USATODAY: The Government-Funded Hospital Boom Is Bursting

On an “ideological” level, I mostly find Megan McArdle far too “establishment” to say I like her. But she does have some real skills in economic analysis. Because of her, I wasn’t surprised at all at the recent USA Today headline: “A Job Engine Sputters As Hospitals Cut Staff.”

Hospitals, a reliable source of employment growth in the recession and its aftermath, are starting to cut thousands of jobs amid falling insurance payments and inpatient visits.

The payroll cuts are surprising because the Affordable Care Act (ACA), whose implementation took a big step forward this month, is eventually expected to provide health coverage to as many as 30 million additional Americans.

“While the rest of the U.S. economy is stabilizing or improving, health care is entering into a recession,” says John Howser, assistant vice chancellor of Vanderbilt University Medical Center.

Health care providers announced more layoffs than any other industry last month — 8,128 — largely because of reductions by hospitals, according to outplacement firm Challenger Gray and Christmas. So far this year, the health care sector has announced 41,085 layoffs, the third-most behind financial and industrial companies.

The lesson here is: What The Government Giveth, The Government Taketh Away. While American hospitals were originally the result of Christian charity and religious philanthropy in general, in the heyday of American statism they also received a huge financial “stimulus” from the government. McArdle describes it:

Multi-bed wards pretty much disappeared from the U.S. after the 1970s. My father, who was a budget analyst in the New York hospital system, notes that this had two causes: first, commissions kept recommending private rooms over those noisy, unsanitary large wards. And second, any new beds you built could be paid for by filling them with Medicare patients at “usual and customary” fees. The result was a hospital-building boom, which is why virtually all hospitals are in new buildings, and why, outside of some emergency wards, you’ve probably never spent time in one of those long wards you see in black-and-white films. “American hospitals are rather like hotels,” I was once told by a British colleague who was defending the honor of the rather more Spartan National Health Service.

And now America is being billed a generation later. USA Today lists as the reason for the sudden layoffs:

• Medicare, Medicaid and private insurance companies are all reducing reimbursement to hospitals. The federal budget cuts known as sequestration have cut Medicare reimbursement by 2%, the American Hospital Association says.

• The health care law has further reduced the Medicare payments to hospitals that provide lower-quality service or have high readmission rates.

• The National Institutes of Health reduced funding to hospitals by 5% as part of sequestration, forcing hospitals to trim research staff.

• The number of inpatient hospital days fell 4% from 2007 to 2011, in part because of the economic downturn, the hospital association says.

• As more Baby Boomers turn 65, their services will be reimbursed at Medicare rates that are lower than those of private payers, putting further pressure on hospital revenue.

The new health care law was supposed to ease the burden on hospitals by expanding Medicaid coverage to more low-income Americans, who often use hospital services in emergencies, then don’t pay their bills. But 26 states, including Tennessee, rejected the ACA’s offer of federal funding to expand Medicaid. That decision led to about a third of the job cuts by Nashville-based Vanderbilt, Howser says.

Since the Feds are only temporarily helping out with Medicaid expansion, states were smart to not take on the financial obligation. The bottom line is that things that can’t last will eventually end and we are now reaching eventually.

Of course, the government-funded boom made many investments that can’t be reversed. As McArdle observes,

Cost controls that are relatively easy to implement in advance – by, for example, not building shiny new hospitals filled with private rooms – become impossible once you’ve made certain investments… We still wouldn’t reach the cost levels of the 1950s, because the buildings are still there. The grounds have to be maintained. Everything has more lights, and the buildings aren’t built to be warm in winter and cool in summer; they’re built on the assumption that they’ll be climate controlled. Frequently the windows can’t even be opened, so it’s going to get awfully stuffy in there unless you turn on the A/C…

So the only way to cut costs is to cut staff. One reason why the bust following a boom is so bad is because many financial decisions can’t be reversed.

USA Today holds out hope that the cuts are temporary and that Obamacare will rescue the laid off health care professionals. But since we already know that Obamacare has incentivized insurance companies to offer smaller networks, this may not work out the way they expect.

One final comment in case any of you think the Medicare invention of “hotel hospitals” proves government economic-intervention is good. The point to remember is the one that F. A. Hayek made in his The Road To Serfdom about admirers of the German highway system. Just because a government makes an expensive product doesn’t prove that it has not misallocated resources. The government can only finance goods through taxation or debt. The debt will either be paid by more taxation or it won’t be paid. We are not beginning to reap the effects of the past century of medical “help” and other economic interventions.