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Published On May 3, 2009

POLICY

Catching a Chill

Ordinarily resistant to economic ills, health care this time is suffering too. Poor and uninsured patients are most at risk.

Between January and November of 2008, the endowment and investments of Oregon Health & Science University in Portland lost 26% of their value. Instead of gaining $33 million as projected, OHSU posted investment losses of about $39 million—a $72 million shift. Many of those vanished millions were reserved for capital projects, but some were slated to help fund operations, which would have been a boon. Hospital revenues also came in lower than expected: 1% growth versus a projected 5%, for a total $20 million drain on the health system’s budget.

To cover the shortfalls, about 120 university jobs were eliminated and a hiring freeze was instituted; salaries were locked throughout the university and its teaching hospitals; and the school’s top executives took a 20% pay cut and gave up bonuses. More staff reductions are planned, including 140 positions at OHSU Healthcare (the school’s teaching hospitals and medical practices), while the school of medicine is targeted for $8 million in cuts for the current fiscal year.

This is a time of hard choices, even for hospitals and academic medical centers fortunate enough to have endowments, with executives forced to ponder what to cut and how deeply. Operating margins are near the break-even point at many hospitals. Returns on stock and bond portfolios that once could be counted on to help subsidize charity care and pay for expansion and new equipment are no longer available, according to David N. Gans, vice president for practice management resources at the Medical Group Management Association. “Investment income is gone,” says David Koepke, a senior scientist at the Center for Healthcare Improvement at Thomson Reuters in Evanston, Ill.

The problem is especially severe for academic medical centers such as OHSU: These institutions may make up just 6% of all acute care hospitals (which provide inpatient care for serious conditions and injuries), but they provide 45% of the nation’s charity care as well as a quarter of inpatient care paid for by Medicaid.

Ironically, perhaps, health care as an investment has always been considered recession-resistant. A sour economy doesn’t keep people from getting sick, Wall Street analysts note, and steady demand typically helps insulate physicians and hospitals from the worst of a downturn.

In part that’s because relatively few patients traditionally pay for care. They get insurance at work or the tab is picked up by Medicaid or Medicare, which covers everyone age 65 and older. So even when the economy tumbles, most people can continue to afford physician and hospital care. And even now, during one of the most severe recessions since the Great Depression, health care as an industry is getting by. In fact, health care jobs grew by 27,000 in February, while the overall unemployment rate rose to 8.1%, representing 12.5 million people.

Still, there’s growing concern that this time health care, too, may share the pain of today’s badly wounded economy. Medicaid rolls are swelling just when state budgets are strained to the breaking point. The government’s $787 billion economic stimulus package may forestall harsh cutbacks for now by channeling an additional $87 billion into state Medicaid programs through the end of 2010. But because states will not be allowed to change their eligibility requirements while receiving the extra federal funding, surging unemployment could still force many states to consider reducing payments to doctors and hospitals. Normally, in the absence of additional government support, every percentage point rise in the jobless rate adds about 1.1 million people to the ranks of the uninsured and forces 1 million more to enroll in Medicaid, according to Kaiser Family Foundation estimates.

Even insured patients are at risk, with 25 million adults classified as underinsured, meaning their health coverage is inadequate to protect them from major medical expenses. Workers who have held on to jobs and company-sponsored insurance may develop a siege mentality, worried that they might soon be unemployed, a fear that often translates into fewer doctor visits to avoid spending on rising co-pays and deductibles.

David Blumenthal, who was recently named national coordinator for health information technology by the U.S. Department of Health and Human Services, worries that if this recession pushes the U.S. unemployment rate into double digits, as many economists predict, there could be dramatic health consequences. There’s much debate about exactly what those consequences will be, but there’s no doubt the heaviest burden will fall on those on the health system’s periphery—in emergency rooms and free clinics. In a nation where more than 46 million people—15% of the population—have no health insurance, that’s the safety net, and these days it’s seriously frayed.

Rappahannock General Hospital, a 76-bed nonprofit facility that serves about 40,000 residents of Virginia’s Northern Neck, a collection of coastal communities near the Chesapeake Bay, gets about 75% of its revenue from Medicaid and Medicare reimbursements. Stimulus funds targeted for Medicaid may help the hospital. Still, B.H.B. Hubbard III, chairman of the hospital’s board of directors, worries that the new money will provide only a temporary reprieve and may prove inadequate in the face of rising enrollment and higher costs. Meanwhile, the sinking economy could create a second problem, sapping charitable contributions that Rappahannock General relies on to make ends meet. “I’m not feeling comfortable at all about the future,” says Hubbard. “But we will survive; we always have.”

Each state sets eligibility standards for Medicaid—Virginia, for example, agrees to cover a family of four whose annual household income falls below the current federal poverty level of $22,050—and then shares the cost of the program with the federal government. (The United States provides more than half the funding, based on a formula that compares state per capita income with the national average.) Medicaid covered nearly 60 million people in 2008, at an estimated cost of $350 billion. But a fundamental problem with this part of the safety net is that it’s countercyclical: When the economy sinks, the need for the program surges, just when falling state tax revenues make funding Medicaid a budget-shattering nightmare. “It would be hard to design a poorer system, at least in terms of dealing with economic fluctuations,” says Mark V. Pauly, a medical economist and professor of health care management at the Wharton School of the University of Pennsylvania.

In January, before Congress passed the stimulus legislation, 45 states and the District of Columbia were projecting budget shortfalls totaling more than $350 billion over the next two and a half years. Unlike the federal government, states can’t print money, and most are required to balance their budgets each year. Medicaid is always a prime target for cuts, and the effect of even temporary restrictions can do long-term damage, Blumenthal says.

Patients facing higher co-payments or completely shut out of the program tend to stint on medicines and postpone care until problems become acute, ending up in hospitals and nursing homes. Despite short-term savings, overall expenditures, borne mostly by federal and state governments, continue to climb. If the recession drags on, lasting public health damage could result. Within a few years, Blumenthal says, there could be setbacks in such benchmarks as the rate of improvement in heart disease and the rate of decline in infant mortality.

Unemployed and uninsured, Sherry Hamman waited until she broke two ribs coughing before she sought care at an emergency room for what turned out to be pneumonia. The ER at Kettering Medical Center, in suburban Dayton, sent Hamman home with prescriptions for antibiotics and painkillers and instructions to come back if she didn’t improve. She returned and was hospitalized for three days.

Kettering is a nonprofit hospital with a sliding scale that discounts charges for low-income patients, and it gave Hamman a 90% break on her bill. But coming up with even a tenth of the medical center’s usual charges was almost impossible on her budget. She also had to pay the full cost of prescriptions and renting a home oxygen tank. Her only income is an unemployment check that’s half the $27,000 salary she earned in her sales job at a printer manufacturer.

Emergency rooms in every kind of hospital are feeling the pinch of tighter budgets, just as the recession is exacerbating an overcrowding problem that has been building for years, endangering access for insured and uninsured alike. From 1996 through 2006, the number of annual ER visits increased by nearly a third, from roughly 90.3 million to 119.2 million, according to the U.S. Department of Health and Human Services. During that period of rapidly escalating utilization, the number of ERs decreased by almost 5%, from 4,019 to 3,833.

The ER at Denver Health, a 477-bed hospital in downtown Denver, is one of the few public hospital emergency rooms that has managed to “just barely run in the black” for the past dozen years, according to Vincent Markovchick, director of emergency medical services for the hospital. “But we’re right on the verge of not being able to continue that,” he says. Unlike many ERs nationwide, his is not in danger of closing, but already, Denver Health has instituted a systemwide hiring freeze for most nonclinical personnel, and most raises are on hold too. Yet the patients keep coming.

Debra Clayton, 49, lost her health insurance when her husband was laid off in October. Then she lost her job as a stocker at Wal-Mart after developing abdominal hernias. By December she couldn’t take the pain any longer and went to the Fan Free Clinic in Richmond, which handles about 6,600 patient visits annually. But her needs went far beyond the basic care the clinic offers. The clinic managed to find a surgeon and a hospital that would repair the hernias for free through a local referral program called Access Now. “My family would have lost me,” says Clayton, mother of three. “I put my pride on the side and asked for help.”

These days, lots of people are asking for help: When the Fan Free Clinic opens at 8:30 on Monday mornings, when appointments for the week are scheduled, there may be a line stretching 75 feet long. “There are some folks who never expected to need a free clinic, and all of a sudden they’re laid off and don’t have health insurance,” says John Baumann, executive director of the clinic, which has an annual budget of $1.6 million. “It’s a different world this year.” But the mushrooming demand goes beyond what the clinic can handle. “It’s getting to the point where we have to turn more and more people away,” says Patricia Germelman, the clinic’s development director. “It’s a real tightrope to walk, since we want to make sure we give optimum care.”

The 1,000 or so free clinics in the United States help reduce the strain on ERs by providing basic care in low-income communities. But typically these institutions rely on volunteer medical staff and donations from individuals, foundations, corporations, and local and state governments, and during this recession, all of those sources of funding have been stretched thin. What’s more, with deficits looming, many states are considering whether to reduce subsidies to the public health system, says Leighton Ku, a professor of health at George Washington University. Federal cash infusions from the economic stimulus package, which includes $2 billion for the nation’s 1,200 community health centers, will offer some relief in tough times. Like free clinics, community health centers serve low-income, uninsured people and save the national health care system an estimated $10 billion to $18 billion annually by offering preventive services and helping patients avoid costly ER care, according to the National Association of Community Health Centers.

Recessions happen, and many of the effects of this one, for all the stress it’s putting on the health care system, may be only temporary. Certainly, the ranks of the uninsured will rise, physician practices and hospitals will have to cut costs, and federal and state governments will need to ensure that patients most at risk continue to have access to care. So far that commitment seems to be there. One of the first pieces of legislation that President Obama signed was an expansion of the State Children’s Health Insurance Program (SCHIP), which will cover 4.1 million children whose families earn too much to qualify for Medicaid but not enough to afford private health insurance.

The February stimulus package, formally known as the American Recovery and Reinvestment Act, props up Medi-caid and contains a provision to help laid-off workers keep their insurance by subsidizing 65% of the cost of COBRA coverage (so called because it was authorized by the Consolidated Omnibus Budget Reconciliation Act), which allows unemployed workers to purchase health insurance at group rates through their former employers. The White House estimates that the measure will prevent loss of coverage for 7 million Americans, though Blumenthal isn’t so sure. “The fact is, people who’ve lost jobs can’t afford even the 35%. So it likely won’t have the effect you might expect.”

Still, Blumenthal considers the health care portion of the stimulus bill a “historic piece of legislation that could make a substantial difference.” It marks a serious beginning for health system reform, he says, including a provision he will oversee: a $19.5 billion investment in health information technology that will speed the adoption of electronic medical records, a proven way to increase efficiency and patient safety. The bill spends $1.1 billion on effectiveness research, which compares clinical treatment options, and $500 million for the National Health Service Corps, which recruits primary care doctors to practice in underserved areas by helping them reduce their medical education debt. And by doing some of the work of health system restructuring now, the stimulus package could make it easier to enact more comprehensive changes later, based on the perception that the cost seems affordable compared with the enormous government outlays for corporate bailouts.

But the current legislation’s temporary measures will go only so far, and much more may be needed if the recession deepens. Then the necessity of more fundamental shifts in health care financing and delivery could become pronounced. “Everybody wants a Mercedes-Benz when it comes to health care, and that’s in part because there is no Kia available,” says Pauly at the Wharton School. “There is no lower-cost, decent version of health insurance or health delivery. My hope is that this recession will stimulate thinking on the part of health care providers and insurers about how to offer an affordable product.”

Dossier

 

1. “Health Care Affordability and the Uninsured,” testimony before Congress on the instability of health coverage, April 15, 2008. Presentation by Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured, detailing the consequences of rising health care costs and unaffordable health insurance.

2. “Examining the Health Consequences of the 2008–09 Recession,” George Washington School of Public Health and Health Services, January 2009. Unemployment and loss of insurance go hand in hand, leading to worsening health for millions, says this report, which studies links between low income and poor health.

3. “The American Recovery and Reinvestment Act (ARRA): Medicaid and Health Care Provisions,” Kaiser Commission on Medicaid and the Uninsured, March 4, 2009. A succinct summary of health provisions and temporary Medicaid increases included in the federal stimulus package. Includes a state-by-state breakdown of where the additional Medicaid money will go as well as links to the latest Medicaid and Medicare budget actions.

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