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Recession? What recession?

Healthcare industry again shows its natural resistance to economic ills


By Jeff Tieman
Posted: December 10, 2001 - 12:01 am ET
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Last month, officials at the National Bureau of Economic Research confirmed what armchair economists, television pundits and hundreds of thousands of jobless people had already concluded: The economy is in a recession. Most major economic indicators show a slump-unemployment is up, and industrial production and the wholesale-retail trade are down.

The recession started in March, according to the bureau, and will likely give way to renewed growth sometime next spring.

In the meantime, as wary holiday shoppers hunt bargains to protect their pocketbooks, one thing consumers still buy without much hesitation is healthcare services. People may be willing to delay a new car purchase, the logic goes, but usually can't afford to postpone a medical procedure.

In an industry as large and complex as healthcare, however, a healthy demand for services is probably not enough to completely shield hospitals and vendors from an economic downturn. Unlike most industries, hospitals serve a customer base that often does not pay the full tab for services received. And as more people become unemployed, fewer of them have insurance to cover their medical bills, leaving healthcare providers to shoulder an increasing burden.

That problem isn't new. Still, even as the current recession sets in, hospitals and medical companies appear to be less vulnerable to-or maybe even positioned to benefit from-the viruses now infecting the overall economy.

"The health sector appears robust, continues to be robust, and does not appear to be affected by the same soft demand in the rest of the economy," says Gail Wilensky, a senior fellow with Project Hope, a Millwood, Va.-based humanitarian relief and healthcare problem-solving organization, and a HCFA administrator under the first President Bush. "I don't see anything in the short term that will change that."

The healthcare industry "marches to its own drummer," agrees Uwe Reinhardt, a healthcare economist and professor of economics and public affairs at Princeton University. "Few industries are as lucky as the healthcare sector to have their output declared a necessity, whether or not it is actually needed."

Working to hospitals' advantage

Industry analysts and officials still are tabulating financial data for the period marking the recession, making it difficult to determine what impact the downturn ultimately will have on hospitals and the companies that supply them. This much is known: Revenue and admissions are up. Healthcare stocks are performing ahead of the major indices. Construction projects are increasingly common. And growing unemployment may provide hospitals with the manpower they need in the midst of widely reported staffing shortages.

"As the economy softens, it makes it easier for hospitals to hire," Wilensky says. Nurses are still difficult to find, sources agree, but layoffs elsewhere in the economy make available to hospitals personnel who can fill many technical and clerical positions.

In October, the ranks of the unemployed jumped more than 730,000, according to the U.S. Department of Labor. During the same month, the healthcare industry increased the number of workers it employs by about 24,000, having added 250,000 total jobs from January to October. And that number might have been much higher had hospitals been able to fill a growing number of nurse, pharmacist and information technology vacancies, industry sources say.

"One of the problems over the past couple of years, especially with the dot-com craziness, is that it was hard to get technology people," says Michael Dowling, executive vice president and chief operating officer of 18-hospital North Shore-Long Island Jewish Health System in Great Neck, N.Y. "Now that's all changing, and it's a little easier these days," says Dowling, who is set to become North Shore's chief executive officer in January.

Many nonmedical companies are just trying to stay afloat, especially following the financial turmoil created by the events of Sept. 11. In addition to a brutalized travel and tourism industry, energy giant Enron last week filed for a record-setting bankruptcy, which left the energy industry reeling.

It is in this economic environment that hospitals continue to get busier. Inpatient admissions rose 2.5% in 2000 to 32.6 million, and outpatient and emergency-room visits increased, too, according to figures released last month by the American Hospital Association.

"As best we can tell, volume is very steady in the hospital field, and we're not detecting any real deterioration in the financial position of hospitals," says Jack Ashby, hospital research director at the Medicare Payment Advisory Commission, which advises Congress on Medicare issues.

Outside of the margins

Despite that assessment, the AHA's figures also show that hospital profit margins fell last year to 4.2%, reaching their lowest level since 1993 and marking the fourth consecutive annual drop.

Declining profit margins, however, do not necessarily mean hospitals have been stung by the economy's downturn, says Robert Reischauer, president of the Urban Institute in Washington and a former chief of the Congressional Budget Office. That's because hospitals, unlike companies in other sectors of the economy, often lose money-because of factors such as low reimbursement rates and higher volumes of unsubsidized patients-even as business is booming and revenue is rising.

The healthcare industry overall, experts agree, rarely experiences the combination of dramatic revenue drops, smaller profits and large-scale layoffs that describes how many nonmedical companies have been affected by the current recession.

"Being busy doesn't mean you can always make money, but I don't see that you will have major layoffs in the healthcare industry," Dowling says. "Healthcare is different than other industries."

Corporations with strong medical divisions serve as good case studies for this thesis.

For example, GE Medical Systems President and CEO Joseph Hogan told Modern Healthcare earlier this month that GE Medical's revenue will grow 14% this year to $8.3 billion from $7.3 billion in 2000.

Meanwhile, the unit's parent, General Electric Co., said this month it plans at least 150 layoffs by January as a result of declining orders for commercial jet engines since Sept. 11.

"Most of the companies that have healthcare divisions are withstanding the downturn in the economy," Dowling says.

Cranking up the volume

Although the recession does not seem to affect hospitals the way it has so many other organizations, some of the positive indicators now defining the healthcare industry may represent a double-edged sword.

"Volume is clearly up, and admissions are increasing," says Carmela Coyle, the AHA's senior vice president of policy.

"But that's only a good thing if you're getting paid more than your costs. As we know, the Medicare program is paying less than cost. Same with Medicaid," she says.

Coyle and others argue that as unemployment grows, hospitals may gain access to personnel they desperately need but also find themselves serving more patients whose job losses have left them without private insurance coverage.

"If Medicaid volume is up, that's not good news," Coyle says. A patient mix that involves a higher percentage of government-subsidized care "puts increasing stress on what is already a fragile healthcare infrastructure."

Just how fragile the healthcare system really is depends on whom you ask, and many experts point to factors highlighting a still-vibrant healthcare economy.

Publicly traded hospital and drug companies, for instance, have fared well in the past two years even as the stock market has punished firms in other sectors (See chart, p. 39).

The AHA's Coyle cautions that it is unwise to conclude that a thriving market for healthcare stocks means the industry as a whole is equally strong. The performance of publicly traded hospitals, which represent only 11% to 15% of all hospitals, can easily lead to "over-generalization," she says. Whether it's on Wall Street or Main Street, healthcare organizations-despite the economic malaise-seem to be in good condition even as companies in other industries have needed intensive care.

Catholic Healthcare West, a 48-hospital not-for-profit system based in San Francisco, has continued to make a financial comeback during the past year. In its fiscal year ended June 30, CHW lost $119 million on total operating revenue of $4.8 billion, a drastic improvement over fiscal 2000, when it lost $306.9 million on revenue of $4.5 billion. On the opposite coast, New Jersey hospitals performed better than break-even in 2000 for the first time in four years, according to information released last week by the state's hospital association.

Some providers are even engaged in aggressive construction projects to help them handle growing volume. They are building new hospitals for the first time in years, driven by inpatient admission growth and an aging population. Nashville-based HCA, which operates 189 hospitals, now budgets about $1.5 billion annually on expansion and renovation projects, more than it used to budget several years ago when it owned more than 300 hospitals (Nov. 26, p. 28).

Hospitals "are busier today than ever before," says North Shore-Long Island's Dowling. "We are close to full capacity at many of our hospitals."

As volume and demand continue their climb, even prices in the healthcare industry seem to resist trends seen elsewhere in the economy.

In October, the U.S. Department of Labor's producer price index-which measures the price movement of finished goods-dropped 1.6%, the biggest decline since the government started monitoring inflation in 1947. At the same time, acute-care hospital prices rose .3%, a modest increase but one that occurs as the lackluster economy is pushing most prices down.

Whether or not the combination of positive indicators in the healthcare industry means that the sector has truly been vaccinated against the economic downturn is something only time will tell.

Like many prognosticators contacted by Modern Healthcare, MedPAC's Ashby cautions that "it may very well prove premature to conclude that the industry is immune from the pressures of the recession."

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