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INDUSTRY INSIGHTS | SPRING 2012 EFFECT

Health Reform: Someone's Cost Savings Is Someone Else's Income

In 2008, I wrote an article about the Congressional Budget Office's projections (see chart below) that show if current spending trends on health care continued, it would eventually consume 49 percent of the gross domestic product by the year 2082. Basically, it would mean that one-half of all dollars spent in the United States would go to health care. An easy conclusion was that it could not happen — the marketplace would not let it happen. The more difficult question was what will change? How? And when?

Projected Spending on Health Care

Source: Congressional Budget Office The Outlook for Health Care Spending, 2007.

There was little doubt that something needed to change, because these costs are a drag on our economy and make U.S. employers less competitive in the global marketplace. Today, the change is coming to us in the shape of heath care reform and the Patient Protection and Affordable Care Act (PPACA). The marketplace is adjusting and accountable care organizations (ACOs) are forming around the country.

In many ways, health care has driven our economy and has been one of the few sectors to generate new jobs. The Bureau of Labor Statistics shows that between 2001 and 2011 the health care industry added 3.2 million new jobs, while the rest of the entire private sector lost 5.4 million jobs. What effect will reform have on job creation in the health care? I have heard some predictions from consultants that 10–20 percent of hospitals may not survive the changes. They will no longer be needed because as efficiency increases, more care will be delivered in-home and at skilled nursing facilities. Unfortunately for many health professionals, the average wage paid to home health workers and skilled nursing home workers is substantially lower than that paid in a hospital. In our push to reduce costs, we have to remember that some of those cost savings may be coming from somebody’s income, and that may affect our economy in a negative way.

Health care reform and the PPACA provide incentives to eliminate waste, and they encourage and reward removing costs from the health care system. The incentive to reduce readmissions to hospitals after patients have been discharged is very straight forward: the hospital doesn’t get paid if the patient is readmitted.

It will be interesting to see if the productivity gains seen over the past decade continue as physicians become employees rather than business owners and entrepreneurs.
Many industries have maintained or decreased costs by increasing productivity. Over the past 10 years, even without the incentives of health reform, the Medical Group Management Physician Compensation and Productivity Surveys have demonstrated that family practice physicians have increased their productivity by 20 percent. However, take home pay per patient seen has not kept up with inflation for those physicians.

In independent practices, physicians are very focused on running cost-effective and efficient businesses. But most believe they will be employed by health care systems in the next five to ten years. For the first time in 2010, more than half of all physicians were employed by health care systems. It will be interesting to see if the productivity gains seen over the past decade continue as physicians become employees rather than business owners and entrepreneurs.

Physicians are also looking at a possible 27.5 percent decrease in reimbursement rates from Medicare. Congress voted at the end of 2011 to delay implementing this provision until February 29, 2012. The proposed “fix” to avoid the 27.5 percent cut is for specialists (i.e., non-primary care physicians) to take an 18 percent decrease over three years and then accept no increases for seven years. Taking inflation into account, this equates to a 50 percent reduction over the course of 10 years. Primary care physicians will have to accept no increases for 10 years.

Changes will have to be made if a physician is paid 50 percent less for performing a service. The number of people hired by that physician and those employees’ wages and benefits will have to be strictly monitored or the practice will go broke. Logic tells us that physician compensation will decrease, on average, as they are paid less for their services. From an economics standpoint, the jobs created and the consumer spending by physicians and their employees have a good effect on our economy, so some are concerned that increased efficiency in the health care industry might reduce that economic boost.

It would be helpful to know how this will all turn out, but there are too many variables and too many unknowns to say for certain. As we look out at these changes, should we be more concerned? Will the savings from the health care industry transfer to another part of the economy? What industry is going to step up and provide the growth in “good” jobs that health care has been generating? And will that industry produce more quality jobs than the ones eliminated in health care restructuring? Will health reform really help keep jobs in the United States when there is such a large wage differential between U.S. workers and workers in China or India?

People across the health care industry felt that change was necessary, and these initial steps may turn out to be the hardest ones. Some of these challenges will be difficult — if not impossible — to overcome, and the risk today is that these changes will simply add to our troubles as our economy struggles to recover. But over the long haul, we will adjust and reinvent our economy for the next generation. Americans are resilient and creative, and those qualities will serve us well in the future, no matter how difficult it gets.

 

Joe WhiteJoe White is a health care partner with CliftonLarsonAllen.
joseph.white@cliftonlarsonallen.com or 612-376-4525

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