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Getting CCRC Feasibility Studies Correct … and Other Studies as Well

In my consulting career, I’ve done a fair amount of feasibility work (market, economic, etc.).  Similarly, I’ve done a fair amount of similar analyses, primarily related to M&A activity and/or where financing is involved (debt covenant reviews, etc.). Heck, I’ve even done some bankruptcy related work!  I’m also queried fairly often about feasibility, demand, market studies, etc. such that I’m surprised (often enough) that a gap still exists between “proper” analysis and simplified “demographic” analysis.  Suffice to say, feasibility work is not a “one size” fits all relationship.

I’ve titled this post “CCRC feasibility” principally because the unique nature of a true CCRC project provides a framework to discuss a multitude of related industry segments simultaneously (e.g., seniors housing, health care, assisted living, etc.).  Starting with the CCRC concept, a set of basic assumptions about the feasibility process is required.

  • Demographics aren’t the arbiter of success or failure – feasibility or lack thereof.
  • Demand isn’t solely correlated to like unit occupancy, demographics (now or projected), or for that matter, how many units are projected to be built (following the Jones’ as a qualifier).
  • Capital accessibility isn’t relevant nor should it be.
  • National trends for the most part, are immaterial.  Local, regional and state are, however.
  • Projects pre-supposed are projects with inherent risk attached.  This isn’t an “if you build it, they will come” type exercise.  The results shouldn’t be thought of as a justification for a “specific” project already planned.

The last point typically generates  a “heresy” cry from folks and certain industry segments. Regardless, I am adamant here in so much that true feasibility analyses determines “what makes sense” rather or as opposed to, justifying that which is planned (or the implication that the client is paying for a study to justify his/her project).  Remember, I am a fan of the fabled quote from Mark Twain attributed to Benjamin Disraeli (the former Prime Minister of Great Britain): “There are three types of lies….lies, damn lies and statistics”.  As an economist, I have deep appreciation for this as all too often, I see analyses that smack of this latter type of lie.

(Note: The source of the actual “lies, damn lies” quote is still a mystery…thought initially to be said by Lord Courtney in 1895 but since, proven invalid.)

Carrying this feasibility discussion just a bit further, the approach that I recommend (and use) incorporates the following key assumptions about seniors housing (CCRCs) and to a lesser extent, specialized care facilities (Assisted Living, SNFs, etc.).

  • The demand for seniors housing, true housing, is very price elastic.  Given the elasticity, all demand work must be sensitized by price. The more specialized or unique the project might or may be, the more sensitive the demand elasticity becomes (greater or lesser).
  • Local economic conditions matter – tremendously.  This is particularly true for CCRCs and higher-end seniors housing projects, especially real estate conditions.
  • Regional and state trends matter particularly the migration patterns, policy issues, job issues, etc.  Doubt me?  Let’s have a discussion about the great State of Illinois (for disclosure, I have a home and office in Illinois).
  • Location(s) matter.  I incorporate location/central place theory elements in all of my feasibility work and analyses.
  • Demographics are important but not in the normative sense.  Yes, age and income qualified numbers are important but education and real estate ownership, location and years residency in the market area(s) can be as impactful.
  • Competition is important but in all forms.  Given the demand elasticity of seniors housing, the higher the price, the greater the wealth status required of the potential consumer, the greater the options available to that same consumer.
  • Ratios matter.  The demographics are important but the ratio within the demographic correlated to the project, within various locations, etc. is “money”.  (Sales folks love this stuff).  How many seniors does it take to fill a CCRC?

Because no one project is equal to another, feasibility work and like analysis is both (an) art and a science.  I liken the process to cooking.  Recipes are key but taste and flair and creativity are important as well.  Honestly, knowing the industry well from an overall perspective is ideal – like being a chef trained by the masters!  When I see flawed analysis, it typically comes from a source that follows a recipe; a recipe for market analysis, etc.  Knowing the industry, having operated organizations or facilities, being trained in quantitative analysis, etc. separates good or great from average.  Remember Twain/Disraeli.

So to the title of this post; the correct or proper methodology for feasibility studies and similar analysis (sans some detail for brevity and not in any particular order)….

New Facility/New Location

  • Location Analysis – in economic parlance, the application of elements of Central Place Theory.  This includes a review of the site in relationship to key ranked variables such as market/demographics, accessibility, staff/employment access, proximity to other healthcare, other services, etc.
  • Pricing – what is/are the core pricing assumption(s)….I’ve written on strategic pricing models on this site.  If I am doing the pricing work, I apply the concepts in the Strategic Pricing presentations and worksheets found on the Reports and Other Documents page on this site.
  • Demographics – I’ll use my pricing data and my location analysis to frame my demographic analysis.  Aside from age and income, I’ll look at migration patterns, education, career history, etc. plus I’ll review the information on a geocoded basis to refine market relationships between customers and other competitors.
  • Demand Analysis – From the demographic data and tested against the pricing, I’ll build a demand analysis and a penetration analysis that provides a range of likely target customers, within the market areas, give the pricing information, for a particular product.  Historic migration and market area occupancy of like accommodations is used to sensitize the demand analysis.
  • Economic Analysis – This is a review of current market conditions and trends that can impact the project’s feasibility, positively or negatively.  Real estate, income, employment, business investment, economic outlooks, policy implications such as tax policy, etc. are all key elements reviewed.
  • Competitive Analysis – What is going on within the area/regional competition of like or quasi-comparable projects is important as a buffer or moreover, a stability (or lack thereof) check.  I like to look at all potential or as many as practical, comparable living accommodations – not just seniors housing (condos, apartments, etc.).

Expansion Projects

I will complete a major portion of the above with less time spent on location analysis and pricing work (though pricing is still key for accurate demand).  I have watched organizations cannibalize their own market share and occupancy levels with expansion projects so accurate gauging of current and pent-up demand is critical along with conditional trends (economic, competitive analysis, etc.).

M&A, Financing, Etc. Projects

Again, all of the above work is relevant but depending on the circumstances, I will incorporate benchmark data from industry sub-sets.  For example, for SNFs I look at compliance information, CMS star ratings, staffing numbers, payer mix/quality mix and of course, federal and state reimbursement and policy trends.  When I review covenant defaults and provide reports, I narrow the analysis based on the core nature of the default but most often, the issues of late are occupancy, pricing, and revenue models versus fixed and variable cost levels.  Pricing work is often key along with a review of marketing strategies.

Is there more to this topic area?  Of course and this post isn’t meant to be exhaustive nor a text-book supplement.  It is however, a ready framework that can provide guidance to those looking at conducting or contracting for, a feasibility, financing or market analysis.  My advice: Getting it done right the first time saves money, prevents future problems, and assists with positive outcomes for any project or purpose.

February 23, 2016 Posted by | Assisted Living, Senior Housing, Skilled Nursing | , , , , , , , , , , | Leave a comment

The Demographic Realities of Seniors Housing and Healthcare

As regular readers know, I speak at a number of conferences annually.  Additionally, I work with financiers and investors in the space literally daily.  In all my journeys and conversations, I am still faced with some major myth “debunking” about the nature of the seniors housing and healthcare demand, current.  The major myth: Baby-boomers are either here, impactful, or here soon enough that additional supply and different supply is necessary. Nothing is further from reality.

The economist in me (and the economist that I am) wants desperately to provide a full-blown lecture here but I’ll refrain and provide a Cliff’s Note version.  Demand is a function of supply and to a lesser extent, vice-versa.  The two are interdependent.  Demand (commercial) requires a supply of consumers, able and willing to pay a price for a given product.  Seniors housing and healthcare, especially housing, has a very elastic demand curve.  This means that price is a major influencer in demand. The amount of demand for higher-end, above market seniors housing, is less than the amount of demand for moderate and lower-priced seniors housing (at its core).

Demand is also influenced psychologically hence the “willing” component. Seniors housing requires the consumer to make a psychological decision about moving or consuming, a niche’ product.  This fact is supported by the demographic reality that less than 12% of all seniors live in a specific “seniors housing” environment.  While a greater number reside within a NORC setting (naturally occurring retirement community) such as a condo complex or apartment complex, the reality is that fully 80% of all seniors at anytime, do not reside in seniors housing nor are they “looking”.  The core dilemma with seniors housing is that seniors universally, prefer to live in their “residence” in their community.  Some, but a rather small number, choose or are motivated to move annually by choice or by need – the latter being the greater motivator (death, family move, health issue, change in neighborhood, etc.).

Consumers, in this case seniors, exist along the full spectrum of age and ability (economic) to pay.  Given the elasticity of demand for seniors housing (the higher the price, the fewer number of able consumers) coupled with a plethora of living options for seniors (home, condo, apartment, etc.), measuring the actual demand for seniors housing is a bit more complicated than most want to believe.  The complexity lies demographically and economically.

First, the demographics today are not spectacular.  While it is true that we have more older adults reaching ages 80 plus than at any time in history, the number of people in this cohort as derived by birth is falling.  An individual today aged 80 was born in 1935 – the depression/war years.  During this period (depression/war years), birth rates declined precipitously.  See chart below.


It isn’t until the post 1945 years and subsequently, into the mid 1950s that birth rates accelerated into what we commonly know as the Baby Boom.  Simple math thus tells us that the real expanse of supply of seniors, age appropriate for seniors housing (around age 80) won’t occur for another 15 years minimally.  Today, we are actually seeing a reduction in overall “age relevant” supplies of seniors for seniors housing.

Back to the point about seniors housing demand being highly elastic.  Fewer consumers (potentially) also means that all consumers by economic status and desire are fewer in number.  The point here is that the supply of seniors for higher-end housing is not just smaller in number  but smaller in “desire” or motivation.  Folks that have the means to spend thousands per month and invest an entry fee of $250,000 to $1,000,000 also have the means to explore multiple different options.  In other words, the range of substitute products (alternatives) for this group is plenty and growing.  They clearly can afford to remain at home longer, acquire supportive services, or migrate to lifestyle communities or other planned communities that include multiple options and services geared towards “aging in place” (see Del Webb and The Villages as examples).

Today, there is a reason many communities and projects continue to struggle with occupancy.  The average nationally remains stuck around 90% and Assisted Living hasn’t broached this level yet – even though projects continue to come forward at a steady clip.  A contributing factor?  The demographics are not as fluid and as strong now as industry folks want to portray.  The industry is in the core openings of the 20th century baby bust.  Additionally, not only is this next group demographically smaller, it is economically less well off, by virtue of time of birth, than the cohort preceding and the one following.  This is in effect, the double demographic dilemma for seniors housing.

The moral of this present story: Supply of units for the most part, in most regions, is good to surplus.  Reinvention in place is what I advise and for growth; acquire – don’t develop.  Adding additional inventory is not only expensive it is difficult to support, except in certain markets where certain really good conditions apply, demographically and economically with proper demand analysis.  This present condition will last for about the next 10 years and to a certain degree, maybe longer as the age at which seniors seek “seniors housing” elongates – moving into the 80s. Developers need to understand this condition and seek proper demand analysis and economic planning before believing the demographics of “If you Build it, They Will Come!”

November 19, 2014 Posted by | Senior Housing | , , , , , , , , | Leave a comment

CCRC Update 2014

Earlier this spring (a couple, three moths ago), I spoke at a marketing/P.R. conference and when my session was over, I sat and visited with a number of the attendees.  My presentation was about value propositions and marketing; how to align your organization’s core economic value components within a marketplace, within a customer segment.  Within the short additional time I spent with these attendees, I learned that a number of their organizations (CCRCs) were still struggling post the recent economic recession/slow-down.  In fact, a number of them expressed that in their areas/region, recovery hadn’t yet begun.

Since that event and over the course of the past three months or so, I took notes on various client engagements, discussions and research reports on how the CCRC industry is fairing these days.  Before I break down my conclusions/observations, some general prefacing comments about the industry are required.  First, the CCRC industry is truly different by location and thus, it is expected that some areas/regions, etc. are faring better than others. Second, established projects have fared differently than newer projects; not always better but different.  Third, the capital structure of a CCRC (how much debt and how the debt is structured in terms of rate, etc.) is a major component of how well or not well, certain projects are doing.

Below are my observations/conclusions of how the CCRC industry is doing mid-way through the third quarter of 2014.  As stated, most of my observations are first-hand (client engagements)* followed by research and conversations with those that work in and around the industry. *(My firm and in many cases me specifically, does capital development/corporate development work within the industry including consultant’s reports when covenant defaults occur, strategic planning, turn-around consultation, M&A work, research for banks and investment banks, and economic, market, and financial feasibility studies.  My comments do not reflect any specific client or series of clients or any engagement former or current).

  • Late 2013/early 2014, Fitch issued their outlook on the CCRC industry as “stable”.  Their conclusion was that improving occupancy rates, stable expenses due to the non-inflationary economy and access to low (historically) cost capital was favorable and thus, their rating.  In general, I concur that where real estate rebounded (used inventory down, prices stable and climbing) and general economic conditions improved (unemployment falling, commercial activity rising, etc.), demand for units returned to near pre-recession levels and occupancy increased.  However, as I mentioned at the beginning of this post, there remains pockets of weakness, some fairly profound, across the country.  The regional/local outlook as opposed to the 20,000 foot national trend is more relevant to the success/struggle of any one project.  For example, our clients in “rust belt, heavy manufacturing” areas in Ohio, Wisconsin, Illinois, West Virginia and New York would mount a stiff argument that the outlook is far from “stable”.
  • Pricing has remained relatively flat and in many areas, occupancy gains have occurred as a result of discounting and promotions.  I don’t see this changing any time soon as while demand is good in some areas, demand is tempered by recent events and still, a large amount of economic uncertainty.  The wealth profile of the current demographic has shifted, especially on the income component.
  • Approximately half of the projects that were in the development queue in 2008 evaporated or re-scaled.  Only recently has the industry returned to a somewhat robust, new development outlook.  Access to continued low-cost capital is a key element of fuel for this emerging (again) trend and even though rates ticked-up in November/December 2013, they have since stabilized.  Rate however, is just one component.  Demand for debt on the part of investors is still at low ebb.  Suppressed yields have moved investors out of fixed rate, tax exempt debt en-masse.  Deals still are competitive but nowhere close to pre-recession levels.  Banks are only now starting to revisit commercial lending to the sector and again, not with the same fervor as pre-2008. The overall number of outlets has declined and the debt to equity levels are still conservative (70/30).  Valuations remain a bit low as comps are still weighted by one-off deals, distress deals and work-outs and bankruptcies.  Book remains the valuation arbiter and as such, cap levels remain in a narrow range.  Overall, the capital outlook is fair but caution and uncertainty remain prevalent and thus, valuations are flat and good deals get done but marginal deals still struggle.
  • Rising occupancy and improving economic conditions have slowed defaults and tempered bankruptcies but not eliminated them.  Again, certain projects in improving economies have rebounded though others in regions/markets of slow to no-recovery languish.  Though average occupancy has once again moved into the low ninetieth percentile across the industry, I still see projects below this level on a regular basis and some, profoundly below.  In virtually all instances when I encounter low occupancy, two elements are present.  First, the market area is struggling economically – real estate, jobs, infrastructure, etc.  Second, the project itself is really viable or relevant.  More on this latter point toward the end.
  • Projects that have done well, rebounded, stayed vibrant exhibit the following key elements, aside from being in a market area that isn’t still declining or not recovering.   First, they were not overly leveraged.  Second, they had/have investments and cash reserves.  Third, they didn’t defer maintenance to any great extent.  Fourth, they stayed relatively lean on the expense side. Fifth, they have diversified revenue streams/bases.  Sixth, their pricing was market balanced and actuarially sound.  Finally, their management was forward-thinking and had plans in place to address the changing environment.  They have a good senses of the economic and market conditions impacting their organization and they plan and address these conditions fluidly.
  • Projects that haven’t fared well exhibit the opposite characteristics from above and/or, they simply exist in market areas that haven’t rebounded.  The most common element of struggling projects that I see is ineffective senior management and governance.  They simply never moved beyond a paradigm that was shifting, shifted and won’t ever return.  They aren’t relevant  and  haven’t learned or developed the current competencies required to compete in a different economic and market environment.  For many, the writing is on the wall and for some, revival is possible but a complete turn-around is required.

What I have concluded over the last few months is that industry success is a function today of five components;

  1. Being in a market area that is economically stable and modestly improving.  Real estate fluidity and price stability is important but equally  important is the general economic outlook, government infrastructure and commercial economy.  Projects that aren’t in this type of environment won’t, no matter what they do, improve beyond a point of mere survival (thriving just isn’t possible).
  2. Marketing and pricing today require a completely different set of competencies and strategies to achieve success.  Pricing must be strategic and financially validated and demonstrative of a clear value proposition.  No longer can a project succeed on guessing, market comparables and eyeballing what “management thinks” the budget will support. Marketing is different as well.  This is no longer a real estate driven sale and the economic axiom of elastic demand applies.  CCRCs have a very elastic demand curve and such, pricing and marketing must unite in the creation and communication of the economic value proposition.  More leads than ever are required to generate sales and build and hold, market share.  Traditional print and media ads won’t get it done.
  3. A highly diverse revenue stream/platform (multiple service lines) such that liquidity and debt service covenants can comfortably be made within normative occupancy levels (90th percentile or lower is best). If this is the case, the CCRC also tends to be more market competitive and capable of self-referral and internal market development.  In other words, it has multiple channels for referral development.
  4. Strong, capable management/leadership that isn’t necessarily, tied to the industry conventional wisdom.  They are adept at planning, forecasting, and keeping operations structured on high-quality, efficient service delivery.  They know the market, know their place in it, know the economic outlooks and demand elements and adjust their products accordingly.
  5. A relevant physical plant environment for the market.  A project doesn’t have to be new and/or the most glitzy.  It does have to fit the market however and be current – minimal to no deferred maintenance.  Economic value proposition are about proper product value, inclusive of warranty, for the customer to evaluate the tangible and intangible relevance.  The physical real estate elements are a major component of the proposition and properly positioned within the overall project, priced and communicated correctly, the prospects for sales and success are high.

August 15, 2014 Posted by | Senior Housing | , , , , , , , | Leave a comment

House Passes Doc-Fix Bill Destined for Nowhere

Earlier today, the House passed a bill that repeals the SGR formula used to derive physician reimbursement under Medicare.  For more specifics on the SGR, see a previous post I wrote at .  The legislation is title SGR Repeal and Medicare Payment Modernization Act.

Unfortunately, the fate of the legislation is predestined as the bill includes an amendment from the Ways and Means Chairman (Rep. Dave Camp) that delays implementation of the tax/fee penalties concurrent with the Individual Mandate. It does not repeal or delay the mandate, simply the punitive measures for those that don’t comply.  Recall, the Affordable Care Acts requires all individuals above a certain income limit (tax filing limit) or without expressed hardship, to obtain health insurance by April of this year or face a penalty.  The penalty embedded within the act is a flat dollar floor with amounts increasing based on gross income.  With certainty, the inclusion of the amendment in the legislation spells a death sentence in the Senate where Senate Democrats hold a majority and Leader Reid, controls the flow of legislation for vote.  The bill will never see a vote in the Senate due to the Camp amendment.

The sticking point on repeal of the SGR is cost.  The Congressional Budget Office estimates that a repeal of the SGR, shifting to an indexed option with market baskets and productivity adjustments, will cost $138 billion over 10 years.  The dollars would need to come from an already shaky Medicare program that today, doesn’t really have another source of revenue save tax increases or contra-revenue infusions via reduced provider payments elsewhere in the industry.  The funding dilemma that occurs with the Camp amendment is that such an amendment actually saves the government $169 billion.  The savings is achieved by a projection of fewer people, sans the mandate penalty, having health insurance including under Medicaid and SCHIP (or CHIP).  With fewer people accessing the government-funded entitlement programs, the outflow is less, savings in amounts greater than the SGR repeal costs.

Once again, a fascinating insight into current federal health policy and the economics at play…

March 14, 2014 Posted by | Policy and Politics - Federal | , , , , , , , , | Leave a comment

CCRC/Seniors Housing Outlook 2014

Using characterizations, 2013 was a year of gradual ascent for the industry but not necessarily, uniformly so.  After a series of years preceding classified as industry malaise, occupancy began to trend forward and absorption rates stabilize.  Industry wide, overall occupancy is hovering around 90% for CCRCs though again, this number is broadly misleading.  Non-profit CCRCs, the bulk of the industry, fell-off slower and less dramatic and thus today, have risen back in generalized occupancy above 90%.  For-profits, fewer in number and newer in market, remain below 90% in overall occupancy (88%).  Interesting to note is that the bulk of non-profit CCRCs are entrance fee communities whereas the for profit variety trend toward rental models.

The question for 2014 is will a growth trend emerge?  My answer is “no” but the tide will remain somewhat positive.  What needs expansion is the following;

  • CCRCs and Seniors Housing is very local and regional.  Effectively, market dynamics at the local and regional level will play more directly than national trends.  As each economic region and market have recovered differently and are pacing recovery differently, so are the prospects for Seniors Housing.
  • The real estate market, while better, remains vulnerable nationally and moreover, regionally.  Some regions and municipal areas have rebounded nicely and days on market have returned to historic lows (averages) and prices, increased to pre-recession levels.  Conversely, other regions remain stuck or have only marginally rebounded (the Detroit area, portions of Chicago are current examples).  For true CCRC prosperity to return, the residential real estate market must continue to strengthen.
  • The overall economy is still mired close to neutral.  Job gains are somewhat phantom and Labor Department unemployment numbers a misleading gauge.  The job gains made are not career oriented jobs with moderate to high wages and solid benefit packages.  The gains are part-time, lower wage, service sector and seasonal/temporary work.  The overall participation rate remains at 40 year lows (fewer numbers) and the long-term unemployment number, grudgingly high.  Inflation remains low and accommodative monetary policy has suppressed fixed income yields at record lows.  Essentially, this means price inflation remains checked, even for seniors housing.  With seniors feeling the pinch of income suppression (low social security increases, low fixed income returns, etc.), the income component of the rent equation remains compressed.
  • Available product in many markets is still fairly high.  While new projects are coming on, the rate is still slow and recent upticks in financing costs have changed the capital components on project cost.  Recall that in April of 2013, unrated and rated tax exempt debt  was at record lows and volume in terms of issuance on the uptick.  Essentially, demand was equal to and often greater, than supply.  Nine months later, the cost in terms of interest is 25 to 50% higher across all rated  and unrated categories  with new project/new campus debt cost today hovering around 8.5%.  Though capital markets remain relatively fluid for projects, the costs today have moved high enough to re-shape new product entries in terms of timing and scope.  Similarly, the fluidity that does exist is subject to short-term volatility as Fed policy (the degree of tapering), global shifts in monetary fortunes via emerging market currency valuation changes (a far lengthier discussion is warranted for this but not now), and the fixed income bias to “short” duration (fearful of upward rate volatility) shifts liquidity and funding dynamics.

Given the above, my outlook is good but not great.  I see continued occupancy improvements but incrementally.  I also see continued regional struggles as some locations are just not in recovery mode.  I see enough volatility economically to keep things moving cautiously forward.  Similarly, the same volatility can rear a period of distraction and even retrenchment, though I think such a period is brief.  Projects will emerge cautiously and then again, given funding dynamics, will evaporate and re-scale.  I think the wholesale raft of tax exempt debt refinancings will cool substantially as the cost of a refunding without enough interest savings has narrowed or tipped, especially for less than A rated credit. I think price compression will continue as rates will remain suppressed by fixed income fortunes and low inflation.  Revenue improvements will continue to come from rising occupancy and improved operational efficiencies though the latter is probably, mostly wrung out.

Non-profits will continue to out perform for-profits in most markets if for no other reason than their time in-market.  For consumers, these sponsors and projects have been around long enough to garner trust and build reputational stability.  This isn’t to say that for profits can’t succeed and many will but as a generalized industry trend, the non profits are ahead of the curve.  This gap however, will narrow if and when, the industry fully rebounds.  A challenge for non-profits is that while they lead in reputational time in-market, they do so often with older physical plants.

Where vulnerability for organizations remains is at the capital structure level.  I still see a tough year with a continued high volume of technical covenant defaults (usually liquidity covenants).  Rate compression and the inability to pass along too much rate inflation (if any at all) coupled with occupancy challenges was the driver in 2013 and will continue to 2014.  We saw some salvation with low rate refinancings but that window has closed for the majority.  The key solution for most is recovering occupancy and for some, this will remain difficult given regional economic challenges.  What I do know however, is creativity in solutions and positioning is key and will continue to be so for at least 2014.

A key element for all providers that seems missed to me in numerous discussions is the true demographic picture and thus demand equation within the market.  For lack of a better term (or terms), I call this the Baby Boom Fallacy.  Too many developers and providers have reached the conclusion that the market is rich with and growing exponentially because of Baby Boomers.  In reality, nothing is further from the truth today, and for the next number of years.  The true baby boom period is 1947 to 1963.  This means that the oldest Boomers are just above 65 (67 to 68).  Using the real age math for seniors housing and CCRCs in terms of average age of initial occupancy (non-hybrid projects like Del Webb communities aise) at 80, the impact of the Boomers is still a decade away.  Their impact today is as adult children and influencers of the current resident prospects; not prospects themselves.

The current resident demographic demand is the baby bust generation or war babies.  The World War II era babies are part of time where birth rates declined due to depression recovery and the war.  The target range lies within the group born between 1930 and 1943 – pre Baby Boom.  This period in time is more bust than boom in terms of numbers.  The shift in numbers evident within this group (today) over prior periods is evolutionary due to survival, not due to birth rate.  There are more of these 75 plus folks than ever before solely due to increased life expectancy; nothing more.  Targeting this group, their cultural norms and their experiences (social, economic, etc.) is where marketing and planning should be – not focused on Boomers.  The Boomers, contrary to rhetoric, aren’t here yet as the consumer.

January 28, 2014 Posted by | Senior Housing | , , , , , , , | Leave a comment

Decline in Hospice Demand?

In the last month and across a series of analyst calls (investment firms) that I field on a regular basis, a question repeats: Why is the demand for hospice declining? Of course the economist in me wants to opine in great detail about “demand” and what factors increase or decrease demand or, shift demand among substitution products, etc.  For brevity, the demand lecture isn’t warranted and in actuality, the current hospice dynamics are less about an increase or decrease in demand, more about realizing where core “hospice” demand lies.

Point of fact: The demand for hospice services at the core hasn’t changed at all and in some markets, demand as expressed by referral volume is up.  The trend that is evident however is that the demand as expressed in overall lengths of service has changed.  This is the impact that most providers are seeing/feeling.  While for some, year over year volumes are flat to down for others, volumes in terms of referrals and encounters are rising but core census is flat.  The flat census expressed by the number of covered individuals on service at any one point, has flattened even with referral volumes increasing simply because stays are shorter.

What is happening in the industry is a bit like realignment of incentives and forces that as they congeal, are morphing demand as experienced by providers. Integrating these pieces paints a picture of now and near future demand  in the industry.

  • The Vitas Impact: Anytime the largest player in the industry is targeted by fraud and federal investigative activity, the spill-over to all providers of similar size (and the rest of the industry) shifts the market.  This impact can’t be directly quantified but it is of a large magnitude.  The behavioral aspects of the DOJ suit are a reminder to all providers to tread lightly in certain operational areas – namely marketing, certification and re-certification.  One need look no further than the home health industry and the Amedisys targeting to see how the entirety of an industry is ultimately impacted once the microscope is fixed on the largest provider.
  • Large vs. Small Providers: The substantial industry growth between 200o and 2011 (60%) occurred almost entirely in the proprietary (for-profit) sector and among large, multi-state, national scope providers. Across the same period, the non-profit and government providers shrunk in numbers.  The overt scrutiny from Medpac, CMS and the OIG/DOJ is on this segment of the industry.  Large False Claims actions and settlements have occurred in the “big” or “large” side of the industry, creating certain behavioral changes that shift elements of the industry demand profile.  Again, the largest impact all other providers in the space as fundamentally, these large providers account for fully half of the industry patient population at any given point.
  • CMS Changes and Diagnostic Scrutiny: Looking at demand and taking into account the drivers since 2000, one can easily be fooled that the core demand was larger than it is.  The laxity in certification definitions within the Hospice benefit created a wide playing field as providers entered the market.  Is this or was this an unveiling of pent-up demand?  Hardly.  It was an exploration of how demand could be quantified or in many cases created or justified to meet the supply of providers in the market.  Across this same ten-year period, the fastest growing diagnoses in terms of percentage increase and volume were Non-Alzheimer’s dementia, general debility and failure to thrive.  Not surprisingly, these same diagnostic (for lack of a better term) categories also profile the longest stays.  By 2014, CMS will eliminate these categories as suitable for certification and require additional diagnostic coding to substantiate initial and ongoing certification.  A quick review of the utilization data by diagnosis illustrates how such changes are playing out on the demand side (data courtesy of CMS – click on the link to open the media files and tab select the charts from the bottom of the spreadsheet).

Copy of Top_20_Charts_1998-2008

Reviewing the above and the attached data charts paints a clearer picture of the shifting demand components.  If, as CMS and Medpac suggest, that as much as 25% of the certifications in the dementia (non-Alzheimers), general debility and failure to thrive categories don’t have any other diagnostic comorbidities suggestive of imminent death (6 months or less), than a quarter of the “demand” is logically lost.  Because demand in all instances is impacted by behavior, market and individuals (single or collective), changes in behavior as a result of changes in incentives leads to adjustments in demand.  In the case of hospice, this is clearly evident today and will magnify going forward.  As I have stated before, the industry has too many providers chasing too few organically terminal patients.

The reality regarding the demand equation today for hospice is that the demand is still present and likely, growing.  What is changing however is the methodology for accessing the demand is different.  Demand for hospice providers is a function of two elements: patients with an appropriate diagnosis and length of stay.  If, as is the case, certain generalized diagnoses are no longer appropriate,  this doesn’t equate necessarily to a lack of demand.  It does equate to a shift in demand from current (today) to future as the overall condition of the patient deteriorates and demand quantifiable through coding, becomes evident.  As the market re-balances and the demand curve stabilizes along a new level of equilibrium between all providers (of which there will be fewer) and the new number of appropriately terminal patients (by definition), providers will see stability.  It is certain that average lengths of stay will decline as categorically, the drivers will no longer exist.  It is also certain that hospices that thrive will adjust behaviorally.  For example, nursing home enrolments will no longer be the “gold mine” for many providers.  Payment reform will adjust this element in the next year or two.  Additionally, greater regulatory scrutiny regarding place-of-care is a certainty as CMS is paying greater attention to the diagnostic qualifiers and matching SNF MDS submissions to hospice data (heads up).  The end: Volumes are flat and in some cases marginally increasing but the demand is for intense, shorter stays and more volatility in referrals.  This is the new norm and providers are feeling the shift toward this revised equilibrium point.

December 9, 2013 Posted by | Hospice | , , , , , , | 1 Comment

The ACA/Obamacare: Predictability and Practicality

With all the news and among the conjecture, punditry and analysis that fits any twenty-four hour news cycle, I wondered with a few colleagues the other day, how predictable the events current with Obamacare were.  Americans being who we are, our collective political memories and policy memories are short.  I too, often find even the recent past a bit muddled in memory though in my case, I attribute the “muddling” to age and a ton of issues always at-play. Nonetheless, my files are always organized and my memory good enough to recall a series of prior articles and posts that I wrote as Obamacare emerged.  For current and past readers, I’ve referenced each below.

When I go back through this list and my notes, etc., my first reaction is kind of an “I told you so”, smug feeling.  The same is quickly buffered by a feeling of how so many folks couldn’t see this coming or refused to view the forest for the trees.  The practical reality is that health care in this country is complicated.  It can’t be re-configured wholesale.  Additionally, experiments that rely heavily on failed math and distributive justice theories (or redistributive theories) are predestined for failure in a society where, like it or not, capitalism continues to reside.

I have colleagues that are small business men/women and self-employed (many consultants are).  They are successful, for the most part, and premiere capitalists.  They are the folks who rely purely on their own skills, intellect, etc. to forge a living for themselves and for the folks they employ. Virtually to a sole, each has had their small business insurance or personal insurance eviscerated by Obamacare.  Unfortunately, none qualify for Medicaid or public subsidy.  Their sole flaw?  They work for themselves or own a small business (or both in most cases).

Certain elitists will claim that their success has come as a result of some oppressive force that hurts a sector of folk less well-off.  The notion that it is about time these folks “paid their fair share”.  Strange logic indeed.  Truth told, these folks have always paid more into the system via taxation and their employment of others.  Likewise, they didn’t get to this stage, nor did I, without committing a single flawed act – worked longer, harder, and sacrificing more disproportionately than many.  Even in the U.S., one isn’t successful ultimately, without putting in a disproportionate share of effort and taking risks that many will simply, not.

The course of failure for Obamacare lies predictably, in its lack of practicality.  It sought to level an artificial playing field created by government via a Robin Hood like approach.  In as much as I love Robin Hood, the perversity in Obamacare is that no legislation can redefine the “haves from the have-nots” (recall, Robin Hood stole from an oppressive government, not from the people – a moral on taxation without representation). The problems of those who don’t “have” is fixable but not at the expense of those who already have and not through a Washington knows best recipe. The result is clear: Obamacare grew out of failed ideology that the “haves” were bad or disproportionately (more) rewarded than those who didn’t have.  Now we know.  Many of those supposed “haves” are nothing more than people who by definition, are middle class or the working class.  The jab isn’t just to my self-employed and small business colleagues but to mid-sized employer plans (non-union) when come 1/1/14, they get a gut kick and thus, so do the employees. Wait until next year when the stomping ramps-up exponentially.

This mess isn’t about failed websites or cancelled individual insurance plans.  It is about a systemic over-reach, destined to fail by design.  Yes, folks point out that Medicaid expansion is by comparison, running smooth.  Enrollment is one thing, access and payment for providers another.  How good of a system is it (Medicaid) when those who now have benefits, can’t find a doctor willing to care for them?  Or, as so much of the U.S. remains rural, can’t find access to a clinic, hospital, or other providers other than one that is hundreds of miles away?  Not my definition of practical or for that matter, smooth.

As I wrote back in 2009, the ACA/Obamacare wasn’t ever about health care reform.  Health care reform was and remains the practical target.  All fixes now going forward are political dynamite and as such, this is the tragedy of Obamacare.  Pragmatically, the flaws in the systems, Medicare and Medicaid, etc., remain and until addressed, finding another way to re-dress this pig with new earrings or a different ensemble will only change the pig’s outward appearance.  Economically, socially and away from the political milieu, answers of a practical nature remain.  We as a nation, need to demand these solutions be at a minimum, discussed and vetted.

November 26, 2013 Posted by | Policy and Politics - Federal | , , , , , , | Leave a comment

Obamacare/ACA: Implications for Consumers

Having jumped around just a bit in the last few weeks “topically”, this post may seem a bit disjointed.  It is meant as a continuation of a series I’ve compiled on the various implications providers, consumers, etc. can/will experience under the Affordable Care Act (a/k/a Obamacare).  Given the news cycle of late and the recent roll-out of the insurance exchanges under the ACA, many readers may think this post somewhat non-relevant.  Begging to differ, the implications for consumers under the ACA are expansive and the surface today is all that is visible.

Setting aside what we know of the exchange access problems and the individual enrollment glitches, the crux of the ACA implications for consumers is cost and ultimately access.  The ACA fundamentally resurfaces the consumer insurance landscape and changes the rules in terms of how individuals access insurance, how prices for insurance coverage are determined, and what coverage levels individuals can experience.  Promoted as simple, one-size premise approach to accessing coverage, the ACA for consumers doesn’t come anywhere close to its promised result.  In fact, consumers can expect a dizzying array of complex choices, cost levels and limited provider and carrier choices (depending on location) than ever before.

The biggest initial jolt for most consumers under the ACA is what will occur within employer sponsored health plans.  Employer plans represent the largest source of insurance for consumers, though the participation rate continues to decrease.  At present, 59% of individuals receive their health insurance coverage via employer sponsored plans. Given the provisions within the ACA that impact employer plans directly, the projected number of employers that will opt to drop health insurance as a benefit is actually minimal (less than 5%).  Where the ACA impact becomes onerous is cost pushed back to the individual.  Employer plans are subject to an ACA tax in 2014.  Additionally, with or without the employer mandate, fully insured plans via group insurance providers are expected to experience premium increases ranging from 10%  to 65%.  Why the big difference?  Regional differences account for some of the increase and the majority, plan design changes mandated by the ACA.  For example, plans formerly offered as high-deductible plans with Medical Savings Accounts can no longer qualify as compliant under the ACA.  The mandated plan changes such as full wellness coverage, affordability requirements, and eligibility expansion (must cover individuals working 30 hours or more) are the fundamental drivers to the added premium cost.

For most consumers covered today via an employer sponsored plan, their first reaction to premium levels in 2014 is akin to sticker shock.  Two things are certain to occur.  First, premiums paid by consumers via their employer plan will rise and in virtually all cases, by minimally 10%.  Second, their plans will change, some for the positive and some for the negative.  The positive will occur in a trade-off fashion: Richer benefits but at a higher premium.  The negative will occur as employers reduce plan benefits to the ACA minimum as a means of offsetting premium increases and where possible, increase employee cost share.  Across my client base, the vast majority of which fall in the large employer category under the ACA and presently offer health insurance to their employees, the projected premium increase in 2014 is 15% on average.  Eighty plus percent of this group plans on passing along, in the form of cost to the insured, 80 to 90% of the increase.

Certain for consumers, regardless of where they access insurance or how, save those who fit an expanded Medicaid eligibility definition and/or qualify for near full-subsidy in an exchange purchase, is that their health insurance will cost more and thus, their net expendable income will decrease.  It is this latter element that represents the biggest impact for consumers and the biggest impact for the economy current.  Wage inflation is negligible across virtually all industries.  Only certain regions and certain industries are clamoring for labor (oil and gas for example in North Dakota) and thus, scarcity produces rising wages to a modest extent.  Presuming a 10% increase in premium cost for an employee covered under an employer plan and an inflationary wage adjustment in 2014 of 2%, the net (simple) decrease to income is 8%.  Taking this just a step closer to reality, assume a 14% increase in premium and no wage adjustment or an adjustment of say, 1.5%.  The net (simple) decrease to income is 12.5% to 14%.  What occurs for a consumer when a change in incomes is so profound is behavioral change.  Consider the following as plausible;

  • Forestalled large-scale purchases such as homes, major appliances and automobiles.
  • Reduced savings and increased consumer debt.
  • A continued lag on employment (job) recovery.
  • A continued lag on GDP recovery and growth as consumer consumption accounts for approximately 65% of GDP.

For consumers not participating in employer sponsored plans, a similar sticker-shock will occur for all but those that achieve coverage via Medicaid expansion and/or full subsidy through an exchange.  What we are already seeing for this group is an evaporation of their current private options and/or premium increases routinely above 25%.  For those whose access to coverage is through an exchange, enrollment today is problematic.  More problematic is the cost, especially sans complete subsidy.  While premiums on their face seem somewhat reasonable, out-of-pocket costs plus premiums for the “bronze” or low-level options equate to 60% of total.  For example, a bronze premium for a 40-year-old in Illinois averages $180 per month or $2,160 per year.  A bronze plan leaves an out-of-pocket exposure of 40% of health costs save wellness benefits (an annual physical, certain wellness tests).  In North Dakota, the cost jumps to $215 per month.  This is for an individual only.

Breaking this down to include subsidies, here’s what a nationalized approach looks like using the Silver plan option (middle of the road, 70% of costs covered, average deductible of $2,500 and out-of-pocket maximums of $6,000) under the ACA.

  • At 200% of the Federal Poverty Limit, the cost of a Silver plan for an individual ($22,980 annual income) is $1,452 per year and for a family plan, the premium is $2,964 – rates include all subsidies.  This equals a total possible cost annually for an individual of $7,452 dollars (premium of $1,452 plus out-of-pocket maximum of $6,000).
  • At 300% of the Federal Poverty Limit, the premium for a Silver plan ranges from $2,772 to $3,276 (range is due to regional pricing differences among carrier options plus income levels and subsidies between 200% and 300%) and for a family, the premium is $6.078 – all subsidies included.  The 300% income threshold for an individual is $34,470. At this premium level, the cost exposure is approximately $9,000 per year (premium plus max out-of-pocket).
  • At 400% of the Federal Poverty Limit, the premium for a Silver plan ranges from $2,772 to $4,368 (regional differences and income plus subsidy levels between 300 and 400% of the FPL).  The premium for a family is $8,952 – rates include all subsidies.  The individual income limit is $45,960.

Per the Kaiser Family Foundation and separately, from a study completed by Deloitte, each of the above options is more expensive for an individual (total cost plus deductible including subsidized premiums) than a typical employer sponsored plan offering.  For example, one of my client companies with 300 employees, 225 participants presently offers a single premium, 80/20 plan for $85 per month. They are a very typical company (health care provider) in their industry (just to dispel any reader’s notion that the company is unique in demographics).  In comparison, a better plan costs a single employee $1,020 annually versus a subsidized plan for the lowest income group (200% of the FPL) at $1,452 per year.

The Consumer Conclusion?  My summary is more, unanticipated cost and fewer options than most expected.  The real implication for the consumer is the economic impact.  The U.S. labor trend is weak and wage inflation minimal.  In such an environment, insurance increases that can’t be offset by wage inflation, reduce consumer income.  Reductions in a consumer’s ability to consume via an increase in health insurance cost will create one of two reactions (three in some cases).  First, if the consumer stays insured or participating in an employer plan, a reduction in net income available will reduce consumption in all areas.  Second, the consumer opts to drop coverage or inclusion, instead paying the minimal penalty.  The third option for those presently privately insured, is that they either drop coverage or alter coverage to lower levels as a means of offsetting higher premium costs.  What is most disconcerting to me is that the exposure in terms of coverage gaps via out-of-pocket costs under all ACA scenarios is growing and this impact is undoubtedly, negative for economic growth and consumer economic health.

October 18, 2013 Posted by | Policy and Politics - Federal | , , , , , , , | Leave a comment

Debt Ceilings, Government Shutdowns and Health Policy

Most of my readers know by now that I am an economist by training and formal education.  My clients know this as well.  The net result is that I’ve been queried, almost to death as of late, as to what this current round of Washington folly is really all about.  Is it about the ACA?  Is it about the budget?  Spending? Is there really a debt ceiling, etc.?  Suffice to say, this post is intended as a concise answer (and no, economists are not known to be concise or clear on anything so I’m going out on a limb here).

While most Americans express concern over the amount of debt at the Federal level, the truth is that the amount is really not the issue.  The ratio of debt to GDP is the bigger issue plus the cost of servicing the debt as percentage of the revenue received by the government.  Today, the debt load is approximately $16 trillion (beginning of 2013).  Of this total, around $10 trillion arrived since 2002.  The $10 trillion is the result of the wars in Iraq and Afghanistan, entitlement growth, stimulus spending, tax cuts, and the recession.  Income flows into the government coffers reduce substantially during recessionary periods and periods of stagnant GDP growth.  As revenue evaporates faster than spending, and during recessions spending on behalf of the government normally increases (income support programs, entitlement growth, etc.), the deficit gap widens.  Deficits require funding (the bills must be paid) and thus, the source for the government is borrowing.  As of late (last few years), the government has borrowed more than $1 trillion annually to cover its cash outflow shortfalls.

While the question of long-term sustainability begs and the debate wages on about fiscal balance, the truth is that while this process (escalating borrowing) is on its face unsustainable, it is likely more temporary in nature than permanent.  At the very least, the policy drivers and economic factors will shift, altering the present course of borrowing.  For example, across the last two fiscal years, borrowing has reduced as budget deficits recede naturally.  Spending priorities in Washington have shifted and taxes increased.  The 2013 deficit will not exceed the trillion-dollar mark, coming in at $700 billion or so. As wars conclude and the economy recovers, even if slightly more than present, the deficit shrinks and the need to borrow is lessened.

What is central to the issues referenced in the title is the budgetary math and how the dollars are received and spent.  Within a budget of $3.8 trillion, two-thirds is allocated toward “fixed” or “mandated” spending.  That leaves $1.2 trillion in the variable or discretionary bucket.  Interesting to note, the budget proportion as a percent of GDP hasn’t changed all that much – up only 2% compared to the most recent forty-year average.  What has changed is the allocation percentages with more dollars spent today on entitlement programs.  For example, Medicare spending is nearly three times greater as a percent of GDP compared the forty-year average. Health spending is more than double and Social Security is one and a third times more.  Because the percentage of GDP spent is roughly the same, the offsets are found in defense spending, science and technology, general government and interest (yes, even with a rising debt level, lower rates have kept the interest cost lower than the historical average).

The government via taxes, will take in approximately $3 trillion.  The gap thus is $800 billion, give or take a billion or so.  This gap is the driver of borrowing limits and debt ceilings.  In effect, the debt ceiling is a self-imposed number and one that is totally arbitrary.  Congress established the debt ceiling back in 1917 with the passage of the Liberty Bond Act.  In the 70s, via passage of the Budget Control and Impoundment Act, the debt ceiling became less relevant.  Effectively, the debt ceiling issue was tied to the budget and a parliamentarian procedure known as the Gephardt Rule (after Congressman Dick Gephardt) allow the ceiling to automatically adjust incident to budget passage.  The problem to a certain extent of late is that the government hasn’t operated with a budget for at least three years and spending bills (appropriations) have stalled in the Senate.  Essentially, a debt ceiling discussion thus becomes separate from other fiscal operation activities.

So where are we now and what does this mean?  In cold hard reality, the issue of the debt ceiling is less about default on credit but about the ripple effect economically that will occur.  The U.S. really can’t default on its debt and does operate with enough cash flow to keep interest payments current.  The President does have unique authority via executive privilege and orders to adjust the U.S. borrowing limit.  The Treasury also has other temporary powers.  Using these powers is a last resort as doing so will certainly cause economic havoc world-wide via the real signal that the U.S. government is in chaos.  Remember, the stability of much of our economy is based on the stability of our systems of banking, credit and government – the full faith and credit stuff – nothing more.  If this system isn’t credible and stable, the erosion is tsunamic.

History and an updated view of the economic reality we live in, paints the true picture.  Today, our debt driver and our economic structural flaws within the government budget (such as it is) are entitlements as presently configured.  There simply is not enough room on the discretionary side or the variable side to right size the budget, offsetting the entitlement growth.  The demographic shift that is occurring in the U.S. and all first world countries (aging) is the catalyst. By 2033, 20% of our population will be 65 and older, eligible as presently configured, for Social Security and Medicare.  Moreover, the expenditure to income ratio per each under Medicare produces a significant outflow deficit.  For example, a 65-year-old couple in 2020, assuming average wages earned during their work years will contribute $110 thousand (with employer share) into Medicare.  Across their remaining life, Medicare will spend in present dollars, almost 4 times more ($430,000).  By 2022, Medicare spending is projected (under current law) to consumer 4.5% of GDP (3% today) and rise of 6.7% by 2035.  This net change equates to a spend rate of more than $1 trillion in current dollars on Medicare alone.

To the point: Health policy is the shutdown, budget and debt ceiling debate.  The good news is that it is fixable but the bad news is that it must be fixed by government.  There is no other course of action that can and will adjust the debt trajectory.  Now, hope is also muddled within the mix.  The healthcare industry has gotten smarter and evidence suggests that recent reductions in healthcare spending increases are as much due to more efficiencies in healthcare delivery (generic drugs, better insurance bargaining, smarter consumption habits of patients) as due to a weak economy.  A public-private initiative could create a paradigm shift, favorably changing the entitlement spending outlook.  Congress and the President will need to get creative and utilize a different legislative approach to resolve the present dilemma.

Is the sky falling because of too much debt?  Not really.  Governments and especially ours, don’t really need to be too concerned about the debt load in the short-run.  The concern is about changing or adjusting the factors that drive debt.  As long as the increase in new debt is less proportionately, than the increase in GDP, debt load as percentage of economic activity reduces.  For example, between 1945 and 1980, the government only encountered 8 years with surplus revenue.  Fully all other years involved deficit spending. In 1945, at the end of World War II, debt as percent of GDP weighed in at 120%. By 1981, the level subsided to 30%.  The reason?  GDP growth accelerated during these years and the deficits were relatively small.  The economic truth is that government policy needs to focus-in on all things fundamentally favorable to GDP growth while constraining with simple austerity, the deficit levels.  The debt problem thus resolves itself.  There is no need to “pay it back” and fundamentally, no reason to do so.  The best approach is to minimize its impact on the economy by fixing the root cause.  In this case, adjusting entitlement spending by relatively modest means (currently structural changes to reduce about $500 billion) is all that is needed.

October 10, 2013 Posted by | Policy and Politics - Federal, Uncategorized | , , , , , , | Leave a comment

The ACA, Funding Resolutions and the Shut Down

For readers approximating my age, a commercial slogan ties to the title of this post: “Is it real or is it Memorex”.  In this current round of Washington political maneuvering and on display dysfunction lies the question;  is the ACA issue real or is it a tool for political posturing?  Is this a real “red line” issue and an issue of such magnitude that a simple continuing resolution for government funding now resides in limbo? Maybe yes and maybe not.

Setting aside the news cycle rhetoric and the political ideologies at-play, merit exists to slow down ACA implementation and re-calibrate.  The problem is that neither party can find a way to address the process and thus, the economic and policy issues operative, without wading hip-deep into political muck.  Truthfully, the ACA issue is worthy of scrutiny and thus, legislative remedy but the timing and the mechanism is not during a budget procedural process.

Dissecting the debate further, removing the fringe and getting at the core, there is logic to explore and facts to review. Non-funding the ACA is a bogus proposition and one that is all but impossible to do.  It is not a stand-alone, singular expenditure like funding another aircraft carrier or a NASA mission.  It is already woven throughout the health care industry.  The issues that remain are whether certain elements need re-thought and arguably, many do.  This isn’t a political point but one shared by most economists (non-partisan), most health policy experts, and even the party leaders on both sides of the aisle.   No matter what the president’s rhetoric is at the moment, his administration delayed the employer mandate and for sound reasons.  The individual mandate deserves the same fate and for the same reasons.

The simplest of all reasons is neither at present, is in workable fashion and likely won’t be anytime soon.  The implementation and enforcement provisions for the requirements exist in only pieces.  Further, the complexity of the mandates (individual and employer) create so many unintended consequences that each deserves a time-out and re-think to address the possible consequences.  For example, the employer mandate created the real consequences of lost work hours and lost jobs – untenable outcomes in a job less recovery.  With this looming outcome and a loss of or reduction in, employer-sponsored health plans the participation goals of the ACA can’t be met and worse, the numbers break ugly quick on additional government resources required to pick-up the slack via Medicaid and subsidies through the exchanges.

A similar course is visible with the individual mandate.  The process is confusing and individuals simply don’t get it.  While the rates look at first glance palatable the reality is, rates plus out-of-pocket costs on the affordable plans don’t equal affordable coverage.  Similarly, rate subsidies are tied to tax credits not direct to income support for most (cash flow timing is markedly different with tax credits).  When viewed against employer coverage options existing, the choice for most is clear – the exchanges lose.  Additionally, Medicaid is full and overflowing.  In a number of states that have recently moved to a Managed Medicaid platform, the transition has created problems yet unresolved in terms of payment, claims adjudication, enrollment and provider access.  Adding to this mess is a certain nightmare, particularly in rural areas or inner-city areas where participating Medicaid providers (especially physicians) are limited and declining.  Worse, the numbers of participants that qualify for the exchanges and ultimately participating appears by estimate, to be far below projections.  If, as I believe and a number of health care economists similarly, the initial participants are folks with immediate health needs and chronic diseases, the costs via premium in year 2 will explode (too many sick people, not enough healthy people in ratio, paying premiums).  Recall, anyone qualifying to purchase insurance on an exchange can do so at any time and not be denied coverage.  There is no penalty to lapse in and lapse out effectively and initially, the “tax” penalty is meager – assuming some methodology of enforcement is available (one isn’t today).  Reality suggests that most who are healthy and presently under or uninsured, will not jump to lower their income via purchasing insurance until doing so is proximal to an immediate need.

If the above reasons aren’t compelling enough to re-think and re-craft the key ACA components, the state of the economy is.  Politics aside, the ACA is anathema to a rebuilding economy that is trying to shift to a different plane.  Large, overarching legislation that is ripe with new entitlements, new taxes, new mandates, and crosses traditional state boundaries with federal intercession creates temporary economic impacts – socially and politically in the immediate, financial beyond.  It is the social and political shifts that are creating a pull opposite to an economy seeking equilibrium.  The fundamental drag or tug is opposite or oppositional to labor, wages, income and consumer spending.  All of these elements succeeding or byproduct of industrial and business growth, capital investment, and production/service expansion.  Point in fact, the ACA addresses more issues in a past or former economy than it does in the shifting current economy.  Hence the flaws in the employer mandate so troubling to many employers.

What we know today of the economy is that its labor norms (employment) are fundamentally different and thus, income and consumption patterns have shifted.  For example, workforce participation rates are significantly down with retirement up and at least for a decade or more, likely to remain at this trend level.  The number of people working at fragmented jobs, temporary jobs and jobs below their former pay and grade has significantly increased and the increase again, is permanent not temporary.  Many of the jobs lost over the course of the last five to seven years are gone permanently.  Government employment is waning and will continue to do so.  This labor shift combined with a wage shift can’t be resolved by government policy.  The shift likewise, in employment and income status and thus, health insurance coverage isn’t adjusted by the ACA – only magnified.  Again, regardless of subsidies and Medicaid expansion, the number of permanently covered individuals won’t shift dramatically and in many regions and states, will shift negatively – more uninsured and underinsured.  Why?  The folks fundamentally “shifted” in the current economy are working, can’t qualify for Medicaid, and regardless of access to an exchange with some or limited subsidy, can’t or won’t afford the “total” cost of coverage (premium plus out-of-pockets costs).  The jobs they lost included benefits and the replacement jobs, without or at a higher cost.  This is the new economic norm and the ACA, unless adjusted, is an adverse factor in the labor market recovery.  Without a labor recovery, the overall recovery will languish.  This is an undeniable fact and one that no political fight or government policy can alter.

October 1, 2013 Posted by | Policy and Politics - Federal | , , , , , , | Leave a comment