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Running on Empty: Healthcare As the Engine of the Economy

By Brian Klepper, Ph.D., and Alain Enthoven, Ph.D., for HealthLeaders News, November 7, 2006
Recently, a flurry of national articles has explored the notion--held by several prominent economists--that increased healthcare spending reflects the choices of an affluent population, and will continue to drive a strong economy.

Many healthcare professionals--physicians, hospital executives, insurance administrators and analysts--see it differently. As one colleague bluntly puts it, “It's a train wreck everyone knows is just around the corner."

Healthcare insiders know that the industry's rosy prospects can continue only if its funding remains stable. Most also acknowledge that the dollars are not likely to flow as they have in the past.

The reality into the foreseeable future is that healthcare--at least beyond a narrow definition of "basic care"--will remain a voluntary buy. In fact, there's every indication that group purchasers are quietly abandoning the market. A wealth of recent data shows that healthcare cost growth is pricing corporate and governmental purchasers out of the market for coverage. Reports from the Kaiser Family Foundation and the Department of Commerce’s Bureau of Economic Analysis show that, between 1999 and 2004, premiums--the point where costs converge from throughout the healthcare continuum--grew 5.5 times general inflation, 4.0 times workers earnings and 2.3 times the growth of business income.

The numbers are spectacular. And purchasers are responding. In September 2006, another Kaiser report on employer health benefits showed that, between 2001 and 2006, the percentage of employers offering coverage plummeted from 68 percent to 61 percent, a 10.3 percent drop over five years or a 2.1 percent annual erosion rate. During the same period, the percentage of employees with coverage dropped from 65 percent to 59 percent. Data from other sources show that certain workers--those in the private sector, service workers, retail employees--were particularly vulnerable to losing coverage.

Meanwhile, Florida's Office of Insurance Regulation released data showing that, between 1996 and 2004, 132,000 small employers (with 50 or fewer employees) stopped offering health coverage. This represents a 53 percent drop, while enrollees in small group plans fell by 760,000 individuals (42 percent, or 5.25 percent annually). The state's population grew by three million during this period.

These precipitous enrollment drops make sense, particularly when you compare the scale of healthcare cost to earnings. The actuarial firm Milliman calculated that the total coverage costs for a family of four averaged $12,214 in 2005. But one-quarter of the nation's workers made less than $18,800, and one-third of its families made less than $35,000. How can mainstream Americans stay in a game that's stacked like this?

Most people understand the healthcare crisis in terms of its human costs: more uninsureds and underinsureds and more frequent cases of personal bankruptcy. But an equally daunting problem is that losses in coverage translate to reductions in the system's financial inputs. This means fewer dollars are available to buy healthcare services and products.

The situation is ominous. Nonprofit hospitals may be able to finesse shrinking revenues through cutbacks in staff, equipment or programs. But for publicly traded companies like Pfizer, United Healthcare, Medtronic or HCA, the drops in funding must negatively impact margin, stock price, market capitalization and credit.

Worse, healthcare is 1/7th of the economy and 1/11th of its job market. If this sector develops a large demand-resource mismatch and becomes financially unstable, the disruptions could cascade to and destabilize others sectors, threatening the national economic security.

A theory of limits applies here. In a voluntary market, healthcare purchasers--employers or taxpayers--will tolerate only so much cost growth. Then they'll recede. It is preposterous to believe the well won't run dry.

Even so, and despite the handwriting on the wall, the healthcare industry remains profitable and resistant to collaboration on the structural compromises that are essential to re-establish stability and sustainability. Exceedingly well-financed, organized and influential, healthcare lobbies have shaped American health policy to their own purposes for decades.

The only option for meaningful change, then, lies in leadership from non-healthcare business, which stands to suffer from the tidal wave of healthcare's turmoil. Good reason for them to mobilize and act.

Several years back, talking about spiraling health costs, the vice president of benefits for a large corporation, commented that "No economy can indefinitely support a single business sector that grows continuously at a multiple of general inflation." That perspective is clearer, more to the point, and almost certainly more accurate than arguing that there's a silver lining in unlimited healthcare spending.

And that's why we worry.



Brian Klepper, Ph.D., is president of the Center for Practical Health Reform, a nonpartisan national effort to re-establish stability and sustainability in American healthcare. Alain Enthoven, Ph.D., is the Marriner S. Eccles Professor of Public and Private Management at Stanford University. They may be contacted at bklepper@cphr.com or enthoven@stanford.edu.