Households sharply curbed spending in 2009 on clinic visits, hospital care and other medical services as the Great Recession wore on and many Americans saw paychecks and health benefits shrink or vanish.
Record slowdown, bigger share
While 2009 saw a historic slowing of growth in healthcare spending, its share of GDP saw an unprecedented increase
The pullback, reported last week by federal officials in the journal Health Affairs, was one of the most significant—and unsettling—trends behind a second straight year of record-slow growth in U.S. healthcare spending.
The nation spent $2.49 trillion on medical care, equipment and healthcare construction in 2009, up 4% from the previous year. That was sluggish enough to beat 2008 as the slowest rate of growth since 1960.
Yet the rise in hospital spending was largely unchanged, adding to recent reports that show hospital finances fared well as the economy faltered.
Hospitals' aggregate operating margin increased to 4.4% from the prior year's 3.3%, the American Hospital Association reported in December, as cost-cutting on supplies, labor and, in some cases, services helped yield income of $30 billion on $686 billion in operating revenue.
And despite the slowdown, healthcare spending grew markedly faster than the economy in 2009, increasing to 17.6% of the gross domestic product from 16.6%. The CMS authors said the 1 percentage point jump was the largest since record-keeping began 50 years ago. As measured by the gross domestic product, the economy contracted 1.7% in 2009, which CMS officials said chillingly was the largest drop since 1938; the second economic contraction of the Great Depression ended in June of that year, according to the National Bureau of Economic Research.
That miserable economic performance and the job losses it wrought were largely to blame for the slowdown in healthcare spending. Although the unemployment rate dropped to 9.4% last December from 9.8% a month earlier, jobs have not fully recovered 18 months after the recession officially ended. In 2009, the unemployment rate reached 10% by the end of the year after starting at 7.7% in January.
“The recession had a much quicker, more pervasive influence on health spending” than in prior economic downturns, said Paul Ginsburg, president of the Center for Studying Health System Change.
Authors of the Health Affairs paper, a team of economists and statisticians with the agency that oversees Medicare and Medicaid, wrote that the recession “profoundly influenced” health spending in 2009. “Many consumers decreased their use of healthcare goods and services partly because they lost employer-based private health insurance coverage and partly because their household income had declined,” they wrote.
Healthcare prices, they noted, held up during the recession. Spending flagged as people sought less medical care, CMS officials said.
That suggests pent-up demand for medical care—treatment delays that could be potentially harmful and costly—or more cost-conscious consumers who have opted to forgo unnecessary testing or procedures. “It's not just how much are we spending and how fast is it growing, but what are we getting for it,” said Stephen Zuckerman, a health economist at the Urban Institute, a nonpartisan, public policy not-for-profit.
Caroline Steinberg, vice president of trends analysis for the AHA, said reduced access to care and rising numbers of uninsured slowed spending, not the greater efficiency sought by lawmakers and health policymakers as healthcare spending outpaces the nation's economic growth year after year.
“You don't want to see a slowdown in spending because people are losing their health insurance” or cannot pay for medical care, Steinberg said.
Spending growth for doctors and clinics dropped in 2009, but the pace of hospital spending remained unchanged, despite reports that admissions to hospitals dropped, the CMS said.
Hospital prices grew at the same pace in 2009, 3%, as the prior year, the CMS said, and overall hospital spending growth was also roughly steady at 5.1% compared with 5.2%. The nation's hospital spending, a figure that also includes hospital investment revenue, totaled $759.1 billion in 2009 compared with $722.1 billion the prior year.
Medicaid hospital spending increased while private insurance spending flagged. The safety-net program's hospital spending growth was 10.2% in 2009, up sharply from 3.3% in 2008. Among private insurers, hospital spending growth slowed to 2.7% from 5.6%.
Hospitals improved their margins in spite of those harsh conditions by aggressively cutting costs. Spending on equipment, construction and renovation slid nearly 3%.
Jim LeBuhn, senior director in the public finance healthcare group at Fitch Ratings, said not-for-profit hospitals with credit ratings from the New York agency showed a “very strong” financial improvement as executives cut spending on construction, labor and supplies.
NYU Langone Medical Center, New York, reported an 7.6% operating margin despite flat hospital admissions, which its management credited to cost-control efforts, among other reasons, which also included higher managed-care payments and an increase in outpatient demand, according to ratings agency Moody's Investors Service.
“We can't manage the external healthcare system at large,” said Dr. Bernard Birnbaum, senior vice president, vice dean and chief of hospital operations at NYU Langone, in a written statement. “So we are focused on managing internally, getting more efficient and creating value that translates to the bottom line.”
At ThedaCare in Appleton, Wis., gross revenue growth slowed to about 1% during the economic downturn after 5% to 7% gains in recent years, said John Ross, vice president of finance for the three-hospital system. But the system's operations improved in 2009, when the system earned $38.4 million on $632.1 million in revenue. Ross said the system curbed its spending through efficiency efforts under way since 2003 and concerted efforts to limit hiring during 2009 to essential positions.
Hospitals also cut some money-losing services as the economy squeezed margins to help create 2009 operating losses.
Excela Health, based in Greensburg, Pa., reported the weak economy led to an operating loss of $2.3 million on operating revenue of $485.4 million when the system closed its books in June 2009, its financial statements show.
The three-hospital system responded by closing its hospital-based skilled-care units and revamping its outpatient behavioral health services and saw an operating profit for the nine months that ended in March 2010 of $3.4 million, the statements show. Excela shifted outpatient behavioral health to community-based providers, the Pittsburgh Tribune-Review reported in December 2009. The system also cut its payroll, Moody's noted last May. An Excela spokeswoman said officials were not available to comment.
Jackson (Tenn.)-Madison County General Hospital reversed its 2009 operating losses early in 2010 after executives cut transitional care and home health services, both of which were unprofitable, said Jeff Blankenship, chief financial officer for West Tennessee Healthcare, which includes County General Hospital.
Blankenship said the hospital brought in a joint-venture partner for its home health services, leased its transitional care to a community provider, ceased matching contributions to its retirement plan temporarily and made staffing changes for nurses.
Sluggish out-of-pocket spending
Slower growth in private health insurance spending was the single largest contributor to the overall slowdown in 2009, followed by a drop in healthcare capital investment and sluggish spending by households for expenses considered “out-of-pocket,” such as co-pays, deductibles and medical bills not covered by insurance, according to the CMS figures.
Private health insurers saw more than 6 million people drop enrollment in 2009 and the sector's spending grew 1.3%, compared with 3.5% in 2008. Household out-of-pocket spending grew at an anemic 0.4% in 2009 compared with an increase of 3.1% the previous year.
Physicians and clinics, dentists and nursing care, where households spend the most out-of-pocket, were hardest hit by the slowdown, said CMS economist Anne Martin, who co-authored the report.
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