Monday, October 27, 2008

Financial Crisis and its Effect on Health Care Providers

This past weekend Janet - a former MBA-Health Care student from USF - e-mailed me about the impact the financial crisis will have on health care providers - especially in Sioux Falls, South Dakota. Specifically here are the questions, my responses or thoughts, which are in bold and should be taken with a grain of salt - as always.

Is it possible that the frustrated economy could lead to decreased demand for health care services, e.g. fewer women coming in for annual exams, fewer teenagers being treated for acne, simply because families cannot afford it?"

In a market like this - anything is possible. I think you (and the class) have hit on a key component as the effect of a slumping economy has on the health care demand - that being there are at least two types of consumer demand for health care - unavoidable and avoidable procedures. I do not see a significant impact on the demand for unavoidable health care procedures - such as heart surgeries. For avoidable procedures - there should be a significant decline in health care demand for these type of procedures (such as annual exams). Thus procedures such as laser eye surgeries could be negatively impacted in the near term on either price or quantity with the decline in consumer incomes. Also, health care procedures that are not typically covered by insurance or for health care providers do not submit many bills to a health insurer - such as chiropractic procedures may be impacted by the decline in consumer demand.

Assuming #1 is possible, will decreased demand in the Sioux Falls marketplace of initially stable supply (via competing Sanford and Avera systems) affect price?"

What part will third party payers have in this? Will they lower reimbursement in response to #2?"

As for price (and third-party payers - since they really go hand in hand) - many customers (patients) are covered by either government (Medicare), employee provided health care insurance or private insurance. Since hospitals such as Avera and Sanford face a large number of patients with existing insurance - I do not see a significant change in health care prices in the near term in Sioux Falls. As the number of uninsured patients rises, we may see a perverse effect that prices to the un-insured may go up in a effort by health care providers to have more costs covered by the state. Also, as we discussed in the Managerial Economics class, a big reason third party payers exist is to reduce the risk of rising health care provider costs (or really health care provider prices) as opposed to offset declines in patient demand to health care providers.

I do not foresee health care prices declining, except maybe for avoidable procedures that do not have large third party payer claims. Declining patient demand could slow the rate of growth in health care prices, again especially for avoidable health care procedures.

Another area that decreased consumer income may impact the Sioux Falls health care provider market is in substitutability between Avera/Sanfor and the for-profit hospital in town. As consumer demand decreases for avoidable procedures, how will physicians and the for profit hospital respond in terms of maintaining their capacity utilization. Depending on the existing mix of avoidable and unavoidable procedures by the for-profit hospital may impact the demand as faced by Avera and Sanford.
In other words, if the for-profit hospital mainly does avoidable procedures, then it may become more competitive in prices charged to physicians for unavoidable procedures done at the for-profit hospital.

"Perhaps what I’m asking is, will anything ever go down? Several members of the class felt strongly that health care prices will never go down – the price-taking vs. price-setting argument. I feel supply/demand will have some effect. If not go down, will increases at least moderate in response to market?"

In summary, the decline in consumer incomes decreases the demand for avoidable health care procedures , but I do not see much decline in avoidable health care procedures. Existing health care contracts with third party payers will not lead changes in prices set by most health care providers (price-taking behavior). While incentives always exist to lower reimbursement amounts by third party payers - I typically think about changes in reimbursement being due to changes in health care costs as opposed to declining demand.

The biggest concern to me from a health care providers perspective is that lower demand will raise the average total costs of health care procedures and given little to no price changes - will decrease health care providers profit margins even more; which gets you back to why health care providers have an incentive to reduce the number of health care employees.

Of course, the wild care in this whole scenario is what happens with the Presidential election and the ability of either candidate to implement any significant health care insurance changes.

Finally, thanks for asking. I have spent most of this Fall thinking about environmental/natural resource topics, and it is good to change gears and think about the health care market.

Let me know what you think!


Janet said...

Thanks, Stacey. Great to hear from you. The reading I've been doing indicates that health care may initially be recession-resistant but ultimately not recession-proof. At first there is a counter-cyclical trend for patients anticipating losing their health insurance to get more of the elective procedures done that they have been putting off. But eventually things slow down. Hospital utilization was at an all-time low during the 2001-2002 recession and took an unexpectedly short time to slow down.
As you said, there isn't much change on unavoidable illness utilization although the payer mix changes.
I happened to speak with Dave Kapaska at Avera McKennan today. He concurred that as things slow down they are already seeing margins narrow. Because so much is fixed and so little they can adjust it won't be long before they have to look at workforce. I guess the Twin Cities has seen a health care layoff of 1000 employees already. (Before I frighten anyone - he indicated they would start by slowing filling vacant positions.)
He also said prices won't go down but they will possibly face lower reimbursements from 3rd party payers especially where they compete.
Thanks again for replying. I'm now going to email the class and see what they think. Best wishes! Janet

Janet said...

One final thought: I started out in this whole topic wondering if there was any possibility that the trend of ever-rising health insurance premiums might stabilize in a recession, I guess as an eventual result of supply/demand. I believe we are underestimating how much of health care is "avoidable" and that as people see their paychecks shrink, they will stop taking the expensive meds and seeing the expensive doctors. We have seen it with gasoline these past months, haven't we? And we thought that was inelastic.
I must admit though after reading your and others' perpectives that health care pricing seems less subject to supply/demand than I originally thought. Looking at it wholistically, health care costs will stay relatively high and there will be fewer of us on the private side picking up the tab. These hard times are going to mean fewer people staying with private insurance and instead seeking government plans.
Thanks, Stacey, for weighing in. I'm told we might pick up this discussion again Thursday night. Care to make a road trip? Thanks, again.

Stacey said...

I am already making a road trip this Thursday - in the opposite direction. I teach a MBA Managerial Econ class in Davenport, which is about 60 miles east of Iowa City. Unfortunately I cannot be in two places at once.

You bring up a good point in your comment that I did not make clear in my original post - the substitution effect. Some individual consumers will be forced to choose generics over brand name drugs, some will elect not to seek second opinions or choose to have procedures done locally instead of at say at Mayo or other more expensive, but perceived higher quality places.

You are right that more of the expenses will be picked up by the government with some workers being laid off and falling off of employer supplied health care coverage.

These are difficult times for many, and even more difficult for those facing uncertainty with their health and their job.