitmCNpWtd1Rq86Q7wZOJYUo5HlWDWCCg-3D-3D. I offered an analysis of what healthcare will look like within a few years. Essentially, we are moving to a three-tiered system. Somewhere between 3 to 5% of people will have what is coming to be known as concierge care, another 20% or so will have what we think of as traditional insurance, and the remaining 75% will get by with some form of government-mandated and -controlled healthcare (with high deductibles and increasing costs).[/SIZE]
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I titled the letter I wrote back in October “The Road to a New Medical Order.” Business Insider,[/SIZE] which posts my letter each week (a surprising number of people think I actually write for them, which is fine by me, I guess) generally tries to come up with impactful and somewhat controversial headlines to attract readers. Their headline over my piece was “Obama Care Will Change Everything – And I Think It Might Cause a Recession.” And yes, buried deep in the article I did write:
When I am asked what keeps me up at night about our economy, my ready answer for the past few months has been the unknown transition costs associated with the ACA. I hope Jack Rivkin is right and that the transition to Obamacare proves to be just another Y2K. I truly believe that healthcare will be significantly better in 10 years, largely due to advances in technology, but also as we streamline our healthcare delivery. So I’m a long-term optimist, though I have to confess that, in the short term, which would be through the last half of 2014, I am quite concerned that dislocating 1 to 2% of the economy could be enough to push us into recession. I have nothing factual to base that on – no inverted yield curve, no evident bubble getting ready to burst – so I will stop far short of a prediction. Let’s just say that these issues need to be right up front on our radar screens. And it wouldn't hurt to keep our fingers crossed.
[SIZE=12pt]Let’s run through a quick summary of my analysis then – which is the same as how I see things today. We are going to reduce the amount of money we spend on healthcare by around 1% of GDP a year for the next four years, or about 5% per year in actual reductions. While right-thinking economists will point out that that money will be spent elsewhere, and they are correct, my concern was – and it is evidently turning out to be pretty correct – that the transition will be messy. I simply do not believe that you can change the “plumbing” of how healthcare dollars are spent, totally change the incentive structure, and demand more service for 20% fewer dollars while reducing the number of workers at hospitals,
without serious short-term dislocations. [/SIZE]
Like we saw last quarter.
Will all this wash out over the next few years? Absolutely. We are not on some permanent healthcare spending death march where quarter by quarter healthcare spending will keep dropping. It is just, to borrow a phrase from my friend Mohamed El-Erian, that we are entering into a New Normal of Healthcare Spending. And eventually that money that we are not spending on healthcare will get spent on something else, and those people that are not employed in the healthcare industry will find other jobs or end up taking less pay for doing the same job. But it is the turmoil created in the midst of that process that is going to create some ups and downs in the economy (more on that later).
I have regular conversations with numerous friends about what’s happening in the healthcare world, as I think that is where the real action is. For an economist, this is a wonderful experiment in incentive structures. And if you are an economist worth your salt, you know that economics is all about incentives. Individuals have an incentive to maximize their healthcare services and reduce their actual out-of-pocket expenses. Healthcare businesses have an incentive to make sure that expenses don’t exceed revenues. And the ACA is nothing if it is not an enormous incentive-changing machine.
Jack Rivkin sent me a note yesterday detailing a conversation he had recently with a healthcare provider. (I’ll remove names, just in case.)
Had a great 3 hour dinner discussion in Chicago three weeks ago with the head of the … Hospital. He realizes he’s at the bottom of the food chain but is very excited about what is happening. First dinner with him was three years ago when he was just beginning. He’s substantially changing the mix of his work force. That includes doctors who are now employees, not independent business folks. He has made the switch to outcomes-oriented medicine and is looking to become his own insurance company where he believes the big ripoff has been taking place. You should hear what he has to say about Blue Cross/Blue Shield and the people running it. He is tired of getting paid for procedures as opposed to outcomes, e.g., [he’s] down from using 7 different types of hip replacements to 3, based on those with the best long-term success. The doctors were told you either switch to what we have chosen or find another hospital. Actually “fired” some do ctors when the data showed what a high rate of repetition [their] patients had.
That complaint about insurance companies is showing up a lot. Here’s a section from a great little article by Jake Novak at CNBC called “An Obamacare bailout? Insurers already got one!”
Whether the ACA has actually helped more citizens than it's hurt has turned into a partisan war of statistics. That war will be waged for years to come. While I believe the new law will ultimately hurt more people than it helps, I realize those on the other side of the political spectrum will never agree with that assessment.
So let's not have that fruitless argument.
Instead let's focus on something the two major political camps can agree on, even if it is something that will make both of them very angry. Based on the non-partisan, hard numbers, the big winners in Obamacare America are… drumroll please… the insurance companies!
Yes, those greedy, heartless, bureaucratic, and anti-competitive health-insurance companies that President Obama kinda sorta blamed for his mother's death and Republicans blasted for seeking a bailout, and doctors accused of interfering with their medical judgment are all still alive and kicking in the 2014 world of the ACA.
Of course, insurance companies would simply argue that they’re playing by the rules and that they’re having a really difficult time making profits. Most insurance plans under Obamacare are going to rise significantly in cost later this year or next year.
Again, we find out something about incentives. It should be no surprise that a significant number of people with serious health issues who had no insurance have now signed up for the new healthcare programs. Lanhee Chen on the BloombergView site sees it this way:
At its base, the data show that people insured through the law’s exchanges have higher rates of serious medical conditions. Of the enrollees who have seen a doctor or other health-care provider in the first quarter of this year, 27 percent have significant medical problems, including diabetes, cancer, heart trouble and psychiatric conditions. That rate is substantially higher than that for patients in nonexchange market plans over the same period. And it’s more than double the rate of those who were able to hold onto their existing individual market insurance plans after President Barack Obama was forced to allow them to keep them.
This outcome should not surprise anyone. The law’s one-size-fits-all regulatory regime, which requires insurers to offer coverage to all comers and prohibits pricing of coverage based on an applicant’s health status, was bound to increase the number of relatively sicker people purchasing insurance through the exchanges. Moreover, Obama’s executive action, which effectively allowed many people who had individual market plans to remain in them through at least 2016, bifurcated the insurance markets such that healthier people remained in the plans they already had, while relatively sicker patients were left to acquire coverage through the Affordable Care Act’s exchanges.
Some of the bad risk in the exchanges has been offset by the enrollment of relatively healthy people who acquired coverage because of the law’s generous subsidies. Yet the numbers make clear that the exchanges remain a haven for those who may consume more medical services than others. (Bloomberg)
The ACA is going to be enormously contentious, as the rules are conflicting as to how insurers can make up their losses. President Obama would like to do it one way that he thinks is allowed within the rules, but there are many in Congress who think that’s a bailout for insurance companies and is against the rules. However it plays out, the ACA is going to cost someone, whether it’s taxpayers or those buying insurance, a great deal more money than initially budgeted. And the insurers will continue to be everybody’s favorite whipping boy.
As an aside, I find it an enormously intriguing idea that a healthcare hospital group is seriously thinking about setting up its own insurance company. You gotta love America, 100 different experiments going on at once. Some of them are sure to be game changers.
Why Healthcare Spending Went Down
My contacts in hospitals and elsewhere in the healthcare industry confirm that healthcare spending was down dramatically (though perhaps not quite the 6.4% in the data) in the first quarter. These same sources suggest that healthcare spending has rebounded during the second quarter. The first week of June was actually the best week ever for one major healthcare provider, but the overall trend is still for somewhat lower healthcare spending than last year.
So what happened in the first quarter? Evidently, several things. Number one, if you haven’t noticed, the deductibles for most of the ACA programs were quite high, often running as much as $5000 (which, for what it’s worth, is the deductible on my own insurance program – buying a lower deductible is significantly more expensive than simply paying the higher deductible. Go figure.)
The high deductibles were a shock to many people who were used to more-traditional health insurance. They postponed some services and started looking for transparency of pricing for the more expensive services. It is no longer uncommon for a patient to ask for a prescription for an MRI that they can take to another provider across the street who will charge them half of what the hospital provider will. If you’re paying it out of pocket, you begin to pay attention to what you’re paying. I think we should applaud that increase in transparency.
To those points, Dr. Toby Cosgrove, CEO of Cleveland Clinic, recently noted:
The entire healthcare system will have less money coming into it – we are taking costs out, so will all hospitals.... Obamacare is accelerating the process.... but this is due to transparency of costs and consumer with high-deductible plans. This is a huge social experiment involving almost 18% of GDP and 100% of people... this will take four to five years to shake out.”
Further, there were a lot of people who didn’t get Obamacare insurance in the first few months and had to wait until March or April for their insurance to kick in. Other people have lost their insurance inexplicably because insurers are losing control of their internal management systems amid all the turmoil. People are postponing what they can until their insurance kicks in or gets reinstated. Apparently, some of this has gotten sorted out in the second quarter, and healthcare spending is on a trajectory to the “new normal,” which may eventually be about 20% less than what we spend today.
Muddle Through Economy Redux
I still think the next shoe to drop may be in the third and fourth quarter when hospitals begin to realize that they have significant cash-flow problems. Estimates are that we have about 10% too many hospitals, and the creative destruction of the new healthcare system is going to relieve us of that excess. Only the strong and well-managed will survive. This is of course going to create turmoil in the whole healthcare employment world, etc., etc.
Further, Obamacare is the largest middle-class tax increase in history. Yes, enrollees are getting healthcare for their additional expenditures, but you get extra government services for an increase in regular taxes. Call it a premium or call it a tax, it still amounts to a reduction in disposable income for individuals and families. Tax increases have a negative effect on the economy equal to roughly three times their actual amount. We have gone over that research numerous times.
And that negative effect doesn’t come all at once but is actually spread out over about three years, so the Obamacare taxes will still be creating a headwind to growth this year and next.
Further, although the president has postponed some of the “features” of the ACA, such as the business mandates, they are going to kick in eventually. We’ve already seen a rather large rise in temporary employment as employers shed full-time employees so they don’t have to cover their insurance. We’re going to see more such unintentional consequences, because that’s just where the incentives are. This will of course create even more headwinds for growth and productivity.
We would have to achieve 3% GDP growth in each of the next three quarters simply to average 2% for 2014. If you go back and look at the chart on US real GDP growth, you will notice that we haven’t grown that consistently since the recovery began in 2009. GDP growth has been rather noisy.
We are at best in a slow-growth Muddle Through economy. And the problem is that consumers are getting hammered from all directions: incomes are roughly flat and core expenses are rising.
Returning to the BLS GDP report, we see that inflation was 1.3% in the first quarter as measured by personal consumption expenditures (PCE). One of the “checks and balances” I like to look at when thinking about PCE is what the Dallas Federal Reserve calls the “trimmed mean PCE inflation rate.” Basically they take all the components of inflation in the PCE (which is the Fed’s preferred measure of inflation) and remove the “outliers” (trimming them off, as it were) to smooth out the noise. And sure enough, when you go back and look at the one-month PCE inflation rates for the first quarter, 1.3% seems to be close enough for government work. But then when you look at the chart of what’s happened since then, you see a rather sharp rise in PCE. If that inflation shows up in the BLS statistics next quarter, in their first measure of Q2 GDP (which we will see in late July), it could reduce overall real GDP growth by about 1%. Just saying.
kidding me?
