Politics. Central bankers can talk themselves into anything. Part of their problem is their training and the models that come with that are not designed for dramatic change. They also tend to lack a certain amount of walking-around sense.
Arthur Burns pursued unwarranted expansionist policies in the run-up to the 1972 election at the behest of President Richard Nixon. Alan Greenspan, in 1999, batted away risks associated with derivatives. Ben Bernanke established a goal of low and stable inflation while ignoring the role of globalization and other risks we now know all too well.
Now comes Jerome Powell asserting that Post-COVID inflation is transitory. Stop for a minute and forget about Wall Street’s models, forget about monetary policy, asset purchases and all the other crazy stuff central bankers have deployed in the extreme. Instead, ask yourself how reasonable is it that after taking an eggbeater to both the supply and demand sides of the American economy, everything will just go back to what it was?
Really?
It won’t because it can’t.
It is the hubris of Washington and especially central bankers that believes tossing larger unemployment checks at people will ensure everything goes back to as it was after a year of some of the craziest public health policy the world has seen since the Middle Ages.
Here in Tennessee, enhanced unemployment ends next week. Yet, labor remains in short supply across industries dependent on inexpensive labor like bars and restaurants. It appears, after an extended closure, bartenders, waitresses, barbacks and cashiers have found something else to do. Wages have increased to encourage their return and with it the price of a not-so-cold-headless beer you waited on for 30 minutes. No one anticipates that will change anytime soon no matter what Jay Powell says.
Policy. Unlike the barkeep, health care providers can only raise prices once a year and then only after negotiation with the chief customers, insurance companies. Inflation appears, then, on a lag. The inflation that was, in fact, transitory in 2011, showed up in health care commodities and services in 2012. Then, of course, health care had its own inflation problem brought on by a host of events including limits on MLR and benefit mandates, among other things.
While the health care industry awaits health insurance premiums to adjust in 2021 or 2022, inflation in the major cost input, labor, is here today. The choice for most providers will be pay more for labor – which due to the generosity of the federal Treasury has been possible - or work less.
Health care’s version of less toilet paper on a roll is rationing care. In other words, the capacity of the health care system is defined by the size of its labor force. If that workforce shrinks, as it has, then less health care gets delivered unless and until productivity gains finally arrive.
Fortunately for the industry, although not great for patients, is that acuity that accumulated during the pandemic continues to accrue. The PPI for treatment of neoplasm at hospitals shot up 13% YoY in February and remains there. It will take months, if not years, for health care to become more efficient. Most hospitals operate at 70% of capacity, a hold over from their cost-plus days. In the meantime, expect fewer hospital admissions but more revenue for each.
Power. The labor disruption brought on by COVID-19 has a very bright silver lining, even for health care. Business formations in health care have increased dramatically. The conclusion is, that while a lot of people may not want to go back to work at the hospital, they still want to work in health care.
In voting with their feet, health care workers are freed to solve one of the problems they have created by their departure: the dismally low level of productivity in the industry. Health care added 2 million jobs between 2015 and February 2020. Yet, during that same period, hospital throughput, as measured by discharges, remained at about 9.5 million per quarter.
To be a policy analyst is to be perennially disappointed but the conditions for disruption of the health care industry are more dynamic and robust than ever. Higher acuity pushes health insurers to pay for services in alternative, lower cost setting. Labor shortages send hospital administrators looking for productivity solutions. Patients, tied of waiting, look for non-traditional answers.
It appears that what a few trillion dollars and the full force of the federal government tried may be accomplished by a virus and a few hundred thousand liberated workers.
Call with questions.
Emily Evans
Managing Director – Health Policy
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