Business is good, and is likely to get better, for those whose occupation is hospital construction. Despite skepticism among many analysts, we believe the demand for hospital beds and services will remain strong as the baby boom generation heads toward retirement.
In July 2003, in an article "Boomer bust?" Modern Healthcare reported, "Many observers are saying the forecast for a boomer bonanza in healthcare business could turn into a bust" (July 28, 2003, p. 24). In February 2003, CMS actuaries estimated that the growth rate of hospital spending would fall from 8.3% in 2001 to 7.4% in 2002 and 5.5% in 2003. Instead, spending growth increased by 9.5% in 2002, consistent with our projections presented last spring and later published in the journal Health Affairs.
The CMS still expects the hospital spending growth rate to decline in 2003. We agree, although we believe that decline will be short-lived. A confluence of factors that drive the demand for hospital services will continue to exert inexorable upward pressure on utilization. The aging of the boomers is only one of many factors that will bring this about.
Here, in the style of David Letterman, are our top 10 reasons why hospitals will need more capacity:
10: Boomers have a higher propensity to consume healthcare services than did previous generations. From 1987 to 1998, the growth rate in hospital and total spending for the boomers (born 1946 to 1965) was greater than for the elderly. If boomers repeat that pattern as they transition into higher spending age brackets, hospital utilization will increase more than previously expected.
9: Disability is increasing among the non-elderly, and more disease is being identified and treated in the middle of the age distribution. Disability is closely associated with hospital utilization, so if these increased rates persist, the demand for hospital beds will rise.
8: Obesity increased 60% from 1991 to 2000, and nearly one-fourth of the U.S. population is obese. Roland Sturm, senior economist at Rand Corp., found that obesity is associated with a 36% increase in inpatient and outpatient hospital spending.
7: Managed care has nearly given up on utilization controls, and government efforts to reduce utilization are almost nonexistent.
6: Providers have consolidated and increased their market power, shunning capitated arrangements, returning to fee for service and increasing supply through investments in specialty hospitals.
5: Population growth, according to our estimates, will increase real (meaning inflation-adjusted) hospital spending by 0.9 percentage points per year from 2000 to 2012 (or 18% of the total spending growth over the period).
4: The aging of the population (exclusive of the effects in reasons Nos. 9 and 10) will increase real hospital spending by 0.5 percentage points per year from 2000 to 2012 (or 10% of the total spending growth over the period).
3: The declines in lengths of stay and the shift to outpatient services-two forces that were instrumental in reducing hospital use-have essentially run their course. Lengths of stay have recently reversed their trend, and CMS actuaries predict that the growth rate in inpatient and outpatient services will converge by 2012.
2: Healthcare is a luxury good, and rising personal income will drive up utilization of all health services. For example, recent estimates by Lane Koenig of the Lewin Group and colleagues show that a 1% increase in real, per-capita disposable income raises spending on physician services by 0.76%.
And now, the No. 1 reason: Technology and the increasing technological capabilities of medicine will continue to be the major driver of increased utilization. Although some advances will be cost reducing, there is no evidence to conclude that the long history of technological progress leading to increased medical spending will be reversed in the near future.
We estimated previously that hospitals would have to increase their capacity by 20% to 28% from 2000 to 2012. The healthcare consultant Solucient recently predicted a 46% increase in the need for acute-care beds from 2002 to 2027. By our estimates even the overly conservative estimates of the CMS actuaries will require 18% more beds by 2012.
While pundits debate the need for more capacity, hospitals in some regions are already at capacity and emergency departments are severely overcrowded. The industry is already responding to market demand, expanding and modernizing old facilities and building new hospitals.
The question for the future is not whether more beds will be needed, but whether the hospital industry will have sufficient capital to build them. Medicaid rates are being slashed to balance state budgets, and Medicare spending is a huge target for reducing the ballooning federal deficit.
In 1997, the budget was balanced on the backs of medical providers. A similar reoccurrence could leave hospitals without the resources to build necessary capacity. If that happens, hospitals won't be worrying about a "boomer bust," but about boomers bustin' out all over.
Stuart Altman, left, is the Sol C. Chaikin professor of national health policy, and David Shactman is senior fellow at the Schneider Institute for Health Policy at the Heller School, Brandeis University.