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Global volatility and its effect on local healthcare supply in the southeast

  • Global economic indicators do not universally support a national contraction.
  • Emerging market declines and a stronger U.S. dollar are weakening demand, but the weakening is disproportionately borne by energy and heavy industrials like Exxon.
  • Georgia realized a net gain of 92,900 new jobs in 2015 and is outpacing the U.S. in population and employment growth.
  • Non-elective medical procedures comprise significant revenue in healthcare organizations, but most of the profitability is based on consumer spending and choice.
  • Removing consumer confidence, whether through institutional shortcomings or macroeconomic volatility, typically leads to deficiencies in local delivery models.

Executive Summary

Recent events in global markets have led to speculation that the expansion of the US economy has ended. But indicators do not universally support a national contraction. China’s growth continues to decline (along with other emerging markets) and with a strong U.S. dollar, weaker economies are dampening the demand for U.S. exports and hindering businesses bottom lines. However, much of this damage to reported profits is contained and disproportionately borne by energy and heavy industrials like Exxon.

Despite the navigation of global economic turmoil, Georgia remains a marked choice for foreign financial investments and business expansions, and has realized a net gain of 92,900 new jobs over the last year. Georgia’s economy is outpacing the U.S. in population and employment growth; however, we should expect to see a slowdown in velocity.

Improving economic conditions, the Affordable Care Act (ACA) coverage expansions, and the aging of the population, are driving faster projected growth in health spending in 2016 and beyond. The significant growth in the healthcare market is evidenced by increases in employment outpacing any other sector. Healthcare and social assistance is projected to continue leading the race in employment growth through the next 8 years.

While the perception that major non-elective medical procedures are the foundation of healthcare spending is accurate, much of the profitability portion of healthcare revenues is based on consumer spending and choice. When consumer confidence is eroded from institutional shortcomings (such as diminishment of the patience experience or overscheduling and increased wait times) or macroeconomic factors (rising unemployment, inflation or stagnant wages) evidence suggests that healthcare organizations make decisions that further erode profitability.

You don’t have to go home, but you can stay here.

Three factors contribute to economic pessimism as of late. First, much of the world is struggling with low or declining growth, including the world’s second-largest economy, China. China is expected to slow further this year with doubts in Beijing’s ability to make the Chinese economy more reliant on domestic consumption. We expect that national leadership in China will divert some portion of U.S. investment toward shoring up local economies and job creation. China created 7M new jobs in the first half of 2015 and that figure is expected to expand rapidly into 2016.[1] The Eurozone (struggling to manage a debt crisis) and Japan are only expected to grow 1.7% and 1%, respectively in 2016, while Russia and Brazil are both forecasted to weaken. [2] Emerging markets like Brazil, South Africa, Thailand and Turkey are especially vulnerable with problems with either financial or political weakness.

Second, the strong U.S. dollar, coupled with weak economies internationally, can cause trouble. The dollar is at a near-term high against an index of other currencies. While the U.S. Federal Reserve recently implemented a modest increase in interest rates, other central banks outside the U.S. are easing their monetary policies. Additional increases to our interest rate are still yet to come, further strengthening the dollar. Since oil is priced globally in dollars, when the dollar is strong, oil becomes more expensive for other countries, dampening their demand for oil. Furthermore, a stronger U.S. dollar makes it more expensive for other countries to buy U.S. goods, thus lowering U.S. exports.

Thirdly, the U.S. is experiencing a decline in Industrial production, a potential warning sign of recession. Production in the U.S. has declined in 10 of the past 12 months and is still down 2% from what it was over a year ago.[3] Manufacturing, in particular tends to lead the economic cycle of instability and it’s struggling, according to Thomas Costerg, Sr. Economist at Standard Chartered. But unlike past dips in production, today’s decline is driven primarily by the collapse in the oil industry. Oil production (among private producers) is up, but global demand is down, resulting in layoffs, particularly in the energy industry. Some energy producers have already gone bankrupt.

Corporate profits are down by nearly 5% since peaking in the Summer of 2014, according to the Commerce Department. But it’s the energy industry primarily responsible for diluting corporate profits and having the most negative impact on U.S. profit margins. When you take energy companies like Exxon Mobil Corp., Chevron Corp. and Valero Energy Corp. out of the equations, profit margins among the companies in the S&P 500 stock index have seen little change over the past year. 2

Stock market prices have fallen this year, with the Dow Jones Industrial Average down 7.6%. In this case, it’s not just oil companies in decline. A falling stock market typically creates worry, leading to consumers’ lack of confidence. As they pull back spending, it can cause additional declines in company profits, ultimately leading to layoffs.

But these three indicators do not tell all the story for the national economy or Georgia. The U.S. job market is one of (if not THE) best recession indicators. While layoffs can signal the beginning of recession, the reality is that so far, the number of U.S. jobs have grown– up 2.7 million over the past year and by 292,000 just this past December.

Examples of strong job growth locally, and across the U.S. (around 2,000 a month) are one of the reasons why many economists remain confident the U.S. can avoid recession. The ultimate call on whether the U.S. has entered a recession would be made by a group of economists known as the business cycle dating committee at the National Bureau of Economic Research (NBER). For now, it’s too early for any NBER prediction. No crisis is “global” if American financial markets hold up. At this point, a true global financial crisis is unlikely, according to Gerald O’Driscoll Jr., a former vice president at the Federal Reserve Bank of Dallas.

Additionally, the University of Georgia experts predict a better Georgia economy in 2016. What accounts for the optimism? First, Georgia has a large number of major projects in its development pipeline and Georgia will see much faster population growth than the nation. In addition, continued low oil and gas prices are much better for Georgia’s economy when compared to the U.S. overall. Georgia’s economy will grow faster than the nation’s next year, just at a slower pace than in the past, according to the Georgia Economic outlook report. Healthcare, as a whole, has a lot to take credit for.

Several new facilities have been announced for Georgia in the past few months. Netherlands-based, CSM Bakery Solutions recently announced its plan to move its global headquarters to Sandy Springs, bringing with it a $5.5 million investment and creation of 120 jobs. Atlanta’s manufacturing sector is also getting a boost, as Swiss-based pharmaceutical company Alcon Laboratories is expanding its manufacturing plants in Atlanta’s northern suburbs, creating another 250 jobs. Baxalta’s new $1 billion biologics plant is slated to be completed this year and expects to employ 1,500 workers by 2018. As the recent slate of corporate expansions can attest, Georgia remains a favored destination for foreign-direct investment.

Continued low oil and gas prices are much better for Georgia’s economy than the U.S. economy, according to UGA Today. As of the end of January 2016, the national average price for regular gas was $1.82/gallon, compared to $1.75/gallon for Georgia and $1.76/gallon for Atlanta.[4]

Georgia will see much faster population growth than the nation, and employment is at its highest level ever. Georgians can also look forward to a rise in personal income of 5.7%.[5] Atlanta is 1 of the 12 largest MSAs, and among those, Atlanta showed the fastest rate of job growth (3.4%) as of this past November.[6] Over the past 12 months, Georgia has added a net of 92,900 payroll jobs and its unemployment rate has also continued to decline, boasting the lowest since 2008. [7] UGA experts predict a better Georgia economy in 2016, but could see a slowdown in the rate of job growth. This is primarily due to many companies no longer being understaffed, or are cautious about hiring. Because both the national and global economies are under duress, local businesses’ profits are showing signs of the stress.

 So why am I paying that for an MRI?

Revenue cycles in healthcare are a complicated mixture of long term contracts and statutory obligations. As a business, healthcare organizations run on a mix of unfunded, half funded and full price procedures keyed into a system that breaks down payments negotiated for thousands of possibilities. The ICD-10 code sets nearly 72,000 procedure codes and 70,000 diagnosis codes. Contracts with hundreds if not thousands of plans are set annually on each of those codes, often as some percentage of federal reimbursable rates. Within that framework care spans:

  1. necessary or elective,
  2. profitable or loss leader,
  3. high margin or low margin,
  4. marginal cost or no/low marginal cost, etc.

In such a price flexible environment, the high margin/low marginal cost/elective procedure portion of the revenue stream becomes a critical piece to both delivery of care AND quality of care. This highly sought after revenue stream is also extremely dependent on local consumer confidence.

Research into surgical suite optimization suggests that while hospitals have become more “sophisticated” and “targeted” in their response to financial pain, incumbent players tend “to increase the number of surgical procedures and perform more surgeries on marginal patients” with some variability in service line and payer type.[8] In essence, because organizations are bound by longer term contracts, the consumer driven variable business lines can be affected by reductions in profitability in core functions.

Admittedly older research into the revenue impact on increasing patient volume in surgery suites suggests that greater utilization of infrastructure does not typically translate into profitability for healthcare organizations and can actually erode consumer preference due to longer wait times and scheduling conflicts.

How’s this connected, again?

Global markets are in flux, but domestically, we see consistent, but slowing growth in employment gains. In Georgia, a backlog of projects and committed headquarter relocations will fuel growth for at least another 18 months.

New thinking is putting a consumer face on healthcare with an understanding that consumers have institutional level choice and the option to defer care. That choice can be driven by experience within the system (something the organization can control) or external factors, like a bureaucrat in China deciding to purchase fewer treasuries in the second quarter, which makes capital a little more expensive and the consumer feel poorer.

As organizations experience a drop in consumer sentiment (whether internal or external), delivery models must be adjusted real time to meet demands in an environment where pricing is set a year in advance. In the end, pricing for elective or non-covered procedures is one of very few real time levers that organizations have to pull to affect pricing.

While we expect that Chinese selling of treasuries will not adversely affect consumer sentiment in light of other economic data, the possibility exists that it (or other external macroeconomic factors) could change consumer confidence. Negative consumer confidence could lead organizations to institute new pricing models and/or modify plans for future healthcare delivery models, like rates on an MRI.


[1] Business Insider (Australia), “China Has Already Created 7 Million Jobs This Year.” July 20, 2015. Available online at http://www.businessinsider.com/china-has-already-created-7-million-jobs-this-year-2015-7

[2] Zumbrun, Josh “Warnings Mount, but Recession May Not Come to Pass.” The Wall Street Journal 25 Jan. 2016

[3] O’Driscoll, Gerald, Jr. “The Chances of a Global Meltdown.” The Wall Street Journal 26 Jan. 2016

[4] AAA Fuel Gauge Report, “National Average Prices” (updated daily) as of January 28, 2016

[5] UGA Today.UGA experts predict a better Georgia economy in 2016, but slower job growth.” Available online at http://news.uga.edu/releases/article/economic-outlook-2016.

[6] Bureau of Labor Statistics (News Release)Atlanta Area Employment – November 2015” Available online at http://www.bls.gov/regions/southeast/news-release/pdf/areaemployment_atlanta.pdf.

[7] Federal Reserve Bank of Atlanta Regional Economics.  January 7, 2016, “Data Digests.” Available online at https://www.frbatlanta.org/economy-matters/regional-economics/data-digests.aspx

[8] Vancouver School of Economics, University of British Columbia. January 2014 white paper. “How Do Hospitals Respond to Financial Pain? Evidence from Hospital Markets in Texas.” Available online at http://www.healtheconometrics.org/SelectedPapers2014c.pdf

Link to whitepaper