Adjusting to post-Great Recession realities as the health care reform debate grinds on

Ophthalmology practices can survive and thrive as the U.S. emerges from economic crisis but health care spending will likely diminish.

John B. Pinto

None of us are very good at force-fitting new data to old conceptions. You wake up feeling 40 until the mirror and scale say “55.” You go to lunch feeling all set to retire in comfort, until the afternoon mail arrives, and with it your broker’s monthly statement, saying “not so much.” You walk down the clinic hall, a surgical god, until the slit lamp in Room 3 says “endophthalmitis.”

So it goes. Being made abruptly conscious of the facts is never very pleasant. Take the current examination of national health care spending. For most readers, what they are actually examining in Washington is your health care paycheck.

Until recently, we have all been relatively unconscious of the fact that health care services, now costing about 18% of the entire U.S. gross domestic product, are a kind of “tax” on society. Is health care vital? Yes. Valued? Of course. But within finite limits. Which, by increasing consensus, are closer to 12% of the GDP, not the current 18%.

Finite limits

The sum of raw dollars flowing to you and all health care providers is bounded by only two core variables: the total size of the U.S. economy and the maximum acceptable “tax” rate. At 18%, America’s health tax rate is about 1.5 times comparable charges in the rest of the advanced, industrial world and more than twice the cost in absolute fiscal terms.

In inflation-adjusted dollars, U.S. per capita income has grown from $29,000 to nearly $40,000 in the 28 years from 1980 to 2008. In the same time frame, inflation-adjusted health care spending has grown from about $700 billion in 1980 (about $3,100 per person, or 11% of income) to about $2.2 trillion in 2008 (roughly $7,300 per person, about 18% of income).

There are only two ways for this high aggregate health care “tax” to be sustained, much less grow. We could reset society’s perception of the value of health care, so that high percentile and total expenditures are happily accepted, and/or we could continue to grow per capita income as a nation to dampen the cost of health care as a percentage of income, which is why we did not get reform in the 1990s.

How likely are either of these favorable adjustments in the two core drivers to come about? Not very, as you will see.

The perceived value of health care

It is possible to put a finite value on the utility of health care. As Brown, Brown and Sharma wrote in 2003 (take a deep breath here):

“Health care economic analyses are becoming increasingly important in the evaluation of health care interventions, including many within ophthalmology. Encompassed with the realm of health care economic studies are cost-benefit analysis, cost-effectiveness analysis, cost-minimization analysis, and cost-utility analysis. Cost-utility analysis is the most sophisticated form of economic analysis and typically incorporates utility values. Utility values measure the preference for a health state and range from 0.0 (death) to 1.0 (perfect health). When the change in utility measures conferred by a health care intervention is multiplied by the duration of the benefit, the number of quality-adjusted life-years (QALYs) gained from the intervention is ascertained. This methodology incorporates both the improvement in quality of life and/or length of life, or the value, occurring as a result of the intervention. This improvement in value can then be amalgamated with discounted costs to yield expenditures per quality-adjusted life-year ($/QALY) gained. $/QALY gained is a measure that allows a comparison of the patient-perceived value of virtually all health care interventions for the dollars expended.”

Whew.

One could clearly spend many career lifetimes trying to academically derive just when American society might say, “Ouch! Stop! Enough! Twenty percent (or 22% or 25%) is too much!” But the snap intuitive answer today is that at 18%, and in the depths of a still-fizzling economic crisis, we are at or near the breaking point. Still, where we go from here, in percentile terms, is hard to forecast.

Any near-term cap at or near 18%, while unlikely, will lead to fierce competition for payer dollars among all of the actors in health care, including ophthalmology. Especially if new mandates oblige a minimal standard of care and electronic health records create a highly transparent, accountable environment for anyone trying to cut corners.

While eye care makes an abundant and readily measurable contribution to “quality-adjusted life-years,” it seems unlikely that ophthalmology will get any special treatment in the game of economic musical chairs now being set up for you at the party. When the music stops, you are going to be scrambling like everyone else in a white coat for the likely diminished dollars available per unit of care.

Per capita income trends

Can America produce and earn its way out of the current health care cost crisis, as happened in the 1990s, when “Clintoncare” was edged out by an economic boom? Perhaps not. There are several reasons forecasters believe U.S. per capita income will stall and may modestly decline in the years ahead.

The most prominent of these reasons is the globalization of labor and the international rationalization of labor costs. Over the past 20 years there has been an abrupt shift from domestic sourcing for manufacturing labor to off-shoring. The accelerating decline in high-wage U.S. manufacturing jobs, and their substitution by low-wage service sector jobs, could, over time, significantly depress average U.S. per capita income. A global market will increasingly pay comparable global wages for a given kind of work, no matter where the worker lives.

Such off-shoring is no longer confined to manufacturing as call centers, software development, engineering and even medical services are being provided overseas. A secondary factor likely to suppress American incomes is the same key driver that led to the Great Recession, a bursting of the housing and related credit market bubbles. The recent 10% cooling in consumer debt may foreshadow an unaccustomed and durable American temperance, a habit of saving rather than spending, further dampening the U.S. GDP and per capita earnings.

A third major factor is demographic. The baby boomers are retiring, reducing most expenditures (aside from health care, of course). Meanwhile, the fastest growing demographic segments of society are the least educated, hence more likely to be paid less in a lifetime, pulling down the average income.

Perversely, any federal downshift in health care expenditures could reinforce a drop in per capita income, since about 8% of the workforce is employed in health care, and such individuals are largely well-paid at present — because, at least until now, we could afford to do so.

Consider your own situation as an eye surgeon. If patient fees drop materially, your first step may be to cut staff wages, especially if unemployment remains high. Such medical worker wages, like manufacturing wages in Detroit, represent a significant wage premium compared to one’s educational achievement. Techs who are high school graduates commonly earn $20 or more per hour.

In addition, as your personal income as a surgeon falls, you will spend less on dining, vacations, fast cars, second homes, fine wine and the like — in turn reducing job prospects and lowering wages for valets, maids, waiters, sommeliers and property managers. A negative feedback loop could arise in the wider economy, depending on what is done with health care reform.

Guiding principles

America’s ability — and the nation’s tolerance — to pay a healthy premium for health care compared to other industrial countries is unsustainable and will surely diminish. Whether rationed by the free market or by top-down federal plans now playing daily on C-SPAN, we are poised at a brief transitional moment between two adjacent and quite-divergent eras in the eye care profession and industry.

Despite the abundant reasons to dread the next decade as all of this plays out, I am confident that most practices — their managers and their owners — will make it through this new era just fine if they adhere to the success factors of the last decade:

• Educate yourself; peer around the corners to see what is coming.
• Believe the data. Like the mirror or the slit lamp mentioned earlier, the facts don’t lie.
• Don’t procrastinate. Get energized now. Act now. Don’t quit.
• Do more with less. More patients. More care. Fewer staff members and facilities. Less wasted motion.
• Take the long view. See the big picture. There are 610 million eyeballs in America, and an unlimited market demand to see clearly and not go blind

• John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consulting firm established in 1979. Mr. Pinto is the country’s most published author on ophthalmology management topics. He is the author of John Pinto’s Little Green Book of Ophthalmology, Turnaround: 21 Weeks to Ophthalmic Practice Survival and Permanent Improvement, Cashflow: The Practical Art of Earning More From Your Ophthalmology Practice, The Efficient Ophthalmologist: How to See More Patients, Provide Better Care and Prosper in an Era of Falling Fees, The Women of Ophthalmology and the new book, Legal Issues in Ophthalmology: A Review for Surgeons and Administrators. He can be reached at 619-223-2233; e-mail: pintoinc@aol.com; Web site: www.pintoinc.com.