Aging Boomers Likely to Boost Health Care Sector: Despite Favorable Demographics, Health Care Faces Challenges from Expected Reforms, High Costs, and Complex Reimbursements

By Van Horn, George | The RMA Journal, March 2010 | Go to article overview

Aging Boomers Likely to Boost Health Care Sector: Despite Favorable Demographics, Health Care Faces Challenges from Expected Reforms, High Costs, and Complex Reimbursements


Van Horn, George, The RMA Journal


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A future generation might look back on health care today and quote Charles Dickens: "It was the best of times, it was the worst of times." During periods of economic stress, health-care-related industries often are beacons of hope for job creation and revenue stability. Meanwhile, the aging of U.S. baby boomers fuels optimism that the rising tide of elderly will lift all boats longer term.

But despite optimism about the future of health care, it is not immune to challenging business conditions. The prospect of wide-ranging federal government reform offers risks and opportunities for existing loans. Aside from systemic reform, the sector also is affected by social influences, a high degree of regulation, and complicated cost, affordability, and payment issues that contribute to business model and process risks.

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This article highlights health care's current role and influence in the U.S. economy, its recent performance, and the business trends that affect how industry segments are responding to current challenges. The article acknowledges coming federal reform, but does not presume to guess the extent of political change. It identifies and assesses industry opportunities and risks among health care institutions, sole practitioners in the health field, and providers of elderly care.

Health Care and the Economy

Health care is a key growth sector of the U.S. economy It has consistently increased its share of GDP from only 7.2% in 1970 to more than 16% in 2008. From a lending perspective, this growth trend is noteworthy for two reasons. First, health care's sensitivity to demographics and regulatory conditions tends to dampen short-term revenue volatility. Stable and predictable revenue streams are critical for the type of sound investment and capital spending required of the health sector. Second, because health care has been resilient in facing recent economic downturns, the largest short-term gains in health care's GDP share have occurred during recessions.

State and federal government spending accounts for 45% of total national health care expenditure, and the budgetary process operates in long cycles. During periods of economic decline, health care expenditures are maintained as a source of countercyclical support to the social system. Even though these short-term bulges in health care performance versus GDP moderate when times are good, the demographics of an aging population and rising costs of health care ensure that health expenditures will increase as a share of the economy (Figure 1).

During the 2001 recession, the increase in health care expenditures reflected both the mild and short duration of the downturn and also a significant expansion in Medicare and Medicaid spending. Between 2001 and 2004, real Medicare and Medicaid spending expanded at a 7% annual rate. For the current recession and consistent with the federal government fiscal year 2010 budget, Medicare and Medicaid spending expanded by 7.8% per year from 2006 to 2010. The vast majority of this increase was experienced in 2009 as the American Recovery and Reinvestment Act of 2009 specifically provided additional funding to make up for shortfalls expected in state funding sources.

For lenders, the environment of consistent growth, low revenue volatility, and countercyclical performance are positive industry attributes that are hard to find in any other major sector. Even with pending reforms, these industry characteristics will likely be supported in the future by a growing and aging population and by a high degree of regulation that protects incumbent operators from competition.

Health Care Reform

Given the aforementioned trends in health care expenditure, the current state of federal and state government budgets, and the coming large-scale retirement of the baby boom generation, health care reform is a daunting business challenge that brings risks and opportunities. …

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Aging Boomers Likely to Boost Health Care Sector: Despite Favorable Demographics, Health Care Faces Challenges from Expected Reforms, High Costs, and Complex Reimbursements
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