In the 1980s, the nation was subjected to the unhappy event that passed into history as the "S&L bailout." It offered a lesson in political neglect, not unlike what the nation's healthcare system is now facing. That's especially true for teaching hospitals.
The breakdown of the savings bank system has been well-documented. Because of changes in fundamental market forces, the basis on which the industry had done business since World War II was no longer tenable. Thrifts, with their low-interest mortgages and federally insured deposits, had been the engine of a decades-long housing boom. This was a politically appealing situation, and neither legislators nor regulators had the will to acknowledge that with the introduction of more attractively priced alternatives to savings bank deposits, such as money-market funds, the system was no longer viable.
The American people had no idea that a major national institution was about to implode. Stopgap political measures were introduced, including what were known as Regulatory Accounting Principles. They allowed banks to count as capital on their balance sheets assets that had no financial worth. Liabilities were, in effect, turned into assets, and the true financial condition of the banks was effectively hidden.
There was no down-home political pressure to correct a situation that wound up being papered over for years. Not until uninsured bonds issued by S&Ls began to go bad, often in the hands of retirees, did the cat slip out of the bag, eventually costing taxpayers hundreds of billions of dollars.
People's attitudes today toward their hospitals are not unlike those they held toward their S&Ls. Everyone expects the local hospital to be there, a sound and reliable resource for the community. While they read about the problems of the healthcare system in all its facets, the risk of closure of the local hospital, large or small, is not a part of their reality. Nor are politicians eager to tell them the risk exists.
Unlike the S&Ls, it is not primarily market forces that have brought hospitals to their current situation. Pressure on reimbursement and the cost of pharmaceuticals and supplies were already taking a toll, but hospitals were adjusting with reasonable success. When Congress passed the Balanced Budget Act of 1997, it fundamentally undercut the economic vitality of a hospital system that already was under considerable pressure. This was not done with malice aforethought. Rather, it was intended to redress some quite visible excesses in the cost and provision of care. But as is now apparent, the law was based on flawed estimates, a lack of appreciation of how stringently it would be implemented, and limited understanding of the effect of its collective impact when added to the pressures the healthcare system was already facing.
So again an institutional crisis is occurring with little public appreciation of its ramifications, and limited political pressure to provide long-term solutions. The artfully named Balanced Budget Refinement Act approved late last year is reminiscent of stopgap measures taken during the S&L debacle. At best, it represents a deferral of timing of the consequences of the 1997 balanced-budget law. By 2004, the collective impact of the budget act on the nation's hospital system, even as "refined," will amount to reductions totaling $110 billion. The confluence of those reductions and continued pressure from managed-care and employers will become an intolerable burden. Hospitals will very likely fail.
While the overall environment for healthcare is troubling enough, the balanced-budget law's impact on the nation's teaching hospitals is disproportionately severe. Even as amended, the budget act will trim $14 billion from Medicare payments to support graduate medical education during four years. Reduction in support for indirect medical education will also be substantial. In addition to the risk of failure for financially stretched academic medical centers, a weakening of the research and teaching programs that have made America the world leader in healthcare now seems inevitable.
So far there seems to be little urgency on Capitol Hill to correct the problem. With the exception of a few knowledgeable legislators, members of Congress have been sitting on their hands. Some lawmakers have even argued that a little benign neglect might not be such a bad thing. Like the S&L crisis, major healthcare institutions may have to fail before Congress develops the courage to respond. Admitting one's mistakes is never easy, but surely now is the time.
The financial and opportunity costs of having to preserve the national system of hospitals and reboot the teaching and research capacity that has made us the global leader in quality healthcare will be enormous. A total revision of the balanced-budget law, addressing the long-term health of the hospital system and academic medicine, must be undertaken promptly. It shouldn't be held hostage to the political posturing that has characterized the recent debate.
George Carmany, a banker, is a former chairman of New England Medical Center in Boston and is vice chairman of Lifespan, Providence, R.I.