Testimony on the Impact of the Economic Downturn on MN Health Care Delivery System

February 17, 2009. As a member of the Division of Health Policy and Management in the University of Minnesota’s School of Public Health, I was asked to testify on February 10 to a joint Minnesota House committee hearing of the Health Care and Human Services Policy Committee and the Finance Division Committee, chaired by Representative Thomas Huntley and Representative Paul Thissen. The topic of the hearing was "The economic impact on Minnesota’s health care delivery system."

Interestingly, much of the impact on the health care system was first felt in the last quarter of 2008. For our non-profit health system, which requires only annual reporting, the evidence in the data will not be seen until this time next year. The most recent data that we could find across the system is for 2007; at that time hospitals were doing fairly well with operating margins just under 5.5% and profit margins a healthy 7.4%.

Operating margins are a hospital’s operating revenue minus operating expenses (operating income) over operating revenue. Operating revenues are defined here as patient service revenue plus premium revenue, and operating expenses are the expenses associated with patient care and other operations. "The advantage of this margin measure is that it focuses on core business operations and hence removes the influence of non-operating gains and losses, which are often transitory and unrelated to core operations" (Flex Monitoring Team 2008). That is, profits earned from the main line of business: patient care.

Profit margins represent the margins from all other activities including interest on earnings and investments. Taken together, the 2007 data suggest that hospitals overall were faring well and we believe will help to buffer this initial pressure on the industry due to lower patient care revenues, loss of interest income, reduced access to credit market, etc.

Recent Minnesota news reports on hospitals lay-offs, freezes in hiring and loss of patient revenue, along with the hospital testimony that followed mine, suggest that times have changed dramatically since 2007. The hospital industry and the state might think about a more frequent, perhaps quarterly, reporting mechanism to reflect more recent changes in operating and/or profit margins to give legislatures more timely information on the impact of economy on providers.

Other important issues include the potential increase in the number of uninsured due to increased unemployment and proposals to cut public programs, and increased out-of-pocket spending for consumers due to an increase in high-deductible plans and health savings accounts. Please check out my presentation for more information. Note: We've updated our estimate of the economic stimulus package with new numbers and currently estimate $2 billion over three years given increased federal matching payments for Medicaid.

Lynn Blewett, Ph.D.