Friday, February 29, 2008

A Slowing Economy--What Impact Will It Have On The Health Care Sector?

Health care is considered a business that tends to be resistant to economic downturns. Brian Klepper returns with a post asking just what the impact of a slowing economy will have on the health care sector. He specifically points to changes in real wages and home prices.

Health Care and The Gathering Storm

by Brian Klepper

Here are two very interesting and frightening charts that my good friend Warren Brennan, the CEO of SMA Informatics in Richmond, passed along recently, with this question, aimed at the CFOs of hospitals and other health care organizations:

What do these mean for hospital bad debt and for the health care sector's future financial performance?

Here's the text from Warren that accompanied the chart on wages:
This chart, from the NYT, shows annual growth in real wages. What that means is that workers today are earning significantly less, in real terms, than they were a year ago: their January 2008 earnings were down 19 cents per hour or $8.31 per week from January 2007.

The chart doesn't mention the main reason for the fall: unusually high inflation. Since inflation is running at a 4% clip right now, you'd need wages to be rising at the same rate in nominal terms just to stay at zero on this chart. If food and energy prices stop rising at some point, real wages will start looking much healthier.

On the other hand, however, it's clear that for most of the past year weekly wages have been lagging hourly wages. That's not good news at all: it shows that the workweek is shortening for most workers. Slower increases in food and energy prices aren't going to help on that front.

And here's an excerpt of text that came with the second chart on home prices:
The S&P/Case-Shiller Home Price Indices show a 9.8 percent year-over-year decline for the 10-City Composite Index, the steepest decline on record.

Wherever you look things look bleak, with 17 of the 20 metro areas reporting annual declines and the remaining three reporting flat or moderate growth rates. Looking closely at these negative returns, you will see that 14 of the metro areas are also reporting record lows and eight are in double digit decline. The monthly data paint a similar picture, with all metro areas now reporting at least four consecutive negative monthly returns.
Health care has ridden a very long wave of prosperity that appears to now be in jeopardy. Combined with an explosion in information technology, transparency and decision support, the coming turmoil should force health care organizations to become far more interested in efficiency and competitiveness.

One lesson is clear: Companies that economically reduce both financial and health risk will be winners.
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