NONPROFIT MANAGEMENT: Red flags for our health-care delivery system

“Health-care costs are an issue both for the government and for our larger economy.”           —Sylvia Mathews Burwell

I'm officially raising red flags of significant concern for the future of the New York state and United States health-care delivery system. 

Fact #1: The U.S. is rapidly approaching 20 percent of our gross domestic product (GDP) on health care. Preliminary estimates for 2020 have the country crossing the 18 percent threshold. As you may know, the U.S. has always been, since the adoption of Medicare and Medicaid in 1965, the leader in percentage of GDP devoted to health care. When compared to other G-7 industrialized nations, in certain cases, we are double our G-7 colleagues, some of whom have yet to cross the 10 percent threshold for GDP.

Fact #2: The recently passed New York State (NYS) budget for the fiscal year beginning April 1, 2021 included a budget, for Medicaid only, of $83 billion. Total NYS budget expenditures are expected to be $212 billion, which makes Medicaid close to 40 percent of total New York State expenditures. Post-pandemic Medicaid eligibility in New York state is 7 million residents, or about 33 percent of the population.

I have been writing this column since 1996 and have been involved in health-care finance for 48 years. To be clear, I am a social liberal and a fiscal moderate. For most of my career, I have been and continue to be in a minority position with what might appear to some as a contradiction in my beliefs regarding social-justice issues, with a moderate to conservative view on health-care fiscal policy.

You may say, “So what’s new that we haven’t heard many times before?” What’s new is that we have just experienced the worst public-health crisis in over 100 years. The impact of the pandemic will take several years, or perhaps a decade or more, to be fully understood. In my continuing homage to both David Letterman and more recently ESPN, please consider the following top 10 topics to be important and relevant to your strategic plan. I believe it is appropriate for each health and human-services provider to update or modify its strategic plan between now and March 31, 2022. 

As one of my early mentors in the 1970s, Darrell Hartline, CFO of The Genesee Hospital, made a profound statement that has proven true for my entire career: “Health-care costs should be viewed as a balloon. Efforts to reform health care without letting air out of the balloon cannot result in significant cost savings, particularly in a society with an entitlement mentality.” 

1) Inflation
The $6 trillion that has been printed to stimulate the economy during and after the COVID-19 pandemic has resulted in inflation-rate increases that have not been seen for the past 15 years. The Federal Reserve remains focused on a 2 percent inflation rate, which, you should know, typically excludes food and energy prices. The return of inflation will challenge all health and human-service providers in balancing budgets after the positive effect of federal stimulus has been exhausted. 

2) Demographics
Retirees and high-net worth / high-income individuals will continue to leave New York state for lower/no-tax states. The fact that the recently adopted budget increased the New York State top income tax bracket to 10.9 percent, with 9.65 percent rate applying to individuals with income above $1 million, will undoubtedly accelerate the geographic move of wealthy taxpayers to Florida, Arizona, and Texas, among others.

3) Employees
The current workforce crisis is exacerbated by the fact that on average, 10,000 people per day will be retiring in the U.S. through 2029. That means on average, 300,000 individuals leave the workforce each month. Based on my research, I do not believe that the published new jobs report each month accurately reflects the fact that 300,000 jobs are being replaced each month. Depending upon which health and human-service sector is analyzed, most employers are now experiencing double-digit vacancy factors, with some organizations at more than 30 percent. This is not a sustainable model for a service sector that is labor-intensive and requires direct face-to-face contact for service provision. Historical vacancy factors have generally been in the low single digits.

4) Minimum Wage
President Joe Biden increased the minimum wage for federal-contract employees to $15 several months ago. New York City adopted a $15 minimum wage on Jan. 1, 2020. These actions, coupled with the inflation pressures resulting from federal stimulus, have accelerated the move to a $15 minimum wage for almost every county in upstate New York. But that’s not the most difficult challenge for many providers. The bigger challenge is the salary compression resulting from the fact that current employees expect a commensurate increase in their wages based on length of service and performance in support of their employers. Extreme compensation examples recently publicized have been $200 per hour for traveling registered nurses and $80,000 annual salaries to recruit registered nurses.

5) Remote
Virtually every employer is facing the challenge of satisfying its workforce on flexibility regarding in-office vs. remote working environments. Rapid advancements in video-conferencing technologies will make it difficult for employers to compete for talent when there will be many employers offering hybrid or fully remote work environments. Competition for recruitment of millennials will become an extraordinary challenge, since that generation is known for frequent job, career, and geographic changes. 

6) Organized labor awakens
The convergence of each of the foregoing topics coupled with the incredible communication power of social media may increase organized-labor activities for employers and employees. This is more likely since almost all industry service sectors need filling vacant positions. In addition, income inequality between senior management and front-line staff may stir the sleeping giant of organized labor to challenge non-union work environments throughout the country. Therefore, a strategic imperative that must be addressed with increased focus will be employee relations. Employees now have a tremendous number of options based on a shortage of workers throughout the economy. As a result, competition for new employees and retention of existing employees must be addressed with creative, flexible, and competitive work environments.

7) Telehealth
In addition to advancements in video-conferencing technology, the by-product of telehealth and telemedicine services has been advanced by a decade in the past 15 months. In the 1996 book “Jumping the Curve: Innovation and Strategic Choice in an Age of Transition,” it’s fair to say that no one predicted the technology advancements that have occurred in the past 25 years. Many technology experts believe that the pervasive implementation of artificial intelligence may result in the current decade exceeding the progress of the past 25 years.

8) Drugs
The cost and utilization of pharmaceuticals must be subject to continuous evaluation by both providers and the individuals served. For those of you who still watch cable television, the direct marketing of what seems to be an infinite number of medications results in pressure on all health-care providers, particularly those with prescription privileges. In a recent informal survey of recently graduated physicians, nurse practitioners, and physician assistants, I asked for their top five recommendations regarding effective control over our ever-increasing health-care costs. While I have spent thousands of hours in meetings with physicians over the past 40 years, one comment that each of them made was news to me. That is, in the current patient-physician interaction, there is incredible pressure and, in some cases, a perceived obligation for the practitioner to “do something once the patient arrives at the practitioner’s office”. This may include but is not limited to a referral to another physician’s specialty, an imaging referral, and/or a prescription for medication.

9) Tort reform
Relative to the statement above regarding practitioner obligations to “do something”, my informal survey also disclosed that the risk of litigation in providing care to patients does drive increased utilization among the various physician subspecialties. For example, a prostate-cancer diagnosis typically involves the primary-care physician, a medical oncologist, a radiation oncologist, a urologist, and possibly a surgeon. We must have meaningful tort reform at the state level, since more than six decades of debate at the federal level have produced essentially no meaningful progress. 

10) Home care vs. long-term nursing-facility care
Long-term nursing-facility care may be the service sector most impacted by the pandemic. Occupancy percentages for most nursing homes need to be more than 90 percent. One of the effects of the pandemic has been an increased demand for home-care services, even though the individual may be better suited and cared for in a skilled-nursing facility. This change in attitude, most frequently by the frail elderly and their family members, will continue to represent a major challenge for the viability of about 600 skilled-nursing facilities in New York state. And remember that the Medicaid program typically pays a daily reimbursement rate that is only about 50-60 percent of the private pay rate paid by individuals who are not eligible for Medicaid coverage. 

Certainly, there will be more to come in future columns on this major topic of health-care service delivery.         

Gerald J. Archibald, CPA, is a partner in charge of the management advisory services at The Bonadio Group. Contact him at garchibald@bonadio.com