As is the case for many people, part of my holiday season was
spent in pleasant gatherings of friends, colleagues and
acquaintances. It's not unusual at such gatherings for someone to
tell me how lucky I am to be part of an industry that is always
expanding and isn't affected by the normal ups and downs of the
marketplace in the way that other industries are.
How do I respond to such a comment?
I usually begin by saying that in the past, such a statement
have been on target. For a long time, the American health care
industry appeared immune to the ups and downs of the marketplace.
Other industries struggled through unpredictable and uncertain
times, but health care seemed to be inflation-proof and recession-
proof. For physicians and hospitals alike, the health care industry
seemed to have no financial downside, only upsides.
The problem, as it turned out, was that the economics of health
care were not based on normal market principles. For instance, we
know from basic economics classes that demand for a good or service
in a market will eventually generate a supply to meet the demand.
When the supply begins to exceed the demand, prices fall.
In the old days of health care, even this basic law of supply and
demand was not observed.
First, there was an insatiable demand for what the health care
industry was turning out.
Second, the patients generating the demand were cut off from any
negative financial consequences of their decisions. For the most
part, it was the government or an employer that was paying the bill.
The result was that demand accelerated faster and faster without
the brake of marketplace prices to slow it down. The normal
economies on price were not a factor, and we entered a long period
double- digit medical inflation, often exceeding normal inflation by
two or three times.
Oh, how times have changed, I tell my partner in conversation.
Weary of rampaging medical inflation, the business community and
government stepped out of the background several years ago to force
health care to begin obeying the laws of economics. Because of the
emergence of managed care and the ability of purchasers of health
care to demand and receive price concessions, health care is now
responding to economic pressures as if it were any other mature
As an example, again consider supply and demand.
In the old days, the voracious appetite for health care services
caused hospitals to add capacity at a tremendous rate.
As a result, in today's market there is too much capacity. As in
any oversupplied market, purchasers can demand that prices be
The exercise of this leverage has brought painful results for
providers of health care services. Physicians for the first time in
the last 50 years have begun to see their incomes erode, and
hospitals find themselves dismantling services in order to
dramatically reduce their costs.
For these reasons, I tell the person who struck up the
conversation, we're now seeing health care providers engaging in
several classic business strategies that one might see in any mature
First, some health care providers have decided that they will
become the lowest-cost provider in their market. They elect not to
worry about esoteric kinds of services that might be found in
hospitals with expertise in sophisticated specialities. …