Summary
Demand for healthcare is viewed as inelastic, meaning that price changes have a small effect on demand for services. This aspect of the healthcare industry allows providers to cost-shift, increase prices more for one group of payors when another group does not increase their reimbursement commensurate with input price inflation. However, there is a limit to cost-shifting that the market will bear. Consumers are self denying care due to economic concerns. With the rise in unemployment, providers are finding more patients are not able to pay for services. While EMTALA laws dictate that patients will not be refused care, providers are looking to cut cost in order to manage the rising uncompensated care.
Analysis
Providers have a long history of being able to increase rates (prices) without appreciably affecting demand for services. This inelasticity of demand has led analysts to view healthcare stocks as a hedge against financial downturns. However, as the author of “Medical devices not immune to recession worries” points out, recent stock performance of medical device manufactures is showing some correlation to the economic cycle. At the root of this may be that the extent to which providers can cost shift has reached a limit. Providers generally run negative margins treating their Medicare and Medicaid patients. The government programs price fix at a level that does not keep pace with actual input inflation. Providers have found they can get around this problem and manage the lack of government reimbursement by increasing prices to non-government payers. If government payers are half of the revenue base of a provider, and they do not increase reimbursement, then a provider will have to raise prices twice as much as they normally would to cover their cost increases. Hospital inflation has been running close to twice the level of consumer price inflation for a number of years. The problem many providers are having is that they cannot continue to increase prices at this level and generate the added reimbursement they need to cover inflation. Non-government third party payers are limiting a provider’s price increases contractually, and self-paying patients can no longer afford the high cost of care. Insurance companies are increasing deductables and co-insurance as a means to manage the increasing cost of healthcare. This creates an even larger amount of self-pay revenue for providers. In addition, the added unemployment is growing the self-pay ranks by levels we have not seen for 60 years. Prior to the enactment of title 18 and 19 (Medicare and Medicaid), our country had a large access to care problem. Even though our government has poured trillions into healthcare since 1965, our country still has a large access to care problem, one which is growing. The self-pay patient population tends to self-deny their healthcare needs. As a result, when the self-pay portion of a market grows, demand for healthcare and bad debts grow. Providers, of course, are legally obligated to provide care to all patients presenting in an emergent situation, regardless of their ability to pay. The growing self-pay proportion of the market is resulting in a lower reimbursement matrix, putting pressure on providers to reduce costs. This cost cutting pressure providers are feeling translates to a reduced pricing power for medical device manufactures. Coupled with the decline in demand from the self-denying of care, and the revenue of medical device manufactures should be under pressure as well. I work at a hospital and we are experiencing a drop in demand and are finding that our purchasing group is being more successful in negotiating price reductions with orthopedic implant vendors.Even though a person’s demand for healthcare is not responsive to price considerations when their life is in danger, patients are postponing elective care and are putting off going to see a physician until the last possible moment. This demand reducing behavior, coupled with a lower ability to pay (declining reimbursement), should be impacting the sales of medical device vendors and lowering their profitability.
