Happy Hump Day! I was going back through some historic stuff and I landed in 2010. The year 2010 was, after further review, eerily similar to right now, economically speaking. Sadly, not much has changed in terms of health policy and the economic state of healthcare.
In 2010, the economy was choppy, recovering or trying to, from a recession. The Great Recession of 2008 to 2009 was the worst economic downturn in the U.S. since the Great Depression. GDP declined 4.3%, the unemployment rate doubled to more than 10%, home prices fell roughly 30% and at its worst point, the S&P 500 was down 57% from its highs.
Now, 2023 is not quite where 2010 was at but the parallels in some regards are fascinating. The Fed had begun quantitative easing (a monetary policy to gradually reduce interest rates and increase money supply in the economy). In 2010, a second round of easing occurred, known as QE2. The primary component of this approach was the Fed’s acquisition of longer-term Treasury securities.
QE2 used as existing rate policy already had produced low, near zero, interest rates. Inflation was low but the economy was stagnated in terms of growth. At the time, inflation was in the 2% range but GDP growth was equal or less than 2%, producing a condition known as stagflation. Unemployment was higher than desired and the real estate market was stuck for the most part, in neutral, due almost entirely to valuation problems (prices not matching values in an open market auction). Residential home prices fell.
A great recap piece on 2010 and the economy is here, courtesy of the Brookings Institute: https://www.brookings.edu/articles/the-top-economic-stories-of-2010/#:~:text=In%20sum%2C%202010%20was%20a,the%20outlook%20for%20the%20unemployed.
Back in 2010, I wrote a piece on the state of the healthcare economy. It is very similar to pieces of a similar theme that I have recently written (https://rhislop3.com/2023/04/28/friday-feature-the-economic-realities/) While the times are different (2010 v. 2023), many issues more than a decade later, regarding monetary policy, interest rates, GDP growth, budgets and deficits remain. Below, reprinted, is a post I wrote on the healthcare economy back in 2010. I hope readers enjoy this bit of nostalgia and of course, Happy Hump Day!
As my work is focused on healthcare and more succinctly, post-acute healthcare and senior housing, I follow overall economic trends and conditions and translate the same for the healthcare economy. As healthcare remains a private industry today, albeit one that is heavily tied to the Federal government, the general economy does impact the healthcare industry. Arguably, as with the current state of the general economy, public policy has the greatest ability to impact the healthcare economy, in the short-run and structurally, for the long-term.
Healthcare is the largest private industry in the U.S. economy, accounting for 17.5% of GDP. The U.S. spends more on healthcare in total than any other country in the world and when taken as an economy by itself, the U.S. healthcare economy (in total dollars) is larger than the GDP of nearly all world nations save five (Great Britain, Germany, Japan, China and France). This means that the U.S. spends more on healthcare for example, than the total dollar value of the Canadian GDP. Its economic wealth and value as part of the U.S. overall economy is enormous and as many would argue (and we agree), its prospects in the future as related to the overall U.S. economy are critically important.
Today, the spending profile on healthcare in the U.S. is at the center of public and governmental debate. The rate of spending on healthcare as a percentage of governmental budgets and personal or household budgets continues to grow at rates exceeding the rate of consumer inflation. As a percentage of governmental budgets, healthcare spending is practically unsustainable in its present form without significant modification to the financing side of the various entitlement programs. In other words, without a broader and deeper taxation base, there is no way that governmental healthcare spending in its present form and at its present trajectory can be sufficiently paid for. The forecast for example for Medicare in its present configuration shows a $46 trillion deficit over the next seventy-five years.
Important to understand about the healthcare economy is the role two separate parties play; government and the private sector. In 2009, government spending as a percent of total healthcare spending will represent 30%, principally on Medicare and Medicaid. There are estimates from various sources that within three years, government spending will account for 50% of all healthcare spending in the U.S. I of course, am skeptical that the amount will rise to quite this level but agree in principal that government entitlements will continue to consume a larger share of total spending in the near future. The largest driver of increased government spending on healthcare is U.S. demographics; an older population living longer, particularly with chronic disease and disability. Another driver of this trend is the economy itself and public policy. As governments continue to create more entitlement programs (state and federal) with easier or more fluid eligibility criteria, the government effectively “buys” more insureds or beneficiaries. An example of this is the changes to SCHIP that increased the income level for eligibility and increased federal funding.
The private portion of the healthcare industry is not directly connected to the government portion but interdependent nonetheless. As government becomes a larger and larger consumer, the inadequacies of government payment and the inefficiencies and bureaucracy of government programs add costs to the private portion of the industry. For many provider groups, government programs are the largest customer (e.g., nursing homes) and therefore, the largest contributor to inflation realized by the provider. Arguably, no other private industry has as much of its economic outlook and revenue and expense profiles controlled by government as healthcare. When the private industry portion is reviewed and its inflationary profile examined, one cannot discount the large role government is playing in contributing to the increasing costs and declining real revenue via reimbursement, arising from its own bureaucracy and legislative tinkering.
Given the present public policy environment, my outlook for the overall healthcare economy through 2010 is somewhat less clear than perhaps at any time prior. I assume that the continued reform debate will produce some legislation though my assumption is for a package that is significantly different than what exists in HR 3200 or the Senate companion, Baucus bill. Below are my general economic and policy assumptions for the healthcare industry.
- My forecast is for inflation to run at 10% in 2009 and slightly lower in 2010 – 9%. History indicates that economies in a recession and then in the early stages of recovery produce higher healthcare inflation as a greater share of GDP is consumed by healthcare. Further compounding the inflation problem is the relative weak value of the dollar and the higher interest or debt costs providers are facing as a percentage of revenue (revenues in the industry are flat or slightly down). Even though interest rates are at historic lows, providers are finding that the debt markets are less than open for refinancing.
- I expect bad debt to continue to run higher than in prior years as typically, every 1% increase in unemployment produces 1.1 million uninsured citizens. Even though non-urgent and elective healthcare spending has fallen, care will still be required by people who have less means of paying for it now and in the near future than two to three years ago.
- I continue to believe that the credit markets will remain fairly tight through all of 2010 and while interest rates will remain lower than normal, the accessibility of credit will be tighter than recent past. This assumption means that credit may likely be accessible but appraisals will continue to produce lower than historic values and creditors will require more equity as a condition of financing.
- I am forecasting only modest increases in supply costs and energy costs, unless of course legislation such as Cap and Trade becomes law. The continued weak economy, even with a modest growth profile, will not produce inflation across these commodities in more than modest amounts.
- The non-specific, general labor market will remain favorable for providers although the skilled, allied health professions will remain competitive, especially in certain clinical areas such as pharmacists, nurses, and physical therapists. Combining the two pools, I see minimal wage inflationary pressure on the horizon as jobless rates will remain high. On average, I see overall wage and benefit increases averaging less than 3% and certainly, could come closer to 2.5%.
- Without a general shift in unemployment looming and a more rapidly growing economy coupled with new insurance mandates from Washington, the trend toward high deductible health plans and Medical/Health Savings Accounts (MSA and HSA) will continue. Plans such as these impact health consumption as consumers seek lower cost treatment alternatives or forego non-urgent medical care entirely.
- As a result of the point immediately above, I continue to see a strong growth profile for non-institutional delivery models of care such as clinics within grocery stores and Wal-Marts. I also see strong growth for continued use of generic medications although the total number of generic alternatives to brands is relatively saturated with no high dollar brand patents set to expire in the near term.
- Merger and acquisition activity will be strongest in the pharmaceutical and bio-tech segments, as has been the case in 2009. While I believe this activity will also pick-up in other segments, the dollar value of transactions and the overall number will continue to be down from prior years.
- Capital spending trends will remain depressed for the balance of the year and 2010 across the industry, principally due to financing availability and a continued focus by the industry in general on achieving margins. I believe this is an area of concern going forward as inadequate investment levels for infrastructure and aging plants could produce negative equity worth and operating inefficiencies across the industry.