Don’t Mess With the Laws of Supply and Demand

Boomers: How they will affect everything next decade

By Chris Renner

The biggest population segm= ent in the United States are called “Baby Boomers”; the segment of the population born between 1945 and 1961 (some extend the definition to 1963). Approximately 28% of the population belong to this segment of the population.&= nbsp; More importantly, according to the US Census Bureau, Baby Boomers control nearly half of the nation’s wealth. Right now, they are in their peak earning years and preparing for retirement. Beginning in 2010, the first Baby Boomers will reach age 65 and, coupled with pre-Boomer retirees and a death rate factor, over the ensuing 15 years, one-sixth – nearly 17% - of t= he population will be retired, a statistic that has never before occurred in t= he history of the United States. (The retiree percentage as of 2000 was approximately 12%.)

From the time they were bor= n, baby boomers have created trends. = As kids, baby boomers were behind the explosion of Barbies, Hula Hoops, and primary schools. As teenagers= and young adults, automobiles, rock n’ roll, and university enrollment reached unprecedented heights. As working adults, baby boomers have led huge expansions in housing and techno= logy and by their sheer numbers created their very own baby boomlet generation.<= span style=3D'mso-spacerun:yes'> Baby Boomers have been responsible= for a tremendous amount of upheaval in America, but they have also b= een responsible for some of the greatest advancements in the world. With all deference to their parent= s, perhaps baby boomers are America’s greatest generation… but now they’re about to retire!

This is the first in a series of how Baby Bo= omers will affect Amer= ica over the next decade. The= se articles will hopefully create some insight into potential investment opportunit= ies, alert you to some investment hazards, and allow you to consider the potential affects to the overall economy during the next decade. Part 1 will highlight the pote= ntial affects of Baby Boomers on health care. Part 2 will highlight the U.S. economic climate during the next decade and Part 3 will highlight both = specific investment opportunities that will take advantage of the Baby Boomer retirement years.

Connecting the Dots with Baby Boomers and Health= Care

By 2025, there will be at least 15 million more retire= es than at the present time! 15 million more individuals on Medicar= e! 15 million more people who will be = slowly moving through emergency departments throughout the U.S. 15 million more individuals who wi= ll need increased access to prescription drugs, hospital beds, and long term care! 15 million more America= ns who will use their vote and demand access to health care.

Will health ca= re costs continue to increase at a rate greater than overall inflation?

What factors w= ill most affect health care in the future?

Will there be = enough clinicians to meet the demand for health care?

Will the United States ever nationalize their health care system?

What investment opportunities will arise?

We all have our opinions on the direction of health care. Clinical personnel that= are on the front lines see things differently than a hospital administrator, who sees things differently than an insurer or a Medicare representative. Many of us question the merits of = the current insurance system versus nationalized health care. Everyone debates the seemingly endless increase in health care bureaucracy and costs= . So what is going to happen with he= alth care? To answer that question= , we must first look at the heart of health care; the patient or rather the availability of patients. To = do that, as with most forecast, we must first look at the demographics of the United States Population.

Demographi= cs

By far, the most important determinant = in forecasting is demographics, or the analysis of population trends. As population segments get older o= r the birth rate increases, certain trends eventually emerge. For instance, because the percenta= ge of Florida’s citizens who are age 65 are older (17.6% of Florida’s population as of 2000) is greater then the remainder of the United States (12.4% of U.S. population as of 2000), it is reasonable to assume that Flo= rida spends more per capita on health care than the remainder of the United States. (In fact, Florida is ranked 6^th among= all states in percentage of gross state product spent on health care @ 14.7% ve= rsus the national average of 11.7%[1].) Because the demand for health care= is greater in Florida, the supply of nursing homes, hospitals, and band-aids is also greater in <= st1:place w:st=3D"on">Florida. While this is a simple example, it underscores the foundation for all economic forecasting. Correctly predicting population tr= ends can begin the process of connecting the dots for investment opportunities. =

So how will demographics af= fect the future of health care? Let= 217;s look at the primary population statistics that will affect health care over= the next two decades.

Think of how this will affe= ct your emergency room? If you are a = baby boomer and vying for health care with 60 million other boomers, how with th= is affect you? How will insurance companies deal with this retiree influx?&n= bsp; How will Medicare be affected? Connect the dots and unveil an opportunity.

In 1999, the average retire= e over age 65 spent nearly $10,000 per year on health care [2]. By the year 2020, the inflation ad= justed annual health care expenditure for individuals over the age of 65 will be c= lose to $40,000 annually! With 15 million more retirees and $40,000 in annual health care costs, the total ma= rket will be phenomenally huge! An= alysts estimate that by 2020, over 20% of every tax dollar collected will be spent= on health care. For emergency physician groups like CEP, EPMG, and EMA, where approximately 1 in 5 patien= ts is currently on Medicare, it is very likely that this statistic will rise t= o at least 3 in 10 patients by 2020. What does this all mean? Let’= ;s connect the dots using supply and demand equations and a little logic.

Labor=

An increased supply of pati= ents means increased demand for health care workers to care for those patients.<= span style=3D'mso-spacerun:yes'> Just over the past five years, a p= eriod when a shortage of health care personnel has been fairly well documented, h= ealth care personnel have seen their total compensation increase annually by 3.2% versus the 2.5% annual increase of all civilians.[3]   Since the late 1980’s, = when the health care employment trend has not kept up with overall patient increases, there has been a continuous supply-demand imbalance resulting in= greater than average wage gains and health care inflation that is higher than overa= ll inflation. Because of the agi= ng population, these trends are set to continue next decade.

Within virtually every emer= gency department of CEP, EPMG, EMA, EPIC, Iroquois, WEP, DeKalb, AEP and indeed throughout m= ost hospitals in the Uni= ted States, patient visits have increased fr= om five years ago. Increasing nu= mbers of uninsured patients, COBRA requirements, and an aging population all contribute to this steady increase. During that time, however, staffing, especially with nurses, has dro= pped!   According to Ken Adams, the Chief Operating Officer at EPMG, they and other physician groups in the upper Midwest are coping with staffing challenges and nur= sing shortages have been chronic for a while. Bob Parker, CEO of EPIC, acknowled= ges that the nursing shortage is consistent throughout all of Utah. Part of that gap may be attributabl= e to technology, improved productivity, and budget constraints but in many cases= , reduced staffing is due to a lack of qualified personnel. With 15 million more patients on Medicare by 2025, will staffing increase accordingly? Will new processes or technology be introduced to improve productivity? Will standards be lowe= red to increase the number of workers? Are health providers willing to accept the higher liability risk of less qualif= ied workers just to have a body in place?

Health care is largely rule= d by emotions with personal interaction a necessary part of every activity. Treating patients can’t be e= asily converted to a conveyor belt. Knowing that the demand from patients will be constantly increasing over the next f= ew decades, the supply of health care workers needs to increase to meet the demand and = keep up the personal interaction. However, at just the time when we need more health care professional= s, 28% of the population will be retiring and the existing shortage of health = care workers will continue. It is = very likely that the existing health care worker shortage will become even more acute in the future.

What does this mean for lab= or? Let’s connect the dots. It is likely that because of the continued worker shortage, pay demands by physicians and other health care workers will continue to rise at a rate greater than inflation. (When the demand for workers excee= ds the supply, the workers can demand greater wages and benefits.) Because a greater amount of patien= ts will be served by a continuing shortage of workers, medical leaders will ne= ed to be creative to prevent longer wait times and slower service. It is likely that technology to im= prove throughput & cost effectiveness will be introduced to help fill the gap created by the worker shortage. Can you say “Self Serve Registration” “Grocery store clinics” (EPMG is already piloting an EZCare clinic within a grocery store) or “Do it yourself laser surgery”?

If you work in health care,= wage increases and job security sound great but in the current world of health c= are, pricing is and will continue to be constrained for reasons described below. Health care administra= tors must travel a fiscal minefield in allocating resources between labor, equipment, and facilities in an era where revenues are likely to be squeeze= d by public pressure to keep health care affordable. While labor gains will be greater = than inflation, it won’t come without an increasing amount of labor strife= .

Health Ins= urance Premiums

Since labor accounts for 60= % - 65% of health care operating costs, would it not be correct to assume that with wages increasing, health care expenses must ultimately increase. If health care expenses increase, insurance premiums will continue to increase at a rate greater than inflati= on. Health care inflation over the pas= t five years approached 10% annually. (Assuming a conservative 6% inflation = rate, a premium of $250 today will be $450 ten years hence. A family may be paying health care premiums of $1500 or more each month by 2016. With the median household income expected to near $70,000 by 2016[4] = how many families would be willing to spend $18,000 or 25% of their gross incom= e on health care premiums?)

Because of these premium co= st increases, it is likely that consumers will react by demanding insurance th= at is less costly, even at the expense of reduced coverage. Health Insurance may trend a bit m= ore toward catastrophic care but overall, it is likely that because insurance w= ill become more unaffordable, the amount of uninsured patients will continue to rise and Medicaid rolls will swell, eventually requiring the government to intervene.

The Politi= cs of Health Care

By looking at the demograph= ics of health care, we’ve determined that there will be 15 million more Baby Boomers on Medicare by 2025. Medicaid enrollment has risen nationally by just under 4% annually s= ince June 1997.[5] The number of individuals under th= e care of U.S.<= /st1:country-region> government agencies will approach or even exceed 100 million individuals by= the end of next decade! Excluding children which will constitute 24% of the population in 2020 [6], this would mean that 46% of the population will be supporting the health ca= re of approximately 30% of the population!&nb= sp; Gross National Product grows by 2 ½% per year but health care expenditures are growing by over 6% per year. When a major entitlement spending program grows by double the incoming tax receipt percentage, “something’s gotta give”!

In order to meet these incr= eased health care costs, government spending on Medicare (and Medicaid) must incr= ease substantially over the next 10 - 20 years.= Where is the money to pay fo= r this increased health care liability going to come from? As I look at it, Medicare and Medi= caid funds will need to be increased from these potential sources:

1.      Increased tax collections (Medicare / SSN taxes)

2.      Reallocation of existing budgets funds from other sources (i.e. military, education, transportation)

3.      Increased Medicare premiums from members

4.      Rationing of care

5.      Increased pool of participating members (i.e. extend Medicare to more citizens; in ot= her words, extend the insurance pool)

Up to this point, I’v= e tried to provide solid demographic statistics and rational analysis to predict the future of health care in America. From this point on, however, IR= 17;ll try to think like a politician (inasmuch as they can be described as thinke= rs) and attempt to predict the future of health care in this country.

According to a wide range o= f so called experts, Medicare is currently set to go bankrupt any time between 2= 019 and 2054. I have no clue when= the program will actually become insolvent but I do know that for reasons cited above, Medicare cannot continue without a major overhaul or without a major infusion of revenue. In my ow= n mind, I know that politicians are primarily self-preservationists. In their attempt to be completely = coated with Teflon, politicians will travel the path of least resistance in order = to pass legislation that can be marketed as action whether it solves the probl= em or not.

So which of the above solut= ions will our federal representatives enact to solve this growing dilemma and st= ill receive public approval? Poli= ticians will shy away from tax increases or reductions in service because those ste= ps are not real popular with voters. “Reallocate” or “cut” is not in the vocabulary of most Congressman so don’t expect that solution to occur.= Rationing of care means killing people and generally speaking, voters frown on anything associated with death.&n= bsp; Increasing Medicare premiums has been acceptable but since premiums = only cover 25% of the total Medicare costs, it’s like filling up the Grand Canyon with a hand shovel.

As I see it, Congress will “solve” the problem by taking the action that is easily marketa= ble, appealing to the greatest amount of voters, and brings money into the feder= al or state coffers. I believe t= hat Congress will try to increase the insurance pool by passing some sort of nationalized health care legislation and increasing taxes as a necessary tradeoff to pay for it. From a voting standpoint, with nearly one-third of voters already on Medicare or Medicaid, improving the service of health care will hold great appeal to th= at bloc. All Congress needs to d= o is win over a third of the remaining voters and with escalating health care premiums, crowded emergency rooms, and slow service due to a shortage of he= alth care personnel, many voters will be ripe for a change.

You may think that I am nut= ty and that my reasoning is flawed but judging from the omnipresent population tre= nds, the most logical course of action that Congress will take is to increase the insurance pool of payers; preferably young payers, so that they can pay for= the ever increasing health care claims of Baby Boomers. Congress will, however; wait until a crisis occurs before action takes place.&n= bsp; Medicare and Social Security are “third rail” issues, meaning that it could be political suicide to vote on an issue that affects= so many people in a largely unknown way. The big health care insurers will try to lobby against government intervention but, when the public sees examples of insurance mismanagement (like CEO’s making $4.5 million per year), they’ll ultimately be viewed as part of the problem. If I had to guess, Health Care will become a huge nationalized issue when the population is positioned to talk about it.= As such, at the time when about half the Baby Boomers have retired a= nd the level of uninsured patients reaches 55 – 60 million (a combined t= otal of about one-third of the population), I believe the issue of nationalized health care will become part of a national debate. I expect that this combination of factors will occur during the middle of next decade and that nationalized health care will be a reality by 2020.

Questions = to ponder

Baby Boomers will have a dr= amatic affect on health care over the next decade. From the sheer numbers of future r= etirees to the way they move through the emergency room or hospital to the amount of health care spending demanded, baby boomers will dramatically alter the hea= lth care landscape. However, whil= e you may think that Ameri= ca’s future health care will eventually become a crisis, perhaps some creative thinking will produce some potentially advantageous benefits.   John Gardner, an American au= thor, once said that “We are often faced with opportunities brilliantly disguised as unsolvable problems.”&n= bsp; Health care is at a crossroads in this country. While this scenario is one manR= 17;s brief simplistic macroeconomic interpretation of = U.S. health care, there are m= illions of permutations that will affect the microeconomics of health care. In fact, I could have written 100 = more pages, included 97 graphs, and cited statistics ad nauseum to underscore th= ese points. The bottom line, howe= ver, is that the trends are in motion and the future of health care is in play. Increased patients, especially eld= erly patients, a shortage of workers, increased labor and health plan costs are = all dynamics that clinicians and managers must confront.

Here are several questions = that you can ponder. Some of these que= stions will be answered in a subsequent newsletter but others are interesting discussion points. I always e= njoy speaking with each of you and would be interested in your opinions on health care. I would be very happy to discuss the future of health care (and other economic opportunities) with y= ou at any time. You can reach me= at rennerc@medamerica.com or (800) 842-2808.

If Medicare a= nd Medicaid patients increase: How will overall reimbursement be affected?&nb= sp; How will patient throughput be affected? Will your site have the resources = to meet the demand? How does you= r site cater to elderly patients?

If staffing p= roblems become more acute due to a lack of qualified candidates: If recruiting physicians becomes m= ore and more difficult, what actions will you take? Will your site allow you to hire n= on-board certified physicians? Can PA’s or Nurse Practitioners be used instead of a physician to handle = the increased flow? How would you operate your department with one less nurse? Two less nurses? Would your hospital administrator = ever require your group to employ nurses? Would your hospital simply close?

In the event = of continued staffing problems along with increased patient load: Will small single site groups bene= fit or would larger groups with economies of scale benefit? How will malpractice premiums be affected? Is physician / nurse burnout a threat?

In the event = of nationalized health care: How will billing and reimbursement be affected from nationalized health care? 10 years after it began? 20 years? Would ER physicians benefit more th= an other specialties? Would qual= ity of care suffer?

Given this information and = your own intuition, how can you profit from this forecast? Buying a nursing home or investing= in health care mutual funds might be the obvious answer but there are many oth= er factors affected by the baby boomer demographic. In part 2 of this series, I will u= se this information connect the dots and try to predict the future of the U.S. an= d world economies. Until then, make e= very day a good one!